Central Asia Metals plc (CAML) Earnings Call Transcript & Summary

Good day and welcome to Central Asia Metals Half Year Results 2021 Presentation. I will now hand you over to Nigel Robinson, CEO. Please go ahead, sir.

Well, good morning, everybody, and welcome to Central Asia Metals plc's 2021 interims presentation. And if we can have the first slide then, please, George? Hello, George, can we have the first slide, please, just put up on the screen there. We seem to have a bit of a technical problem I'm afraid here at the moment. I was just waiting for the slides to come up on the screen, so I can talk through them. [Technical Difficulty] what we've done in the first 6 months of this year. I'm delighted to announce some really strong financial numbers, as you can see on the page there. So on the back of those strong -- that strong financial performance, which is driven by strong commodity prices, we're delighted to announce an increase in our dividend to GBP0.08 for the first half of this year and we'll also be paying back early a $10 million of our corporate debt facility. So $10 million back to the banks and GBP0.08, which is $19.5 million back to shareholders, which if we were to pay the similar kind of dividend at the final that would be a yield of about 6.8%. That's driven off the back of strong revenues. Our revenues increased to $106.3 million from $75.4 million in the comparable period last year, and the EBITDA on the back of that is 61% margin, which is $64.4 million. A key number for us is our free cash flow, and that's increased 131% in the 6-month period to $48.9 million from $21.2 million. All of us will remember, last 6 months in -- the first 6 months in 2020, so the comparable period was a particularly tough period for all businesses, but still 131% improvement is a good performance on the back of those strong metal prices. And that's the number, the free cash flow that we paid that dividend against. And we were around the 40% of that number for the GBP0.08 dividend that we've announced this morning. On the back of those strong cash flows over the period, we are deleveraging the balance sheet. We've now got just under $61 million of gross debt on the books and cash of $54.3 million. Outside of the financial numbers on sustainability issues. We've had a good response to COVID-19. We currently only have about 3 employees at Sasa with COVID-19 and none at Kounrad, and our procedures are proven to be robust to prevent much disruption on-site from the pandemic. We have unfortunately suffered 3 LTIs and I'll talk about those later in the presentation, which gives us an LTIFR at the half year of 2.5. We set to be reported our second sustainability report to GRI standards in April of this year. And one thing which we negotiated one day after the period end on the 1st of July with our electricity supplier in Macedonia, with the supply of 94% renewable energy to the site, we have to purchase a percentage from the government, which is claimed to be renewable. So in essence, we're looking at a 100% renewable energy at the Sasa mine. And that should reduce our CO2 footprint for the Group, not just Sasa, but for the Group by about 35%. We are still working on other projects at Kounrad and also at Sasa to further improve that and we'll be coming out with targets later in the year as part of our climate change strategy. And last but by no means least before I hand over to Gavin, the Cut and Fill Project at Sasa is underway, it's progressing well and we're on track to deliver on that in Q4 of 2022. And on that point, I'll now hand over to Gavin to give some more information on the financial numbers.

Thanks, Nigel. If you could turn to Slide 4, please, which just gives us a background to the market that we operate within through the last half. COVID is still prevalent, unfortunately, and we are seeing sort of wary vaccination programs. So we continue to be sort of wary ourselves, but -- and operating within this environment. But what that has impacted is, is metal prices, so you can see in the charts on the right-hand side of the slide. The average prices that we received for copper, lead and zinc over the past 3 periods with appreciable increases in those prices due to sort of squeezed supply, robust demand, given the sort of stimulus that we've seen coming through from governments. And also sort of build back better mantra that governments are selling us with the transition to green economy, very supportive of copper prices and also zinc prices, lead. We did see some supply disruptions throughout the industry, but a weak demand from auto industry due to this semiconductor shortage has capped some of the demand there. Treatment charges, we mentioned here because those feed through to our lead and zinc revenues. We did see an increase period-on-period that's because those prices sort of kick in from April 1 every year and we do expect them to reduce as of April 1 this year, and we do continue to see spot TCs being suppressed mainly due to continued COVID impacts on supply and sea freights. If we turn to Slide 5, please. This is a summary of the income statement. As Nigel mentioned, the highlights there. Gross revenue and EBITDA really responding to those increased commodity prices, with increases of 41% in the gross revenue line there. And what I'll draw your attention to here is some increase in the cost of sales. Now, that does include $14.8 million of depreciation, which goes -- which we report in that line. Then we also have an unrealized hedging loss, which is $4.9 million in our cost of sales as well, which -- hence, we're sort of reporting an adjusted EPS at the bottom of the table there, which strips out that unrealized loss to allowing a period-on-period comparable. So you can see the EPS has gone up by almost double. Again, the chart on the bottom right-hand side of the slide probably tells the story best, where we're seeing increases in the commodity prices and their impact on revenue. You can see that copper alone has contributed to a $20 million increase in revenues with more modest increases from lead and zinc, but still significant to push out that gross revenue line on the income statement. Margins remained strong across the business. As Nigel said, 61% for the business as a whole and segmentally, we are looking at a EBITDA margin of 80% at Kounrad, which is a stunning result for that operation and 54% at Sasa, both significantly increased over the prior period. We turn to Slide 6, please, we can show you the sort of development of our EBITDA from H1 2020 to H1 2021. Obvious there are the huge increases in commodity prices that we've seen for each of copper, lead, and zinc. And then where we've sort of suffered some losses, we had a fair value loss on the hedges of $1.9 million, we hedged 30% of our metals for the year, beginning January. And then the other cost of sales, we are seeing some inflationary pressures, which I'll talk to you a little bit more in a later slide. And then G&A cost of $1.9 million is non-cash and relates mainly to share-based payments. We turn to slide, what is this one, 7, yes. So cash cost at Kounrad, as I said, that EBITDA margin of 80% really being driven by extremely low costs. They have increased from $0.48 to $0.57. This is a consequence of increased electricity prices, primarily increased reagent consumption and a slight decrease of 393 tonnes in terms of units produced. So if you look at the dollar amounts at the bottom of the table, you can see almost a $1 million increase, which is related to -- in the C1 costs, related primarily to some inflationary pressures and those reagents, which constitute $0.6 million of that amount. And if we look at the total cost of sales, we are looking around 20% higher total cost of sales at Kounrad but around half of that is actually related to MET which is the royalty effectively that which we paid to the government for copper extracted and that is directly related to the increased copper prices. If we switch to Slide 8, please. Similar chart for Sasa, the C1 equivalent zinc cost. We have seen an increase there again of around $0.16. That is attributable to a slight decrease in production, which Nigel spoke about earlier, $0.05 of which is cost inflation, again around consumables and reagents. If you think about it, we consume things like steel in the ball mills and copper in the flotation plant as a reagent. So all of that commodity complex increase of prices filtering through to miners right now. And also, the way we calculate the zinc equivalents with the relative price moves in lead and zinc, plus the production increase relatively on zinc and lead, we are reporting more cost towards that zinc than we did in the previous period, hence, the higher C1 cash cost. But if you look at the actual unit costs on-site, those are almost entirely down to inflationary pressures. A lot of that is actually foreign exchange at Sasa, where we've seen the Macedonian denar, which is paid to the euro appreciate relative to the dollar and 41% of our sort of on-site costs are related to foreign exchange increases. If we go to Slide 9, balance sheet, as Nigel said, we continue to delever and more aggressively with the additional prepayment that we announced this morning. Let me draw your attention to a couple of items which may stand out on the balance sheet, one is your PPE number, which has decreased fairly significantly. There's 2 reasons for that. The primary one again is foreign exchange where the local balance sheets in Macedonia denars is impacted by the relative some weakening of the dollar there, plus also we've started depreciating our latest tailings facility, and this is the first full period that we'll be reporting the depreciation of that facility. If we go down the table to other liabilities, that unrealized hedge loss of $4.9 million needs a balancing item somewhere in the accounts, and that's where it sits right now within that $22.4 million, hence, the higher increase there. Slide 10, please. And this related to CapEx. Now, if you recall from our previous announcements, we've -- and we have been talking about a project to transition from the current in sub-level caving mining method to cut and fill and we started to see some of that CapEx come through in H1 this year, $3.3 million of the total CapEx spend on a cash basis is relating to that project, alongside $2.9 million of sustaining CapEx at Sasa and $1.5 million of sustaining CapEx at Kounrad. Now, the sustaining CapEx relates to replacement of some mining fleet, mine development underground and also the usual dripper pipes and implementation of, what we call, the ILS system, Intermediate Leach Solution system on the Eastern and Western Dumps at Kounrad. Cut and fill, you can see the little photograph there, some of the items that we bought, that's a new twin boom jumbo, which is going to be excavating a decline. So it's that sort of thing that we're buying, so declining equipment and we also received certain items related to the paste fill plant that we are constructing and also, some prepayments that we've made on equipment relating to that cut and fill project as well. Final slide for me, Slide 11. Cash flow and this is important because it does drive that dividend. We're very pleased to report that enormous increase in free cash flow period-on-period to $48.9 million. Again, if you look at the sort of developments of that from the cash balance at the January 1 this year, we generated $60.9 million of cash from operations. We have, in terms of investment and returns to shareholders, purchase of equipment $7.7 million, repayment borrowings $19.2 million, dividends of $19.4 million and all value generated for shareholders there and then some other items, including income tax interest and some adjustment on our working capital facilities as well. So ending the period with a very healthy cash balance of $54.3 million. On that note, I'll hand back to Nigel. Thank you.

Thanks, Gavin. Hopefully, you can see there a strong financial performance, strong balance sheet, and some good returns back to shareholders, as well as early repayments of debt. Just a few slides now on our progress in improving our sustainability and our ESG credentials. Health and safety, first of all, Slide 13, if you don't mind. At Sasa, we have disappointingly had 3 LTIs in the first 6 months of this year. We're working to understand what went wrong and improved the procedures on-site there. And at Kounrad, we've had no LTI. So overall, at Group level, we're reporting 3 for the period. As I said before, that gives us an LTIFR, which we measure ourselves against of 2.5 for the 6-month period. COVID we have our cases of COVID on-site, 77 at Sasa and 58. These accumulative numbers. At Kounrad, currently, we have no cases at Kounrad. We only have I think it's 3 or 4 people now currently with COVID-19 on-site. But I think overall, as I said before, I think we are controlling that reasonably well. The vaccination programs, given quite a lot of the government initiatives and government pressure effectively in Kounrad, we've got nearly 100% of our employees now double vaccinated, which is really encouraging in terms of moving forward with this pandemic. Slightly worse at Sasa where we think it's 36% at the moment that we had vaccinated. There is a little bit of resistance to vaccination within the country. That kind of percentage vaccinated mirrors what the general population is. So we are trying as best we can through a program of education to try and educate people about the benefits of being vaccinated. And slowly but surely, the governments are clamping down on things that you can't do without a vaccination. So I think that's helping us on-site as well. But that's work in progress a little bit. Moving on to a more broader update on sustainability. We published our sustainability report, our second one to GRI standards in April this year. That incorporates 4 of the 17 United Nations Sustainable Development Goals. So no poverty, good health and well-being of all our staff, quality education, decent work and economic growth. So I think all the work that we're doing on there is pushing us forward in terms of how we report on sustainability matters. And we're quite proud of where we've got to for the size of the Company that we are. At both operations, both Sasa and Kounrad, we now have an independent legal entity that we call a Foundation, which is just charitable works for the community. We put money into those separate legal entities, and all that money is ring-fenced for community projects to improve education, welfare and just move things forward from a sustainability point of view. The outlook, we continue to work on our climate change strategy, as I mentioned before, we're looking to come out later this year or early next year with some greenhouse gas emissions target. We've made a good start with this 35% reduction in Group levels from the renewable energy at Sasa. But we're also working on solar farm at Kounrad and other initiatives, tree planting, et cetera, at Kounrad and Sasa. And we'll come out with more details on that later in the year. Couple of other points, Asset Retirement Obligation, which is something any mature and responsible company will do for closure responsibilities, what's expected of us. We've engaged with a company called Golder to actually do some work on that and we'll be reporting on that later in the year as to what our plans are in that regard. And the last one is the Global Industry Tailings Standards, which we're making good progress in terms of compliance with that on the suggested 3-year guideline from August of last year. We're quite well advanced on that in terms of meeting the compliance against that particular standard. If we turn to Slide 15, I won't talk much to this, but just to reemphasize the point that we are setting targets for sustainability. And against those targets, executive remuneration will be benchmark. So we will be set targets and rewards and remuneration will be against how we perform against those targets. So for example, in governance, we're looking this year for zero human rights abuses. The health and safety, ones that we've always set ourselves really 0 fatalities and improvements in LTIFR. People targets in terms of collective agreements at Sasa and also, developing plans to train and develop and improve the knowledge and the workforce at Sasa and Kounrad. Environment, zero severe or major environmental incidents is the target for this year. Unfortunately, we -- as everybody on the call probably knows, we did fail on that one with our TSF4 incident last year, almost a year ago to the day, but I think we've recovered from that and I'll touch on that a little bit later. And finally, on the community, just working closely with the community really and putting money into the community to develop it and be a responsible citizen. Just a little bit more on the greenhouse gas emissions. You can see the chart there on Slide 16, we did manage to reduce our CO2 footprint because we use less coal at Kounrad primarily between 2019 and 2020. So we're now reporting for 2020 about 98,000 tonnes of CO2. As I've said before, the 35% reduction in that number on an annual basis from this renewable energy supply that we've negotiated at Sasa. Just a few key facts and figures there of our electricity consumption at both sites, and I won't reemphasize the point about the 35% reduction. So I think I've probably said that enough. In terms of Slide 17, just a little bit on where we spend money within the communities. And the picture on Slide 18, which I'll come to in a minute, is where we primarily spend some money at Sasa. But at Kounrad, we have purchased an ambulance to help out with, not just the pandemic, but moving forward with all kinds of health issues in the local town of Balkhash, near to us. And we're constantly putting money into the community there to help out. So just moving to Slide 18, just few pictures there, really, not a lot of words, just a lot of pictures of something which we spent just north of $100,000 on as a kind of goodwill gesture back to the community and cabinets that following the TSF4 incident. Something I think as a management team we're particularly proud of. And I was there on-site last week actually and there was a lot of young children, a lot of parents using the facility. It was a lovely sunny day and it was really nice to see that we've actually built that and given that back to the community. And I think the Mayor is particularly grateful for that as an input. And just turning over to Slide 19 now, and really to draw line on the TSF4 incident, which has taken us a while to recover from. I think it's -- hopefully, we've managed it in a very professional and transparent manner. Obviously, there was the immediate remediation of the dam that was getting back into production, some slight changes to our operating procedures there to improve things. And we have an audit from Knight Piesold in late June, early July, which gave us a very good complementary review independently of how we're managing that facility now, which is very pleasing for myself and Gavin to get that. But there's just a few pictures there of something which is taking slightly longer to remediate, which is the pollution that we very, unfortunately, did to the river. We stated at the previous announcements that 95% of the tailings have been removed from the river by the end of December 2020. In this half that we're reporting now we have continued that work. And the river is actually in a very good condition, helped by mother nature as well a little bit with some strong rains that we've had over the period that have flushed things through. But we've now removed all the silt traps. We planted 3,600 trees, 350 and 320 kilograms of wildflower seeds and grasses to try and improve the environment there. So again, that's drawing a line under the TSF4 incident in terms of the community part, for the river remediation and the work that we've done on-site to improve our procedures to prevent this happening. So if we just move on to an operational update and move to Slide 21. And very quickly, everybody knows that Kounrad operation, I'm sure, we're now reporting approximately, because everybody knows this is not an exact science in many ways that we have about 134,000 tonnes of recoverable copper -- copper, sorry, still to produce at Kounrad, about 10,000 tonnes on the Eastern Dumps and about 124,000 tonnes on the Western Dumps. Slide 22 is just a diagram, standard one that we got every 6 months up to the investors of our production, everybody knows it is seasonal. We produce more in the summer months. And the standard leach curve there in the bottom and we are progressing well on all of our cells that are currently operating in terms of the production. Moving on to Slide 23 now, something which Gavin mentioned before which is some capital work that we're doing at Kounrad to help through to the end of the life of mine in 2034 is what we call an Intermediate Leach System. That Phase 1 has been completed. That was the construction for 14-kilometer water pipeline from the East to the West in the associated pumps. Phase 2 will be completed next year with the irrigation pipeline onto the older Western cells that will be irrigating to get some extra pickup. And then Phase 3 will effectively be operating in 2023 during the summer months to increase the offtake from those Western Dumps and increase and maintain the production levels. The table there at the bottom of production and just to reemphasize, for the first half of this year, we produced 6,214 tonnes of copper, and we're on track for the upper end of our guidance of 12,500 to 13,500 tonnes of copper. Slide 24, just moving on to the Sasa zinc and lead mine. We've now owned this operation for almost 4 years and just a few statistics from it. We've now generated $214 million of EBITDA from it. So it is a highly profitable operation. We've repaid $135 million ahead of the announcement this morning for the early repayment of another $10 million of that debt repayment. We have reserves and resources out to 2037. And as everybody knows, it's a mechanized underground mine. The production numbers there, Slide 25. The table on the right-hand side just showing the first half of this year. We mined 414,000 tonnes of ore. We processed slightly more, 423,000 tonnes of ore. We have some stockpiles in the surface at the beginning of the year. We have had a few issues with some of the grade issues as we've -- when we were a bit behind on development. So we generally get higher levels of dilution when we're getting production from the stopes and -- the stopes and we suffered that a little bit in the first half of this year. We are recovering from that, we've had some couple of good months and we are maintaining, as a consequence of that recovery program, our guidance for the year of 23,000 to 25,000 tonnes of zinc and 30,000 to 32,000 tonnes of lead. And just to reemphasize, what we've actually done at the half year, which nearly 11,300 tonnes of zinc and 13,800 tonnes of lead. But just as mentioned, those points about the grade and we have a program to try and recover some of those grades by doing more production from the development stopes as opposed to the -- sorry, the stopes from the development channels as opposed to the ore stopes. So that's Sasa production. Big project at Sasa on Slide 26. I won't talk much to that slide because it's just a picture of the portal for the new decline, which we've started. So if you move over to Slide 27, we now named this new decline the Central Decline, in Macedonian, that's [ Misdock Central ] for those who might be interested. Development has commenced. We've got a good team on-site, led by Phil Jackson and [ Tommy Purcell ], who were managing that and training the guys in the new equipment that we bought to manage that new decline. And we've done so far approximately 200 meters. We took the decision to start the decline from the 910 levels to start underground effectively, where we've done now 188 meters. And the picture you just saw a minute ago, which was the opening portal. We've now excavated in about approximately 10 to 12 meters from that surface and we're just getting to the point where we should hit hard rock and then start heading down to meet the 910 level. We expect to do about 800 meters of new decline this year and it is a 3- to 4-year program to do 3.8 kilometers in total. And why we're doing it? Well, it's going to give increased ventilation and improve the ventilation. It will make far easier access into some of the lower areas of the mine and it would be -- it effectively increase our ability to ultimately increase production up to 900,000 tonnes with greater access to the lower ore bodies. So that's the Central decline. And the long section on Slide 28, I think it is which shows the mine. Again, I won't talk to that. You can see the dash line there just showing where that new decline is heading from the surface and nearby the process plant down to the 910 level and subsequently down to below 750 level on a 3- to 4-year program. Slide 29, the paste backfill plant, which is a key part of this program is well advanced in terms of designing and choice of suppliers for most of the equipment. And the equipment lay down area on-site has been established when those supplies are delivered. The new site offices have been delivered to site and we'll be marketing out and segregating the area shortly. And as I say, most of the major plant components have been ordered. And over the next few months, we'll be delivered to site ahead of construction starting in the first half of next year. And we're on track to install reticulation from -- starting to install reticulation, which is basically the plumbing of the pipework that takes the paste in the backfill plant to the voids and the areas within the mine that we'll be putting that paste. We are on track to start that pipework in October of this year. And as I say, on track, in total of the construction of the paste backfill plant in the reticulation to be done by Q4 2022 and then it will go into operation shortly thereafter. So we transition into cut and fill mining. Probably the more difficult aspects of the project in some ways is dry stack tailings. We did have a while, but we weren't 100% sure where we're going to place those tailings. Knight Piesold have done a conceptual study and given us confidence that we can place between 3.7 million to 4.4 million tonnes in the older area of TSF2. So we are now going to detailed engineering design and we're expecting report back from Knight Piesold at the end of October on the detailed costings and design of the dry stack tailings, landforms we call it. The plant itself, which is a basic filtration plant to get the moisture levels down to 11.5%, is fairly well advanced with the team on-site in terms of, as with the backfill plant, design, ordering of equipment and that is also on track for finishing by Q4 of 2022. So that's Slide 29 and Slide 30. Just moving over now to slide -- jumping on then Slide 32, if everybody, please, just look at that. And our capital allocation priorities, and just to reiterate this morning of the GBP0.08 dividend, that's going to cost us about $19.5 million. But on top of that, we're paying $10 million back to the bank in advance of the regular payments that we made, which is $3.2 million every month. We maintain our policy of 30% to 50% free cash flow being paid back to shareholders. This particular dividend, as I said before, is 40% of that. And in total, since we started the dividend policy back in 2012, we've now paid back GBP1.20 to the shareholders, $229 million in total, something as a track record, we're particularly proud of as a Company. And as Gavin said, and I won't reiterate the point, we are deleveraging rapidly. And in theory, with this advanced payment of $10 million, we would have paid the debt off by August 4, 2022. Just continuing with capital allocation, Slide 33. Clearly, in the other leg of that is not just paying back dividends and paying back to the debt holders, but it's also investing in the business, developing the business. And I've already touched on the Cut and Fill Project at Sasa. And we are spending between $18 million to $19 million of CapEx by the end of '22, upside to deliver on that. What will it give us? It gives a more efficient method of mining, maximize extraction of our mineral resources, some more metals for the ore that we're actually mining. And it will certainly improve the tailings storage in a more environmentally friendly way as we put 40% to 45%, that kind of level of tailings back into the voids underground. And it will be a lower CapEx and building another 2 TSF4s further down the valley, which has its problems and complications if we were to had to go down that path, but this is a solution to that. And finally, on capital allocation looking at growth opportunities. We continue to look, it is opportunistic, and we've looked at about 18 opportunities over the past 6 months and various NDAs signed and site visits, but there's nothing much better than that at the moment. But clearly, it's something we wish to do to actually enhance our portfolio of assets within the Group. So just finishing off on Slide 34, just on the outlook. I think we've announced some strong financial numbers this morning. We have got a good strong sustainable business with strong finances and good performance on the sustainability aspects. Strong operational performances, a few challenges in the first half of this year that we're working hard to overcome. And our basic mantra is to produce the basic metals that we need, that are essential for modern-day living in terms of what society needs to actually move forward. Strong EBITDA and free cash flow generation, a good dividend back to shareholders, this morning announced of GBP0.08 and $10 million back to the banks. And our outlook is really to continue on delivering to our shareholders the production, work on our climate change strategy, which we're -- is work in progress and we'll deliver either later this year or early next year. Delighted with the reduction that we so far managed to achieve on the CO2 footprint of 35%. And strong metal price environment is, obviously, a very favorable tailwind for us and long may that last in terms of maintaining good financial performance for the Group. And on that note, I'll hand back to the operator, Emma, and we'll open it up to any questions.

[Operator Instructions] We will now take our first question from Alexander Pearce from BMO.

So it's really good to see, obviously, the move to renewable energy at Sasa. I just wondered, could you give us any kind of indication of the cost impact of that going forward? And then also, obviously, moving to cut and fill, I wondered if you can kind of give us an idea of how much of an impact to your overall energy consumption as well for the mine?

I'll deal with the first question, Alex. Yes, there is not a major premium. We've been using EVN, who is the supplier of our electricity for some time now. It is quite complicated the supply of electricity in Macedonia, which is why we're really only claiming 94% because they have put in place, in discussions with us, a process whereby they'll audit that and give us declarations of origin to prove that it is renewable energy from a company called EVN Elektronik, which is a sister company of [indiscernible], a 100% renewable energy. In terms of the costs associated, we paid a slight premium for renewable energy. The electricity costs, in general, have increased at both of our operations, and particularly at Sasa where they've gone up from $0.065, I think, was per kilowatt-hour closer to $0.10 per kilowatt-hour. So across the world, we were experiencing an increase in electricity costs because of these issues. So how much of that is factored into? I certainly don't know, but we paid a small premium above and beyond that price just to ensure that we got renewable energy from them within, as I say, a certified process underlying it. In terms of our increased CO2 from them because of the cuts and fill, probably during the construction period, you're right to say that will happen. But I think it's probably a number of moving parts for us to assess what the actual footprint will be once we move into cut and fill, because obviously, we've got a different operation then with different movements from how the ore is moved underground and through the decline. And we are looking at using electric vehicles in the future and that's why we've widened the actual decline itself from the original plant, so we can accommodate potentially in the future electric vehicle. So I think that would help. So there's quite a few aspects we're looking at Sasa and at Kounrad to bolster that initial starter pack, if you want to call it that, of 35% impact on our 2019 or CO2 footprint. Does that...

And then maybe if I could ask -- sorry. Hello? So can you still hear me?

Yes, we can hear you Alex. Sorry, yes.

Okay, good. Sorry. Yes, maybe I can just ask a kind of a follow-up just on Kounrad, obviously, you haven't completed the feasibility study yet. But do you have a kind of a rough idea about how much power potentially could come from solar in terms of like a percentage of the total and how seasonal that could be?

Yes, I think the amount that we consume at Kounrad, we're looking at solar farm contributing, I think, 20% to 25% of that power. So it will be no more than that, really. It wouldn't be the full 100%. As things improve in Kazakhstan, we will look at other opportunities there. But at the moment, that's where we're putting our focus as we move from scoping study to feasibility study and we've allocated the area and we're dealing closely with people to actually get that delivered effectively.

We will now take our next question from Sam Catalano from Canaccord.

Two questions. Just firstly on unit costs in the second half. Obviously, you've already spoken a bit about some of the inflationary pressures that you dealt with in the first half. Just wondering how you're seeing that into the second half of the year? And then the second question, just to maybe push a little bit more on capital allocation, which to be fair, you've been very clear on. But assuming the Board discussions, where you potentially could have gone through the top end of your payout range, 50% and perhaps not paid as much back in debt. Just wondering how the decision process worked around balancing those 2 sort of competing uses of capital?

Do you want to take, Gavin?

Yes, well, I'll take the first half, certainly. The -- in terms of unit costs, Sam, I think we -- the electricity increase that Nigel mentioned earlier, we're going to see more impact from that in the second half at Sasa. We think that all the other costs are reasonably under control. And you're probably seeing what we presented today is probably going to continue into the second half. We may see some additional G&A at Kounrad as well relating to some salary increases there just as sort of inflationary pressures here. But other than that, not so much. On the positive side of things, as I mentioned earlier, we've got our treatment charge contracts kicked in on April 1. So second half TCs will be lower than H1 TCs, which -- and yes, we've reported earlier, we're looking at about a 30% decrease annually on those treatment charges. So that's a good positive there.

And I think some of the capital allocation, hopefully, become more reasonable. It's a fair question you asked, how did we arrive at that decision? I mean, it's one of these situations you never please all the people all the time, can we? So we have different shareholder basis and what we thought it's a good balance was to pay a healthy dividend. There's also -- we've got some shareholders who wouldn't prefer us to pay the debt off maybe earlier. So we thought because of the strong cash flow generation we've experienced because of the high commodity price, it seems a good balance to pay back early without any penalty some of the debt early. And I think that strikes the right balance. And we didn't want to get ahead of ourselves too much because it would maybe then create a problem to the final dividend what people expected almost then. So I think it's a good balance, really. And we have historically played around the 40% mark. And I think GBP0.08 and $10 million back to shareholders just strikes that balance from a capital allocation side correctly.

We will now take our next question from Richard Hatch from Berenberg.

Nigel and Gavin and team. Few questions. First one, just on the move to the Western Dumps. Are you comfortable on the recoverability there? I mean, you kind of talked to the challenges that you saw, you managed to mitigate it in this sort of first year of going wholly there and next -- in this winter, you'll kind of blend between East and the Western. But are you comfortable that you are able to get the recoverability that you're looking for? And is there going to be any impact on costs as a result of that if you need to sort of throw a bit more reagent at it or such like?

Yes. No. I mean, on the cost side, first of all, Richard, we don't expect a major incremental increase in costs as the consequence of doing any of this, really. And am I confident in the recoveries? Well, we've now been leaching the Western Dumps since 2017. And yes, we are confident. And we're claiming, what, 35% to 42%, which is quite a range of different cells. And we're confident that we will get that recovery over the life of mine out to 2034. But clearly, because it is lower, and it's a longer leach time and everything else, we have to husband those cells and that's what we're trying to do here by trying to get an extra little bit of pickup from what effective is, I said rain, I said lot of rains which is, in fact, is freshwater we're put on, and that's what we will do, we get a little bit of copper back because there's enough pyrite and pyrrhotite in there in the cells to generate their own asset. If we have to add some assets to it, we will do, but we don't suspect at the moment from what we've experienced in the West that we need to do that and then we'll put it on just to increase the tenure of the grade and just to help with the production side of it. So not a major increase in cost, confident with the operation on the West having the lead now for 3.5 years and the kind of recoveries that we're getting on our program to rotate around those Western cells to get the 124,000 tonnes that we require. And we may end up, as we often say, it's not an exact science, we may end up recovering more than that, but our plans are based on those numbers and those recovery levels and we're fairly confident that we can do it. We -- Howard and the technical team there had planned this ILS system quite some time ago, actually, and we don't need it at the moment, but we feel it will be a good beneficial supplement, if you like, to the operation in the future, a pretty minimal CapEx cost to be quite honest with you. One thing, just to add on to it, which we did experienced in the winter of last year was, we stopped -- for the first time since we started operating, we stopped the Eastern Dumps and just leads the Western Dumps. And that did create a few concerns over the consumption of reagents. That came through some of the costs. And firstly, it was plummeting even people like Howard and the rest of the technical team, who are pretty knowledgeable about these things. And we concluded there was other physical leak, which we then concluded there wasn't because we expected the whole equipment. And we look to discuss into levels and the different makeup between the East and the West. And so as a consequence of that experience last winter, what we're decided to do is continually leaching the Eastern Dumps throughout the winter period, this winter. And I think that will help as well with the kind of makeup. So as with many things in life, Richard, you live and learn as you're going through it, but I think we're fairly confident in how we manage and postpone those dumps through to the end of the life.

And can I switch over to Sasa? So you talked a bit earlier in the presentation about the dilution challenges that you were seeing there. Would you just be able to kind of give us a bit of a flavor as to how you're seeing sort of the mine performed in the last couple of months since you provided that last update? Is it kind of more tracking in line with your expectations? And are you managing to kind of show some signs of improvement and get a handle and sort of address those challenges that you saw?

Yes, Scott and the team on-site have put in place. We felt they handle on developments is the honest answer. And we have got some [ ground improver ], ground conditions down at 910, 990 level, which takes a bit of work. So they put in place a recovery program. So we are seeing more of the ore coming from the development as opposed to the stoping, which is developed in January has got lower dilution, as I said before, because you're more in the core of the ore body. So this recovery program is showing signs in July and August. We've got a couple of good months, I have to say, which is positive. But I don't want to sit here and be disingenuous and say, well, definitely, that we'll get back to the lower end. And that's what we kept maintaining guidance up, but we may be a couple of percentage short. And likewise, we may be a couple of percentage over on the copper, as I said before. But we have a plan in place and we're working hard to deliver on that. And the past 2 months have shown signs of recovery from that with increased combined grades on daily basis for quite a number of days about 7%. So that's all positive as far as we can see.

And then while we're still at Sasa, just -- I mean, I noticed in the results there has been kind of commentary around technical work to look at the move to 900,000 tonnes a year, third ball mill and maybe some additional [ flotations ]. I mean, we got a kind of rough sort of order of magnitude and what kind of CapEx that might be?

Well, we've got the order of magnitude on the main backfill plants and everything else. So I think we've put around $2 million or $3 million for the plant. If you're talking specifically, Richard, about plant expansion, that's the kind of number.

No, there is a -- the ball mill, third ball mill?

That's the kind of number we're talking about $2 million to $3 million on the ball mill, the plant expansion. It will be a few more flotation cells, a bit of an expansion maybe to the building itself. And then a ball mill is what Barrie O'Connell, I think who's running it, he's thinking about at the moment.

Sorry, I'm maybe done. Just on the labor renegotiations at Sasa, have you got a steer and what kind of them inflation rate that kind of is a good order of sort of magnitude to think about?

The actual official inflation I think it's about 3.5% in Macedonia at the moment, something of that magnitude. We are going through -- we will go through a collective bargaining agreement, which we expect to finish in this half of the year. So I can't really say what percentage pay rise we make in next year in terms of that will be a pretty confidential information. So no, I can't. But as I say, and as Gavin alluded to, we are -- as most mining companies and people across the world experiencing some cost inflation as a consequence of higher oil prices and metal prices, we're not immune to any of that. But I think the numbers are probably sub-10% overall, even though they look on the face of it higher than that. If you strip out exchange and you strip out mineral extraction tax and those kinds of things, we're probably looking at percentages in some consumables, in some aspects at mining 10% and some that's less. So anything below the 10% I suppose is what we're looking at as a kind of cost inflation overall that we're experiencing across the [ factory ].

Yes. Okay. And then just on the M&A commentary, would you be able to give any more sort of -- are you looking across the piece in terms of development assets? Or is it producing? Or is there any -- could you just give a little bit more flavor as to kind of some of the broader kind of opportunities you're looking at? Should we be expecting maybe a producing mine or something that you can just step in and finish the development mill?

There's not a lot more I can add, if I'm honest with you, Richard, and I always feel like give a woolly answer on this, so I do apologize. But it is opportunistic and we are increasing our focus on it and our energy on it really to see what we can pick up on top of our current assets, which is a great base to build from. And it could be something -- I mean, ideally will be something in our own area, be it, in the Balkans or Central Asia in copper is primary but like this can't chooses sometime. So we have to look at other assets and be a bit more creative and look at the opportunities and look at every aspect of it. So we continue to do that. I think we're looking at having paid all our debt off next year at some stage and certainly, turning into a net cash position soon, we will become stronger by the day to actually acquire a decent asset, but it is opportunistic still in terms of where we look.

I mean, it sounds obvious, but the key thing is the accretion metrics that we look at here. So Richard, of the 18 that we reviewed over the last 6, 7 months or so, we would have included producing assets, development assets and a larger sort of transformational...

M&A, yes.

We will now take our next question from Peter Mallin-Jones from Peel Hunt.

Unfortunately, actually jumped in with my M&A question. So I will defer to the next questioner, please.

Sorry about that, Pete.

[Operator Instructions] We will now take a follow-up question from Richard Hatch from Berenberg.

Sorry, I have got a last one. I'll just -- with the Traxys agreement kind of coming to a conclusion at the tail end of next year, how are you thinking about the sale of the products from Sasa and Kounrad when you haven't got a sell into Traxys? Would you kind of extend, you happy with that? Or do you think you could get a potentially a better agreement somewhere else?

Well, Richard, I think the -- on Kounrad, we've been selling to Traxys since the outset there, but we have during that period run at least one tender process, where we've invited other parties to tender for the material. And there is no obligation to stick with Traxys beyond October '22 on Kounrad. So I foresee us running a similar process, again. On the lead-zinc side, it's a product that's far more complicated, the logistics are way more complicated as well. So I don't see us doing that ourselves, but we haven't decided anything yet in terms of running tender processes and the like. But I think there's certainly benefit to having somebody with that deep market knowledge assisting us with those sort of sales.

Any other questions, Emma?

There are no further questions in the queue at this time, I will turn the call back to your host.

Okay. Well, thank you very much for everybody attending this morning. Thank you to Louise for producing a lot of the literature for and thanks to Gavin, and thanks to the Board for supporting us on announcing a very healthy dividend of GBP0.08 and $10 million back to shareholders. We will work to improve our climate change strategy or develop our climate change strategy as we've already announced, work to improve on the production in the second half from the first half and deliver on that guidance for the year and continue to pay down our debt and look for other business opportunities. But I'd like to thank everybody for paying attention this morning and listening to us. And we look forward to meeting some of you, hopefully, in person physically in the near future as we move, hopefully, out of the COVID-19 restrictions we've all suffered from for the past 18 months or so. So thank you very much, and goodbye.