Executives

Jeff Wilhoit – Vice President of Investor Relations

Chuck Jeannes – President and Chief Executive Officer

Steve Reid – Chief Operating Officer

Lindsay Hall – Chief Financial Officer

Analysts

David Haughton – BMO Capital Markets

Stephen Butler – Canaccord Genuity

Haytham Hodaly – Salman Partners

Mark Liinamaa – Morgan Stanley

Goldcorp Inc. (GG) Q2 2010 Earnings Call Transcript July 29, 2010 1:00 pm ET

Operator

Good morning, ladies and gentlemen. Welcome to the Goldcorp Incorporated 2010 second quarter results conference call for Thursday, July 29, 2010. Please be advised that this call is being recorded.

I would now like to turn the meeting over to Mr. Jeff Wilhoit, Vice President of Investor Relations of Goldcorp. Please go ahead, Mr. Wilhoit.

Jeff Wilhoit

Thank you; and welcome everyone to the Goldcorp second quarter 2010 earnings conference call. In the room with me today are Chuck Jeannes, President and Chief Executive Officer; Lindsay Hall, Chief Financial Officer; and Steve Reid, Chief Operating Officer.

For those of you participating on the webcast today, we have included a number of slides to support this morning’s discussion. These slides are available on our website at www.goldcorp.com. As a reminder, we will be discussing forward-looking information that involves unique risks concerning the business, operations, and financial performance and condition of Goldcorp.

Forward-looking statements include, but are not limited to, statements with respect to future metal prices, the estimation of mineral reserves and resources, the timing and amounts of estimated future production, cost of production, capital expenditures, and cost and timing of the development of new deposits. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause the actual results to be materially different from those expressed or implied by such forward-looking statements. So accordingly, you should not place undue reliance on forward-looking statements.

With that, I will now turn the call over to Chuck Jeannes, President and Chief Executive Officer.

Chuck Jeannes

Thank you, Jeff; and thanks everyone for joining us today. I am pleased to report that Goldcorp’s second-quarter saw solid gold production throughout the portfolio, leading to strong growth in revenues, cash flow, and earnings. Overall, gold production met our expectations for the quarter at over 609,000 ounces, at a total by-product cash cost of $363 per ounce.

Another solid quarter at Red Lake anchored our production, and we are especially proud of the continued success of two of our newest mines, Los Filos and Marlin. Following the startup of the crushing and agglomeration plant at Los Filos during the first quarter, the mine experienced its highest production to date, 82,600 ounces. Marlin has also been a consistent performer for the company for some time, and I can assure everyone on this call that the operational excellence on display every quarter at Marlin extends to all aspects of the mine, including a clear commitment to operating safely and responsibly.

The combination of solid low-cost gold production and strong gold prices drove a 34% increase to revenues and record operating cash flow of over $382 million. It is interesting to note that our second-quarter cash margin of $845 per ounce of gold is the level at which gold itself was trading just 18 months ago. Delivering these strong and steadily increasing cash margins enables our shareholders to maximize exposure to robust gold prices.

In the first half of the year, our disciplined M&A strategy has also created value for shareholders through a number of transactions that have significantly strengthened Goldcorp’s overall asset portfolio. We began the year by completing two important strategic acquisitions, in the El Morro project in Chile, and the Camino Rojo deposit near Peñasquito. This was followed in the second quarter by the disposition of non-core assets that created value available for investment into our existing suite of growth projects. The completed or announced sales of the Escobal silver deposit, the San Dimas gold silver mine, and our interest in train metals, each unlocks value on our balance sheet, and frees up management time and resources that can be reinvested back into our business. These assets will now be developed by talented management teams to build new growth platforms, in which our shareholders will participate.

The other major development of the second quarter was the successful start-up of the second sulfide processing plants at Peñasquito. It is now in the commissioning phase and ramping up towards its designed 50,000 ton per day capacity. Commercial production at Peñasquito is expected this quarter, with full completion of the processing circuits still expected by year-end. And I will cover more on Peñasquito in just a moment.

Those of you on the webcast can see the dramatic increase in cash margins Goldcorp has experienced over the last several years, culminating in outstanding cash margins on a year-to-date basis. We remain confident in the fundamental strength of gold markets, despite recent weakness that we normally see this time of the year. In fact, current prices could provide an attractive entry point for the investment and fabrication sectors ahead of summer’s end and the start of the traditional Indian wedding season. With our forecast calling for strong second-half gold production, we expect this positive trend and expanding margins to continue.

As I mentioned at the outset, the trends at Peñasquito have continued to be very positive in all facets of the operation. From mining rates, ore grades, mill throughputs and recoveries, to the delivery and sale of concentrates to smelter partners around the world. We see production ramping up on track towards our 2010 forecast of 180,000 ounces of gold.

I have consistently highlighted the fact that Peñasquito construction schedule has not changed over the last two plus years. It is a testament to Goldcorp’s ability to deliver large projects on time and on budget. I say it often, but the path toward commercial production at Peñasquito has been extraordinarily smooth for a project of this magnitude, and the team there deserves special mention for such a tremendous accomplishment.

During the second quarter, Goldcorp also presented its initial response to the independent human rights assessment in Guatemala. Consistent with our commitment to operate with transparency and accountability, Goldcorp is the first company in our sector to make the results of such an assessment public. We believe that implementing the recommendations in the HRA will enable the Marlin mine to be an even greater influence for positive economic and social growth in Guatemala.

Marlin also continued to cooperate with the Guatemalan government’s investigation in connection with the recommendation of the Inter-American Commission on Human Rights that operations at Marlin be suspended. Goldcorp strongly believes the IACHR’s recommendation is based on environmental allegations that are simply false. Operations at Marlin are continuing normally during this investigation, and we believe that the overwhelming evidence demonstrating no environmental harm to the area as a result of our operations, should be more than adequate to allow the government to demonstrate to the IACHR that it should withdraw its recommendation. And we continue to offer assistance to all parties involved in an effort to achieve that result.

In the second half of the year, we will see news flow from Goldcorp concerning a wide range of important initiatives. Commercial production at Peñasquito is now just a matter of weeks away, rather than months or years; and we look forward to seeing the full contributions from this world-class asset on our income statement for many years to come. The development of Cochenour will continue to advance, spurring an acceleration of optimization efforts at the prolific Red Lake Camp.

The news continues to be very positive at Éléonore as well, as we prepare and update to the pre-feasibility study due by year end. Steve and I were just there for a project to review last week, and I am very pleased with our progress. New exploration and development success supports the project’s growing potential to become a cornerstone asset for Goldcorp. Finally, we continue to work on the El Morro project in Chile, with a focus on permitting and updating the existing feasibility study. So look for a lot of news regarding the company’s next-generation of growth projects around year end.

With production schedules weighted more to the second half of the year, first-half gold production of over 1.2 million ounces keeps us on pace towards our guidance of 2.55 million ounces for the year. As noted in yesterday’s release, that guidance number reflects the imminent sale of San Dimas and the removal of its 50,000 ounces of expected production over the remainder of 2010. Due to the relatively small production and byproduct revenues at San Dimas, we do not expect material changes to cash costs as a result of the sales, so cash cost guidance remains unchanged at $350 per ounce on a byproduct basis, and $450 on a co-product basis.

And with that, I will now turn it over to Steve Reid for a review of the operations. Steve?

Steve Reid

Thanks, Chuck. The second quarter included successes in both current and future gold production. In addition to our significant progress at Peñasquito, we have also furthered a number of our key growth projects, which I will discuss in a moment.

Starting with Peñasquito, we saw the successful start up of Line 2, slightly ahead of its expected date. With the commissioning of Line 2, we remain on track to declare commercial production in the third quarter. The high-pressure grinding roll circuit is targeted for completion by the end of the year, and this is the final step in allowing us to bring Peñasquito to full production capacity of 130,000 tons per day in early 2011. And the HPGI unit itself is due in port in Mexico any day.

Regionally, we continued to advance Peñasquito’s two satellite operations, Noche Buena and Camino Rojo. At Noche Buena, infield drilling continued to confirm the oxide portion of the deposit, and expand the sulfide body at depth. We remain on track for the completion of an internal feasibility study by year-end. At Camino Rojo’s project, data analysis continued ahead of the important progress towards securing required drilling permits, and we believe that both Noche Buena and Camino Rojo should form the basis of significant sources of satellite production that will enhance our overall production profile at Peñasquito as of the long-term, and both assets continue to exhibit potential for sulfide systems at depth.

Second-quarter gold production at Peñasquito totaled 39,100 ounces, consisting of 17,000 ounces from the sulfide plant, and 22,100 ounces from the heat leeching of the oxide cap. We expect sulfide production to surpass production from upside material in the third quarter, and with the buildup in production from the two lines, we remain on track towards our previously issued 2010 guidance of 180,000 ounces from the property. For those on the webcast, as you can see in this recent photographs showing Line 2 on the right-hand side, we now have ore being conveyed to both of the lines for processing.

Los Filos broke its quarterly production record that it set just last quarter. With the completion of the crushing and agglomeration plant during the first quarter, the plant continues to steadily advance towards its design throughput of 11,000 tons per day, and is contributing to the production growth for the site. Los Filos is looking to be Mexico’s largest gold producer again this year.

At Cochenour and the Red Lake, we continue to explore from the underground workings at the 2050 level, to test the gap zone and the out proportions of the Bruce Channel and Cochenour deposits. Underground development continued such that we have now completed more than 12% of the critical path development on the five kilometer high-speed haulage trip that will connect the Cochenour operation with the Red Lake mine. And work also continued on unwrapping the scoping study.

At Éléonore in Québec, we continued the construction of the shaft column, and the associated surface facilities for the 725 meter deep exploration shaft, which is expected to be completed during the third quarter of 2012. Exploration drilling at the site has focused on identifying and deploying new ore zones within the hanging wall statigraphy and close to the exploration shaft. Initial assay results for this drilling have been positive, and follow up drilling is underway to better define this new area. During the remainder of 2010, our exploration will also focus on identifying new drill targets, on the Éléonore concessions that are outside of the main Roberto ore body.

We have also continued to work on upsetting our previous pre-feasibility study to allow us to make a construction go-ahead decision on the project at year-end. With the pre-coloring work taking us to a depth of 34 meters, we are now completing the surface looks necessary to allow us to commence full-face sinking on this shaft later this year.

And on a final note, despite of our overall commitment to safety, we are very pleased to report that our Porcupine Mine Rescue Team recently won the 2010 Ontario Provincial Mine Rescue Competition, and they also received the top firefighting award. The commitment from the team members and from our leadership teams are outstanding and I wanted to thank them for that.

So with that, I will turn it over to Lindsay for the financial highlights.

Lindsay Hall

Thanks, Steve. A very strong financial performance for the quarter, as we reported record revenues, managed our cash costs, resulting in record cash flows from operations. Gold ounces sold for the period increased by 5%, resulting from sales of inventory built up at Red Lake in the prior quarter, and ounces held at the Alberta port in the prior period due to a temporary work stoppage. Our gold margin increased in the second quarter, as we again captured 70% of the gold price, resulting in over $380 million of cash flows from operations for the quarter, or $0.52 per share, which is a 22% increase over our first quarter results. These cash flows funded capital investments of $310 million, made in our mines and projects for the quarter. We also realized approximately $220 million in cash for our dispositions of mining properties.

Turning to some of the details of the financial results for the second quarter, we had record revenues of $844 million, and record earnings from mining operations of some $353 million. We sold 598,000 ounces of gold, at an average price of $1208 per ounce, at an average cash cost of $353, realizing a crude ounce cash margin of $845. Cash costs on a by-product basis were $38 per ounce higher compared to the first quarter of $325 per ounce, primarily the result of higher operating costs at Alumbera, which included higher YMAD net proceeds payments, and export retention taxes paid. If we had normalized for the effects that Alumbera had on cash costs this quarter, our cash costs quarter over quarter would have shown a decrease.

Pre-commissioning, production, and performance measures at Peñasquito during the second quarter met or exceeded expectations. Included in our Peñasquito MD&A is disclosure with respect to production volumes for gold, silver, lead and zinc, and cost metrics associated with mining and processing activities, as well as off-site costs. All costs incurred are in line with our expectations, or our declaration of commercial production this quarter.

Our adjusted earnings amounted to almost $200 million or $0.27 per share. To calculate the adjusted earnings, we have deducted from reported net earnings of $828 million, the non-cash foreign exchange gain of $196 million, from translation of our future income taxes, and the net gain on dispositions of mining properties during the quarter of $436 million after-tax. Consistent with the previous quarters, we do not make any adjustment for non-cash stock option expense, which amounted to $15.2 million or $0.02 per share.

In those lines of our financial statements, details of our hedging position at June 30 are provided for foreign currency, heating oil, copper, and zinc contracts. The provisional pricing impact related to our copper fields was a negative $14 million or $23 per ounce during the quarter. For the next quarter, we have about 44 million pounds of copper, priced at $2.95 per pound, which is subject to provisional pricing. Through copper board and option contracts, we have approximately 22% of our estimated copper production for the second half of 2010 protected at $3.28 per pound, of which 78% is called away at $3.76 per pound.

We ended the quarter with cash and cash equivalents of almost $500 million and $862 million of convertible debt outstanding, and an undrawn $1.5 billion revolving credit facility available. The mechanical completions chief for Line 2 at Peñasquito are funding needs for the planned capital spend at Peñasquito is essentially complete. As well, we obtained proceeds from the completed project financing for Pueblo Viejo in the second quarter in the amount of $312 million, funding the remaining planned capital expenditures for the project. We remain very confident in our ability to internally fund the development of our existing mines, and the building of new mines such as Éléonore and El Morro, which was consistent with our disciplined financial approach at Goldcorp. For the second half of 2010, planned capital expenditures amount to $1 billion, inclusive of approximately $280 million relating to Pueblo Viejo.

Lastly, we also anticipate the closing of the disposition of the San Dimas mine, and our investment in trains during third quarter, resulting in the receipt of approximately $450 million of cash proceeds.

With that, operator, that concludes our presentation. And please open the line for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). The first question is from David Haughton with BMO Capital Markets. Please go ahead.

David Haughton – BMO Capital Markets

Good morning. It is David Haughton, I believe. I have got a question with regards to Peñasquito. There were some recoveries disclosed within the details of package. I am just wondering whether that is indicative of what we should be thinking about going forward for recoveries of each of the metal components.

Steve Reid

You know, David, there is a couple of factors of in terms of why these are not appropriate for the longer-term. Firstly, we are early in the startup, so, we are certainly looking for operating efficiencies and steady state conditions, which will improve the way we actually recover it, and the second part is that we are certainly very close to the top of the old body and as we have discussed several times, we will be dealing with that interaction between both the oxide and sulfide materials. So once we are down into the cleaner, completely sulfide materials, we will get better recoveries.

David Haughton – BMO Capital Markets

I am pleased at the answer, because the lead and zinc recoveries were well below the previous guidance that we had been given. And just to make sure that the guidance is still accurate, for lead we are looking at 75% and the same for zinc for that recovery.

Steve Reid

And I know that they were very different recoveries based on rock parts and so on, which we have provided in the big title. The bottom line is that nothing has changed.

David Haughton – BMO Capital Markets

All right. I saw that you have made a commitment to go ahead with the Hoyle Pond deep. What kind of contribution can we see from that going forward as far as process grade unit costs, et cetera?

Steve Reid

David, that is still being worked through in terms of additional contribution. What it does for us primarily is looks for efficiency that dips, because we are currently, it is dealing with the material between the depths of say 1300 meters and roughly 2200 meters. So it is very deep, which we are accessing primarily from a ramp at the moment, with some internal haulage. So it is primarily about efficiencies with grade. The good part, however, is that what we are seeing and the reason that it folds in and the reason we are going ahead is we do have additional discoveries there in terms of additional zones, and we are also seeing a flattening of one of the zones, which is great, because it gives us more ounces per vertical meter. So all of that is something we are working through, and in terms of providing future guidance from that, we haven’t yet, but we are working through that as we go through assessing the project.

David Haughton – BMO Capital Markets

So you think that guidance could be ready for the field trip coming up September?

Steve Reid

We will certainly be giving you an indication, yes.

David Haughton – BMO Capital Markets

And okay, so that would also apply for the new zone that you had indicated at Musselwhite?

Steve Reid

Yes, we obviously cannot disclose all the meters without doing a very large disclosure, but yes, we will be ready to do that in September.

David Haughton – BMO Capital Markets

All right. Now perhaps for, let me see, I am not sure, you can direct it as you wish, looking at Alumbera, the retention tax is quite a large number kind of streaming in the breeze at the moment, although during the previous quarter, you had paid some. What should we be thinking about going forward as far as the unit costs at Alumbera, whether those costs are in and increases we have seen flying through for other reasons in the quarter?

Chuck Jeannes

Let me start by saying, David, this tax has been paid now for all of last year and into this year, and you will recall, when we put out our budget for the year, we said that we would be including it in cash costs, because while there has been challenges lodged and discussions of political and other legal nature regarding the tax, it remains in place, and we don’t have any indication that it is going to come off anytime soon. So it is a part of our cash costs recording. Lindsay, perhaps you can give some more color.

Lindsay Hall

Yes, David, to answer to your question, and I believe your question was should I include it on a go-forward basis in my costs at Alumbera, and I would say yes.

David Haughton – BMO Capital Markets

All right, and as far as the other unit costs, it seems to be, for a number of reasons, a fairly abnormal period. What should we be thinking about for costs going forward?

Steve Reid

David, maybe if I can answer that, initially, what we are seeing cost wise is that the team has been doing a great job in terms of focusing on costs and the actual expenditures are great in terms of I actually had savings on fuel during the quarter. Largely, I think the issue relates to grade which we had during the quarter, which on a per ounce basis, makes it look lower, but I know that we dealt with grades that were effectively the same as I think the third and fourth quarters of last year. It is primarily the result of finishing the latter parts of the Phase 9, and as we get back into Phase 10, we see things coming back in terms of growth.

David Haughton – BMO Capital Markets

Should we expect a second half similar to the first half at Alumbera as far as production goes?

Steve Reid

Their production from memory, about 52% weighted to the second half, so just slightly up.

David Haughton – BMO Capital Markets

All right. Well, thank you very much.

Chuck Jeannes

Thanks, David.

Operator

Thank you. The next question is from Stephen Butler with Canaccord Genuity. Please go ahead.

Stephen Butler – Canaccord Genuity

Guys, a question for you coming back to Peñasquito on the early numbers here, again it does look good. You gave us the mighty million in G&A costs for the respective areas in the quarter, and obviously, they are higher as we would expect as well in this process, in these early days. Any comments there? The G&A, I guess, in particular, but I guess as you go forward and get up to 130,000 tons, that number will come down, quite percent of it I assume are hope and on the mine costs as well, $827 versus the feasibility study $371. I just want to make sure you feel you are still confident in the feas numbers.

Steve Reid

Yes, Steve, I think the short answer is yes, again, nothing has changed there. We are still dealing with about 3000 people on the site, so in terms of G&A costs and so on, that is a reflection of that. Those numbers will start to reduce now, as we have said, with Line 2 up and running. The HPGI unit is not lots in terms of the effort there, because that will change things there. The same is true in terms of throughput. Once we get the throughput up, the unit costs in regard to milling will be more appropriate the way we were expecting them.

Stephen Butler – Canaccord Genuity

Okay. Thanks, Steve. Lindsay, question for you, again just to come back to you, I think you alluded to if you had sort of normalized for YMAD and retention tax at Alumbera, your consolidated cash cost rate you were suggesting would be lower in the second quarter than Q1. Can you maybe elaborate, I don’t know how lumpy particularly the YMAD and retention tax were, I assume retention tax has been paid in Q1 and Q2, anything that is particularly lumpy there that deserves elaboration?

Lindsay Hall

The YMAD on a pronounced basis was about $16 an ounce, so, in addition to the YMAD, it just seems that the operating costs at Alumbera were a little higher this quarter. The combination of those events that led us to the comment that we would have normalized. So, the YMAD was lumpy, and as you know, YMAD is really triggered by payment of dividends for essentially out of Alumbera. So obviously, we paid a dividend or Alumbera paid a dividend to us in the second quarter triggering the YMAD payment.

Stephen Butler – Canaccord Genuity

All right, okay. And then the investment in Tahoe, that seems to be a kind of separately, I assume saw the cash come through. That investment is shown on the balance sheet separately under mineral properties, it is not therefore on their investments, is that correct?

Lindsay Hall

We just lump it – it is an investment as what you are talking about, even it is an investment in Tahoe equity accounting, but for disclosure purposes, were included in property and plant equipment, rather than separating it on the balance sheet. We think it is more a better disclosure than highlighting it as just a marketable security, because it is just balance sheet geography, if I could put it that way.

Stephen Butler – Canaccord Genuity

Right. That is fine.

Lindsay Hall

We are going to act with the account for Tahoe, just for the question.

Stephen Butler – Canaccord Genuity

And the same thing for, I guess, (inaudible) is that correct?

Lindsay Hall

Same thing, Steve.

Stephen Butler – Canaccord Genuity

Same treatment, okay. Thanks very much.

Lindsay Hall

Thanks, Steve.

Operator

Thank you. Your next question is from Haytham Hodaly with Salman Partners. Please go ahead.

Haytham Hodaly – Salman Partners

Just a simple question. I think Steve had a couple of my questions. With regards to Cerro Blanco and what you are seeing happening in Guatemala, are you more likely to sit and just wait and see how things get resolved or will you still continue to try and move that along at the same pace?

Chuck Jeannes

Well, let me just say, Haytham, that because of the progress that is being made on the Cerro Blanco development, we really don’t have to make a decision in that regard yet. We have work to do in completing the declines to basically prove our feasibility study in terms of the mining methods and grades and everything else. And until that is done, we are not faced with the decision of when and how to make an investment for Cerro Blanco. So we are looking at completing that work and having a feasibility study ready by mid next year, and at that point would be the opportunity to consider our overall strategy for additional investment in Guatemala.

Haytham Hodaly – Salman Partners

Have you seen any direct opposition whatsoever against that project since you have been there?

Chuck Jeannes

Very little. It is different than it is in Marlin given the fact that it is not a traditional indigenous area. You know, there is some anti-mining activity elsewhere in the country, but it is not nearly the extent that you see at Marlin.

Haytham Hodaly – Salman Partners

Okay, thank you, Chuck.

Chuck Jeannes

Sure.

Operator

Thank you. The next question is from Mark Liinamaa with Morgan Stanley. Please go ahead.

Mark Liinamaa – Morgan Stanley

Hello, and is there any update at all that you could provide regarding the status of El Morro, or is that at still any efforts proceeding in the litigation area, thanks?

Chuck Jeannes

Yes, I would just say that the litigation is proceeding. That is pending in Toronto, and unfortunately, it hasn’t gotten going on a full-scale basis with respect to the resolution of the merits of the case. There has been a lot of pre-trial candidates skirmishing. We think that that is largely resolved or close to being resolved, so we are looking forward to advancing the consideration of the merits in the latter half of this year and into next year. As far as the project itself, yes, we are continuing to work there, basically focused on or mainly focused on staffing up our teams, advancing the update of the existing feasibility study for the project, and advancing the previous permitting efforts that were already underway.

Mark Liinamaa – Morgan Stanley

Thanks for that. And then just quickly, maybe for the back of the envelope crowd, we have seen some peers lifting dividends. I think you still position yourself as a gold opportunity. Would you be willing to talk at all about, you know, what growth aspirations could be over and above the targets we have seen now? Thanks.

Chuck Jeannes

Well, yes. Thanks for that opportunity. We have, as you know, are very public about 50% growth profile between now and 2014, rising to 3.8 million ounces. That does not include any contribution from Éléonore, from El Morro or several of the other projects that we have just talked about that are in our portfolio. So we do believe that we have an outstanding growth portfolio and that it will continue beyond existing five-year plans.

With respect to dividends, you know, we are focused primarily on funding our growth, but as Lindsay just said, if you line up all those projects, including the ones in the five-year plan and the others, at El Morro and Éléonore and the like, we have the capacity internally to fund those without the need for additional shareholder dilution or any shareholder dilution. So we are looking at a situation now with Peñasquito ramping up, we see ourselves entering into a time when we are generating free cash flow starting late this year, earlier next, and that I think is when one would consider a change in the dividend policy. To us, it just doesn’t make sense from a capital allocation standpoint to increase the dividend if one is not yet generating free cash. Effectively, you are just borrowing money to distribute it to shareholders.

Mark Liinamaa – Morgan Stanley

Thanks for that and good luck with everything.

Chuck Jeannes

Thank you.

Operator

Thank you. I would now like to turn the meeting back over to Mr. Jeannes.

Chuck Jeannes

Well, thank you very much, and thanks again everyone for joining us today. Impressive growth in financial performance, both in our top and bottom lines in the second quarter provides a preview of the rapidly accelerating profitability that we expect to experience in the quarters and years ahead, as we advanced that portfolio of growth projects that I was just talking about. So, we look forward to catching up with many of you in person this fall, and please enjoy the rest of your summer. Thank you.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.

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Executives

Phil Wright – Director, President and CEO

Marie Inkster – CFO

João Carrêlo – EVP and COO

Paul Conibear – SVP, Corporate Development

Analysts

David Charles – JMP Securities

Ola Sodermark – Swedbank Market

Onno Rutten – UBS Securities

Greg Barnes – TD Newcrest

Kerry Smith – Hayward Securities

David Cotterell – BMO Capital Markets

Marcus Almerud – Morgan Stanley

Cliff Hale-Sanders – Cormark Securities

Christian Kopfer – Nordea Markets

Pierre Vaillancourt – Macquarie Capital

Presentation

Lundin Mining Corp. (LUNMF.PK) Q2 2010 Earnings Call July 28, 2010 10:00 am ET

Operator

Good day ladies and gentlemen and welcome to today’s Lundin Mining conference call. For your information, this conference is being recorded. At this time I’d like to turn the call over to your host today, Mr. Phil Wright. Please go ahead sir.

Phil Wright

Thank you very much operator, and welcome everyone thanks for joining us. I’m conscious that our results have only been out for a short while and so, therefore people might not have had as much time as normal to analyze. Anyway, I’ll try and make it as clear as I can, and chance to ask questions at the end.

I have with me on the call today, João Carrêlo our Chief Operating Officer; Marie Inkster our CFO; and Paul Conibear who is our Senior VP of Corporate Development. They’ll help me with questions at the end, once I finish.

Well, then I’ll turn to the Q2 performance. I think as most of you are aware, metal prices Q2 this year are somewhere between 30% and 70% stronger than they were a year ago. And we’ve seen the euro Q2 this year to Q2 last year down some 7% on average. So those results have been good news for us.

Our production recovered well from recession in Q1, our net income is well up. Net income this quarter contained a number of non-recurring and in part often in items and I’ve got a slide to show our adjustments for this.

So I think just concerned our results include equity earnings from 10-Q of $8.3 million. Not as high as last quarter and that is largely owing to lower sales. It’s a tiny difference, the production was higher than sales and we should capture that up as the year progresses

We have also for the first time recognized from an accounting perspective the minority interest in the earnings. The taking earnings as I am sure many of you are aware are basically a non-cash equity accounted item and I think its interesting to note that the excess overrun facility has been reduced by $26.8 million in the down to $188 million.

Looking at progress on projects. We continue to make a very good progress on our internal projects. The nervous Neves cobalt shaft has been successfully expanded and that’s the key to some of our future plans for Neves and the Lombador pre-feasibility study is now complete and the entry of the new copper project was successfully started up during the quarter.

Here’s a slide on the normalized earnings. We do have a type tight run news release for the first time that does this. You say that the number of non-recurring and partially offsetting that in to the quarter and this type will basically set us out. I think most of the adjustment there are pretty self explanatory and as you can see, our results on a normalized basis are well hidden last year and last quarter, is problematic I think repeat till last year, there is something like it $75 million pre-tax difference in pricing adjustments between Q2 this year and Q2 last year and this is really marking just have a big an improvement, they had actually driven in results one year on.

Looking at the adjusted results, one of the things that I think has probably disappointed us is that we did not manage to capture any of the nickel price tag during the quarter. Our earnings for Aguablanca don’t reflect the high nickel prices that we sold in the market the March, April, May period. We had inherited an off-take contract when we bought Rio Narcea and that contract guides to the off-take, a tremendous amount of flexibility regarding quotation of periods and none of Aguablanca’s concentrated sales this year have been settled and is effective that is that we reflected in the first quarter positive price adjustment unrealized at $12.4 million and that’s been reversed in this Q2 and consequently we had quite a dampening effect on earning this quarter.

I think the deficiencies in this contract have really felt during periods of high volatility such as we just experienced. That contract is now expired and I am very please to say that the new contract that we have put in place addresses all of those issues. We get higher realizations for ourselves from Aguablanca. We also invest more frequently and there is now fixed quotation period which we means that we would come very close to LME averages right in the last season that we’ve seen announced as to date. So taking the big difference in price adjustments between the quarters into account, the recovery for Q2, I am quite satisfied with the result that we have got this quarter.

Looking now to financial position, I think the financial position is pretty good now. We had good cash flow in the quarter and the cash flow really is better than what appears here again just reflecting on the fact that we had $26.8 million (inaudible) from Tenke that’s going to repay the excess overrun facility that is not reflected here. So the cash is building and continues to do so.

Looking at production, this chart compares Q2 this year with Q2 last year. First copper’s concerns, you can see that what’s really been driving CapEx, (inaudible) I am not sure if either you could press release your fund and then maybe a bit of feedback come through.

And as far as the effect on copper, you can see we had a lower head grade which is primarily accounting for the difference between last year and this year. That’s really effect of two issues, Lundin, is of head growth which is effective at a higher copper prices here and also we’re mining some that as a reserve material in order to rebuild the stock price volume in industrial action in the first three four months of this year.

Our estimate looking at the industrial action, it’s probably reduced by expected production by somewhere around 10,000 tonnes of copper in the first half of the year, 7,000 in the first quarter and somewhere around 3,000 in the second quarter. And obviously this copper is not lost, it’s basically a deferral as its going to be minding the future and I think what I’m encouraged to that is that the efforts to recover are well underway production in June was above budget levels and again this month we are running above budget. So I think that issue is now well behind us and we continue to try and recover as much as we can this year.

So looking at lead and zinc’s concerns year-on-year, we’re down totally accounted for about the closure of Galmoy. In fact if we look at the results for zinc moving by our head on a quarter-to-quarter basis, the work I have done to restore their volumes coming out of the first quarter, I think has been very good. And so a year-on-year basis excluding Galmoy and we are well on zinc and lead production.

So, nickel’s concern, we had further flooding of the pit in April and to-date we’ve must have had a lot of claim for Aguablanca and we’ve seen some losses throughput and that’s been made up by some better grades on the nickel.

Looking at cash-cost performance, this chart shows the cash comparison from this year to last year and this quarter to the same quarter last year. It’s included on page 12 of our MD&A floating on it doesn’t have the presentation up on screen. Just and what this slide shows is changes in the unit cost including in the cost of sales. This is not a cost reflection during the quarter, this is our cost of sales during the quarter.

And the increase that you’re seeing from this year to last year, really relates to two issues. One is that we had higher customer report from the first quarter in terms of our inventories because as the production challenges in the first quarter and secondly seeing some elevated costs as we are implementing recovery plans to recover the production that we would.

This next slide gives you some idea of our present metal exposures. In Q2 of this year 68% of our revenue came from copper and just bear in mind that, that is not including any element that’s Tenke, so Tenke is additional on top of that. So after mining, copper is pretty dominant determinant in terms of our revenue line and zinc is obviously comparatively smaller at this stage but I think not to lose sight of it is that we do have tremendous leverage when the zinc prices do rebound as they are inevitably going to.

Base line view on zinc prices is still pretty much unchanged, with now way that the industry can replace capacity at these prices and we may well see a surplus. I think some estimates are that that surplus might last for a couple of years, but certainly after that we’re moving into a deficit situation and I think Lundin is very well placed when that occurs.

This slide just looks at metal prices. As you can see quite mixed but all up and quite volatile during the period. I think you see on this slide the average LME, nickel at 10.15. And all of our sales during the quarter valued at $8.94 because none of them have circled. So you can see the effect that this contract has had in this period of volatility.

I was just looking at in terms of our operating costs. Mixed performance here, the euros is actually on average 7% weaker against the US dollar, that’s good news for us. Of mixed effect to us, the seg is actually up by 5% because the round in these numbers on the slide don’t show it. But the seg was actually shown on the bar graph which obviously increases slightly our cost that’s (inaudible) when measured in US dollars.

So looking at results, there’s not really a lot that is worth commenting. Looking on this slide, one thing you will notice is that there is a large increase in tax expense; it is $2 million in Q2 of last year, and $31 million in the present quarter. Of that $13.50 million, $13.6 million relates to a charge for on current taxes or for future taxes. And therefore doesn’t really relate to the period.

And some of the other changes accounted for by the fact that we have used up some of our lost carry forwards and other allowances and in addition to last year’s expense was really artificially narrowed by some $6.2 million as a result of some non-recurring recoveries that were included in last year.

The tax issues covered I think pretty comprehensively on page 11 of the MD&A. This wonderful chart compares earnings for this quarter to the corresponding quarter last year. You can our sales volume was down, that really related to the Lundin copper production at Neves and Aguablanca. Just a point I think our inventories at the close of this quarter within the realm of what we consider normal sales were reasonably normal for quarter.

Metal prices, you can see according to this workflow of $60 million effective of the price changes, that is masking $75 million difference in pricing adjustments. So the effective prices on the line between this year and last year has been very larger than what we’ve shown there because of the effect that there is a difference in pricing adjustments of some $75 million and that really without that we would have seen a pretty substantial change from last year because of the strength of metal prices.

As far as cost to concern you can see there the costs are up and quarter-on-quarter $6 million of that or approximately $6 million of that relates to Aguablanca. I think mostly you will recall that last year Aguablanca was operating on a very limited non-sustainable operating plan because of the dystrophies with the high nickel prices and we were treating oxidized on surface. So obviously we’re back to full scale mining operation and as we might clear at the time when we resumed production of Aguablanca we anticipated two year of very high steep ratio. So fundamentally there is nothing happening at Aguablanca that is different to what we anticipate as far as cost are concerned.

And the rest of the changes is really the effect of high cost brought forward from Q1 and inventories that have now been expensed as part of cost to sales and also, some additional money that we are spending in order to be able to recover from some of the challenges in the first quarter.

Looking at Tenke, I’m pleased to say that we are managing to get some more thoughts on our statistics in relation to Tenke and this production sales and the cost information is being shown here now for first time. You can see copper production was in line with nameplate capacity and that was really key spot some issues that occurred during April.

And I think without the issues in April, we would have seen production that was quite a bit high than what we have here. The issues that occurred in April were really, there was nothing unusual for start up at this stage of start up, and we now having hedging occur I don’t think that there is anyone who could have dealt with them better than what we Freeport did and is suffice to say now but I think Mill throughput is now performing consistently above desired capacity.

As Freeport has announce in procurement of additional mining equipment, they have advised they are expecting production to increase from manufacturing nameplate capacity. This year is 115,000 tonne to over 130,000 tonnes in 2011. And they are continuing to address some of the start up in quality issues that remain in the cobalt sector and have concrete plans for implement some corrective actions in order to make two quarters.

Cash cost is down $0.79. This is after bad product credits and I guess from Lundin’s point of view as we reported in MD&A. We expect cash cost will benefit in the future, reported talking about higher throughput on the copper side, I think when some of the issues get resolved, as a result of the effects in the cobalt circuit and just on regarding cost reduction efforts that are under so we’ll remain optimistic as far as that’s concerned.

Looking at the effect of Tenke on us during the quarter, I’ve mentioned $8.3 million this quarter compared to $17.2 last. Lower sales volume, timing difference and you can see from the production numbers and sales numbers that we solved some 350,000 tonnes of copper less than we produced and that will obviously get picked up just in the non-recourse of event.

We’ve also seen a 3.2 million effect as a result of recognizing minority interest for the first time and that’s recognized during the current quarter because we’ve now absorbed the accumulated pre-operating period losses. The excess overrun facility is dealt with here. Stock expansion study is concerned is reported by Freeport, the expansion study work is going to continue into the third quarter 2010.

Turning now to Lombador, pre-feasibility study has concluded that Lombador can be economical developed and this is now subject to further study. Just some of the general parameters of Lombador. We are expecting that it will lift zinc production at Neves from a nominal 50,000 tonnes somewhere around 140,000 tonnes per annum and the capital cost of doing that is, is in the order of around 140 million euros.

We are expecting a startup date during 2013 and at this stage we are expecting cash costs to be in our third quarter based on a normal costing basis. So it is a very low capital cost I think our benchmarking puts us as probably at about or equal to the lowest capital cost expansion that you envision for closing front.

We have commenced the rent we’ve reported as previously. We are due to reach the 300 level which is some 900 meters below surface in Q1 of 2012. That’s a very significant loss for us and I think that we have probably reaching, by the end of this year I think we will would have pushed the envelop as far as we can in terms of continuing to explore long ago from surface. So this first phase of development on Lombador gets us there and not only into production and with attractive economics, but it, it also gets us down to 300 level approximately where we have plans to put in an exploration drive and I think its only once we get that exploration drive in that we will be able to fully define what we have (inaudible) Lombador shaft which is all we did in this year and Lombador East and also out into Lombador mid-zone we have been getting encouraging the rest.

So turning to outlook. We’re holding our guidance with the exception of Tenke. I’ll just point out for everyone as well this note that we are maintaining this for comparability purposes. We’re maintaining our cost estimates on a go forward basis still of 140 euro to the US dollar and if we change our estimates every quarter, then it becomes pretty hard to track.

So, in the one that we produced Aguablanca are from, where we stand today, we’re probably going to be budget for Aguablanca coming end of August. This year we’re doing (inaudible) the pit is taking a tremendous poundings from the very high rainfall that we had in the first four months of this year, and also into December of last year. And some of you might recall that our pit bottom was inaccessible to us owing to flooding for around half of the time.

We started to pick clean up in April. During that clean up we have identified a number of unstable areas which had some potential to disrupt the main vent systems. We discovered a couple earlier in the year, December and January and those were largely mediated. One of these areas which we only discovered pretty late in May has compelled us to really think quite seriously about bringing forward our next push back. We’re only paying to do push back number three in 2011.

So, it appears now that we will probably bring that forward to late August or September. So we’re going to be in a situation where we are on budget at the end of August and probably produce nothing for September

And I think that decision is fun made, but it’s pretty likely and as a consequence we’ve taken that into account, in terms of looking at our outlook. Put it in perspective, we’ve got a five year mine life with Aguablanca. This pushback was going to be done next year within our five year envelope anyway.

So effectively lastly we’ll see a reduction in metal as for this year, it’s really just a deferral and this is not again, lost production to us. I think it’s been mentioned in the ND&A, we’ve also had notification of some possible volume industrial action commences at the end of this month.

And I think really just as a precaution of taking these two items into account, we’ve reduced our guidance with Aguablanca and unlike we did before famous that this is the guidance that we are giving plus or minus 5%. And, my question here is we’re dealing with very geo mechanical issues that are not entirely possible to know them and also the trade and industrial actions. So we’re a bit cautious on this.

Again, maybe just to put some perspective on this, I think our large operations are running well. We are maintaining our guidance in respect of those. We obviously still aiming to try and pick up as much as we can between now and end off the year and I think the revenue affected the change in Aguablanca is revenue affect in line is going to be less than 10 million or so and is the deferral.

So, no really no huge change as far as (inaudible). We’re still considering an early restart of zinc at Nevis but having said that I think looking at the way zinc prices are something that we’re finding hugely compelling although we can make cash at these numbers. I think we’re probably just as likely to possibly use that capacity for additional copper production using light grade copper.

We’ve reduced CapEx that is entirely related to a reduction of Tenke. We’ve guided for the year of Tenke between 40 and a 100. We are now guiding 40 and as a consequence, we expect our CapEx to see it come down under 200.

We have had something of an increase in explorations and there’s a number of reasons for that. We are doing a bit more near a mine at Neves. We have defined a couple of quite interesting, copper, gold prospect in the Spanish side of the Pyrite Belt in North Morena region and we are presently testing nodes. And we are also encouraged by the continuing results we’re getting and put properly in Ireland and so there’s a little bit more as far as Ireland’s concerned.

Just a note at the end of July our cap and colors on copper has expired and at this stage we have no derivatives and we presently had not planned for any. Outlook as far as the market’s concerned who knows I mean I think our view is that we’ve developed so its still likely to remain high during the rest of the year, and our feeling is that there will be improving asset thereafter.

So I guess in summary for the quarter, I think we had a pretty solid recovery during the quarter. Major operations are running well and our cash continues to grow and we are pretty active in terms of continuing to look for the opportunities. So with that thank you very much. Happy to open it up to questions and over to you operator.

Question-and-Answer Session

Operator

(Operator Instructions). We’ll move to our first question from David Charles of JMP Securities. Please go ahead.

David Charles – JMP Securities

Yes, good morning Phil. I am just trying to understand what’s exactly going on at Augarita. Maybe first off, can you confirm that your realized price in the quarter for the nickel sales was $8.94?

Phil Wright

I think, I’m just looking to Marie here that our proxy during the quarter was mark-to-market effectively that has been with the quarter, so $8.94 is what the closing sounds going to be.

David Charles – JMP Securities

Maybe just so I can understand, you didn’t have any final settlement, do you expect that you’ll get final settlements on those sales sometime later this year or now that you have changed the contract, is it but a same off-taker or is it another off-taker and if you switch to a new off-taker does that mean that you have an issue which are prior off taker, I’m just trying to understand what’s going on?

Phil Wright

No, there’s not probably in terms of settlements, there was a flexibility in terms of the quotational period but that could be nominated and it was contingent a number of things. There is not problem in terms of settlement advice in fact this is the same off-taker but the contract now has really dealt quite differently with Q3 periods and you should see us getting pretty close to LME averages now.

David Charles – JMP Securities

So, its very likely that that $12 million that reversed this quarter will reverse again sometime in the future when those contracts settled?

Phil Wright

Well, it depends at what price we settle. We were provisionally priced at the end of the quarter $94 depends what the nickel prices in the settlement period. If it’s above $94 we’ll get more, if it’s below we’ll get less.

David Charles – JMP Securities

Can you give us some idea, how many terms are involved in this?

Phil Wright

Its in the MD&A (inaudible) I think it’s somewhere around 2,000 tonnes just from memory and I’d be very surprised if there is anything that doesn’t settle this quarter.

Operator

We’ll now move to our next question from Ola Sodermark from Swedbank. Please go ahead.

Ola Sodermark – Swedbank Market

Is Ola Sodermark, Swedbank Market. I have third question on tax rate. What tax rate goes onto use when we’re doing our forecast ahead?

Marie Inkster

Yes, the tax rate is looking a bit strange this quarter just because of the anomalous things that happened but (inaudible) the tax rate that was increased by 2.5% such that the tax rate there is 29% now up from 26.5%.

In Sweden, the tax rate is 30%. We have losses there, we shouldn’t be paying much cash taxes in Sweden. In Spain we have pretty much exhausted our loss carried forward and so we’ll be paying tax at a rate of 30% on Aguablanca income.

Ola Sodermark – Swedbank Market

Okay so the tax rate for Portugal is 29% going forward?

Marie Inkster

That’s the rate at which we pay cash taxes. There is some tax engineering there that takes our effective rate down a little bit, but we do pay tax at that rate.

Operator

Thank you. We now move to our next question from Onno Rutten from UBS Securities. Please go ahead.

Onno Rutten – UBS Securities

First of all quickly on that Aguablanca contract, a new one. You say substantially better terms. Does that include less of an aggressive type participation flaws because of previous contact, that’s quite aggressive participation?

Phil Wright

We get a better realization for our product under the new contract and we got under the previous one.

Onno Rutten – UBS Securities

And then quickly on Lombador. Do you think production profile, good numbers let’s say by 2013, between the 50,000 initial run rates and getting up to the 140,000. Is that step change only occurring in your view in 2013 or could we see some early preproduction benefits out of Lombador already in 2011- 2012?

Phil Wright

I’ve used the word nominal 50 and nominal 140 Onno, because the plant capacity is perhaps a little above that. So it really comes down more to shaft capacity mining sequence what we move. I think if I were modeling, I’d probably count on $50,000 starting up from next year. And I would count on the incremental starting up during 2013. So, I wouldn’t model the full 140 for 2013. I would allow a start up period.

It’s not a lot for us because this is the same sort of material that we’re accustomed to using. So there is really not a start up which, it’s just a question of building up the stock price, and with the underground development and everything. So, 2014 you can count on that I think in full and I’d probably take a graduation up during 2013.

Onno Rutten – UBS Securities

Okay perfect, and then lastly $140 million CapEx, is that purely for the mine or does that include the zinc plant expansion that would be required to handle that much zinc?

Phil Wright

Yes, it includes the expansion as the new grinding circuit that we’re supplementing. We’re obviously spending some money now to grow it up to the $50,000 coming year of contingent and there is some additional money in the plant, but most of it is in terms of just normal underground development. And (inaudible).

Onno Rutten – UBS Securities

Would you switch over the copper and the zinc circuits essentially; the zinc will start becomes a major volume or is it really expanding the zinc circuits keeping the copper circuit as is and hoping that you extend the copper mine life on a continuous basis?

Phil Wright

That’s a present basis. We do have the option in the future as you correctly point out. To switch those plants over and I think that’s a decision, where we are with Lombador other than I think you probably got a idea is that we’ve done all of our drilling from surface. There is a limit to how much we know, so the key thing for us was to get down now to the old body and start. So, we’re starting off on this basis. I think once we get down to that underground exploration, we can then develop a much clearer idea in terms of what the full development scale is for Nevis and clearly one of the alternatives at that stage is to look at switching two plants over, because they are both very flexible.

Operator

And we’ll move to our next question comes from Greg Barnes from TD Newcrest. Please go ahead.

Greg Barnes – TD Newcrest

I’ll apologize ahead of time. So its on Lombador again, but the 140,000 tonnes of zinc. I guess that implies 90,000 tonnes from Lombador itself. What kind of ore tonnes would you be lifting at that rate?

Phil Wright

Greg you know the thing we dealt through this on an incremental basis, because the ore that will come from Nevis and the ore that will come from Lombador will change over the period as we go forward. The grades at Lombador are generally higher than the grades at Nevis. So the 50,000 tonne capacity, when we start up, will all be coming from Nevis. But in future, some of that 50,000 tonne will also come from Lombador as that makes sense because we’ll just be getting a better grade from doing that down there.

Now in terms of ore tonnes, I think we’re looking in the order of, if you would have worked on sort of a nominal number, incremental number, I guess rather than anything else, probably is around million tonnes, would be better, we’d be looking?

Greg Barnes – TD Newcrest

A million tonnes of ore from Lombador itself?

Phil Wright

Well, incremental tonnes getting addition through what we’ve effect.

Greg Barnes – TD Newcrest

So the shaft capacity, once you’ve completed the expansion will be 4.5 million tonnes?

Phil Wright

The shaft capacity is done. We expanded that during June that all the works done. Its about 4.5, 4.6 million tonnes and the jobs gone very well and the shaft is operating beautifully as I understand it. Joao?

João Carrêlo

It’s 4.6 million tonnes and the capacity we have now in the chart. So basically just change of the skips, and the breaking system and installation of balance rope and it sort of it’s operating very efficiently at the moment.

Operator

Thank you. We move to our next question from Kerry Smith from Hayward Securities. Please go ahead.

Kerry Smith – Hayward Securities

Phil, could you just breakout the 140 million euros into sort of big blocks of capital just to give me sense as to where that 140 euros would get spent in the broad sense?

Phil Wright

Carrying the broad sense I’ll probably do that when we do the feasibility study. I mean the majority of it is in terms of mine equipment?

Kerry Smith – Hayward Securities

So mine equipment…

Phil Wright

Yes mine development, mine equipment, so mine development, some more about equipment with mine development is the majority of it.

Kerry Smith – Hayward Securities

And in that 140 million euros, I assume the expansion of the existing same circuit there right?

Phil Wright

It’s incremental on top of the existing expansion, correct.

Kerry Smith – Hayward Securities

So does just run through over a 140 million does not assume you’re switching over the zinc and copper circuit then?

Phil Wright

Absolutely not, now we’re putting a logic growing circuit at the front end on the zinc plant and will be running it through the zinc plant.

Kerry Smith – Hayward Securities

And then excess Lombador would be by define, right? You’re not assuming a new shaft on this number, right?

Phil Wright

No, we are not.

Kerry Smith – Hayward Securities

You are not. Okay.

Phil Wright

We’ve increased our capacity of the shaft, we’ve increased our capacity on some of the underground haulages and we will be accessing it through the decline that’s presently gone down into the operation. My view is the shaft consideration are still sits in our future and but we just don’t have the information yet to know exactly what Lombador is. So until we gets some more drill information, I think it’s premature for us yet to make a decision in terms of expand these shaft capacity or new shaft. So I think that question will be revisited some three years down the track.

Operator

We’ll now move to our next question David Cotterell from BMO Capital Markets. Please go ahead.

David Cotterell – BMO Capital Markets

I’m going to ask one of those annoying questions, will be the lower CapEx guidance at Tenke, can I read through that in saying that anything about negotiations of Freeport market having with the government?

Unidentified Company Speaker

I think for those annoying questions I’ll get Paul to pick that right now.

Paul Conibear

I think as Freeport and ourselves have noted, the (inaudible) aren’t done yet. If they hadn’t been done and (inaudible) with that, earlier in the second quarter, our spend for the year would have been higher.

There are a number of scenarios which are being looked at, which inevitably, we assume that we’re taking into account the current situation that is hard to view. Its not (inaudible) although they are still in very constructive construction (inaudible) there, in order to make another major investments that are instantly in the country that we lodge (inaudible) compared to the successful behind this. But we are looking at a number of scenarios in expansion, Freeport as mentioned has a 50% of stake as the base rates are and others above and even below their rate.

So until those decisions are made, the amount of capital spent going into Tenke this year. And a big payments (inaudible). They are pretty aggressively, lets bury some program in the areas on the additional mining footprint which are their production of as Freeport has guided and just normal on going with (inaudible).

David Cotterell – BMO Capital Markets

I guess Freeport made a couple of comments on their call regarding that and it kind of sounded like Richard was having better conversations with the government or they were kind of on hold I suppose while they’re doing their celebrations on being an independent country, if you want to call it.

Paul Conibear

Yes, if you’re looking for additional comments, I think a bit hard for me, its best (inaudible) to color on that. We maintain a very (inaudible) biologic regarding that, between the government and Tenke partners.

David Cotterell – BMO Capital Markets

And Phil if I may, just in terms of Lombador, there’ll be somewhat incremental increase in copper as well, not just zinc. Big increase in zinc, there will be some in copper and lead as well?

Phil Wright

They will. The lead is one of the issues that we’ll be continuing to look at in relation to the feasibility study phase. We’re doing a bit more metal testing. I think ultimately we’ll have the capacity to extract lead and ultimately the fund, the commerce is not going to be done in the lab, but it’s going to be done when we start mining.

So, we’ve seen higher lead grades in Lombardo than we do elsewhere in Neves. And as a consequence, I think that we feel there is pretty reasonable prospect of getting lead out. And yes it’s going to be copper. We’re presently updating, the pre-freeze was done on 2008 resulting in losses. And we’ve had quite a lot of copper drilling successes at that stage. So one of the things in the freeze is also picking up, the latest drilling that we have. I think we have a pretty strong feeling that there is more copper down there than we can identify, trying to drill 250,000 euro holes from surface. And so once we get some decent underground drilling we’re expecting that we will continue to drill up coppers with that also. Yes, there will be more copper coming from Lombardo.

Operator

Thank you. We now move to our next question from Markus Almerud from Morgan Stanley. Please go ahead.

Marcus Almerud – Morgan Stanley

Two questions, first regarding Neves-Corvo and the throughput that you are putting through. What you had in Q2 was some 650,000 tonnes which is roughly what you had in previous quarters and a quite dramatic increase in Q1 even though you had the spillover effects from the strike. What kind of level should we expect going forward and also in terms of zinc, is this the level we should also expect for the rest of the year?

Phil Wright

Mark as I think its clear I could probably answer that. If I refer you to our outlook we expect to produce 77,000 tonnes of copper this year and 6,000 tonnes of zinc and what I really want to get sort of drawn into forecasting too many levels as far as our production is concerned. So that’s a target we’ve been working to and we continue to see if we can do better than, but at this stage I am comfortable with those numbers.

Marcus Almerud – Morgan Stanley

My second question is just regarding the CapEx in Lombador, the 140 million; when do you expect to start building? So when should we see (inaudible)? Will it be? Would you start building this next year and then go to 2013 or later than that and when do you expect to be done with the feasibility study?

Phil Wright

Okay the feasibility we are expecting to complete Q1 next year. There are some long-lead items involved in expansion for Lombador and that are primarily middle items and there is a chance that we might be making some commitments likely this year and not even waiting for the feasibility study. So we’re just looking at critical part at the moment to decide what is governing that and what we should be spending in advance, generally speaking particularly with mills. There is a very standard practice where most can be ordered and you get increasing amount of cancellation fees if anything particularly goes wrong. So I don’t think you should expect much this year. You will start to see it building up from next year.

Of course we’re advancing the length at the moment. So as far as our rent development is concerned that’s ongoing as we speak. We are mobilizing up on that to make sure that we can push that forward and get down to that 300 level as soon as we can.

Marcus Almerud – Morgan Stanley

Okay and then just going back to Neves-Corvo, the increased shaft capacity, will we see you using any of that before Lombador or will that simply be waiting?

Phil Wright

No, I think we have capacity now in the shaft, we have capacity in the plants and the beauty we have it, never ceases depending on prices and we have a lot more flexibility than much doesn’t minds us seeing up and therefore we can decide as we go forward how best to use it, but I think you’ll find that for most mine manages that it sit around and leave their capacity unutilized. So I’ll refer to exactly may we’ll be looking at using some of their capacity for lower grade copper which at present prices, we can treat at and above what our normal mine plant would have been.

Operator

(Operator Instructions). We’ll now move to our next question from Cliff Hale-Sanders from Cormark Securities. Please go ahead.

Cliff Hale-Sanders – Cormark Securities

Just another one those annoying questions on Tenke. And you can have they’ll be to answer it, but with the election coming up in 2011, is there any concern on your part that the government officials may just want to put this off until beyond the election timeframe. This was to make any real concrete decisions, and just another question before you answer that one. From the Lundin perspective obviously investing in Tenke is a great world class opportunity and Lombador looks very attractive at this point. But should we look at other opportunities for Lundin to grow via M&A so that you actually have full control over some of these projects as opposed to being no at Freeport’s back in call, I guess the (inaudible).

Phil Wright

Let me just answer the second one first and Paul then you can take the first, I guess I firstly, I don’t think I feel that we at Freeport’s beck and call. I mean I think we have an excellent working relationship with Freeport, they are very good partners. We try very hard to be the same and in terms of the size of the opportunity at Tenke, I think you could probably count on the fact that we are not in a position to go and acquire Freeport interest in Tenke and I think you can probably see that our interest is not up for acquisition but someone else.

So, but from the point of view of your question in terms of broader corporate development, yes we obviously are very actively looking for new opportunities and we don’t set out for the preset to decide we will not do something unless we control it. I think we have a flexible model that looks at each opportunity on its side and decides how appropriate to do it. And I’ll have to say with the SX-EW plant such as Tenke’s and I have to say with quite honestly Freeport is a better operator of that plant and we could be Freeport is one of the largest operators of SX-EW in the world. If you want to see world class operations you got to see this. So I’m happy having them as a partner even if we are their beck and call. Other issue Paul, you go.

Paul Conibear

Yes, its pretty hard just to especially on when your elections are going to be sometime next year is what we have expected, because we don’t know details on same capital, we speculate how that might or might not affect operations like Tenke. We are pressing on to maximize the efficiency of Tenke and expand it prudently as we can. All of them will come and go.

Operator

Thank you and we’ll move to our next question from Christian Kopfer from Nordea Markets. Please go ahead.

Christian Kopfer – Nordea Markets

Just a follow-up question some more. My questions have been more or less been answered but looking at just to clarify the production guidance for this year, does that include any of the earlier start ramp up of 25,000 tonnes in Neves?

Phil Wright

No it doesn’t.

Christian Kopfer – Nordea Markets

And also on the depreciation, is the second quarter representative for the next couple of quarters?

Marie Inkster

The depreciation is based on your, its over proven improbable, so given production was slightly lower, I would expect it to be a touch higher in the future quarters.

Christian Kopfer – Nordea Markets

Okay, that’s all?

Phil Wright

You have your electors and just got a off whatever you’re modeling production to be really expensive on the units of production basis.

Operator

And now we’ll move to our next question from Pierre Vaillancourt from Macquarie. Please go ahead.

Pierre Vaillancourt – Macquarie Capital

Just wondering if you could provide your best estimate on when you may be driving cash flow from 10-K?

Phil Wright

I think it’s obviously something is contingent from the metal prices, but I think we’ve previously guided that we expect somewhere around Q3 next year and you know what we seen so far is consistent with that.

Pierre Vaillancourt – Macquarie Capital

I may have missed it but in terms of the cobalt output this year, what’s the outlook on that?

Phil Wright

You didn’t mention it wasn’t there. Sorry don’t worry about that, now look we’ve reported cobalt on an actual basis regarding as far as copper is concerned, but I think generally speaking, our view is that there is some issues to be soft in the cobalt circuit, but we don’t see any impediments to achievement or exceeding the cobalt name-plate capacities moving forward. Paul, I don’t know if you want to add anything to that.

Paul Conibear

You know its been reported previously the capacity of cobalt in hydroxide contained metals capacity is 3,000 to 6,000 tonnes per annum. I think it was last week’s guidance that we had expected it to be above that for the year.

Phil Wright

I think their guidance was above nine.

Operator

Thank you. It appears we have no further questions at this time, so.

Phil Wright

All right operator thanks, thanks very much for attending guys and follow-up questions we are happy to take. Thank you very much operator.

Operator

Thank you. That will conclude today’s conference call. Thanks for your participation ladies and gentlemen. Thank you.

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