Q3 2006 RIO NARCEA GOLD MINES INC Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: [OPERATOR INSTRUCTIONS] Good morning, and welcome to the Rio Narcea's third quarter 2006 financial results for November 10, 2006.

Your host for today will be Chris von Christierson. Mr. Von Christierson, please go ahead.

CHRIS VON CHRISTIERSON, CHAIRMAN & CEO, RIO NARCEA GOLD MINES, LTD.: Thank you very much, and good morning to you, everyone. My name is Chris von Christierson. I'm the Chairman and CEO of Rio Narcea Gold Mines Limited. It gives me great pleasure to chair this meeting for the discussion of the third quarter results of the Company.

Firstly, the financial results. For the third quarter ended September the 30th, 2006, Rio Narcea reported net income of $15.6 million or $0.10 a share on total revenues of $59.1 million. %his compares to a net loss of $9.1 million and $0.06 a share on revenues of $30.1 million for the same period of 2005. Revenues from nickel operations totaled $37.3 million for the third quarter of 2006, compared with $11.5 million in the same period of 2005. Revenues from gold operations for the third quarter of 2006 were $21.8 million, of which $13.9 million was sales from the Nalunaq ore, compared to $18.6 million of which $10 million was from Nalunaq ore during the third quarter of 2005. Operating cash flow provided by the Aguablanca nickel operation was $23.6 million in the third quarter of 2006, while consolidated operating cash flow amounted to $18.5 million for the quarter compared to $6.3 million in the same period of the prior year.

Net income for the third quarter includes derivative losses of $8.4 million arising from the effect of higher copper and gold prices on the hedging instruments that were required to be entered into by the Company for the project financing of its Aguablanca and Tasiast projects. For the nine months ended September 30, 2006, the Company reported net income of $24.1 million or $0.15 a share on total revenues of approximately $160 million. This compares to a net loss of $29.8 million or $0.19 a share on total revenues of $71.4 million for the same period of 2005. Operating cash flow was positive $35 million for the nine months, compared with $2.6 million negative in the corresponding period last year. The operating cash flow during the first nine months of six months was mainly attributable to the increase in nickel sales from Aguablanca. Cash provided by operating activities before changes and components of working capital amounted to $54 million in the first nine months of 2006, compared to negative $1.7 million in the same period of 2005.

Turning now to a review of the operations, firstly, the Aguablanca nickel operation. The Company produced 3.4 million pounds of nickel and 3.7 million pounds of copper during the third quarter of 2006 from processing 275,000 tons of ore. Head grades during the quarter were 0.6% and 0.51% for nickel and copper, respectively. This compares with 258,100 tons of ore processed in the third quarter of 2005, which produced 3.7 million pounds of nickel and 2.9 million pounds of copper. Recoveries amounted to 68% and 88.2 %, respectively. While nickel head grades were above the reserve head grade and what the ore block model was predicting during 2005, the opposite has occurred in 2006. The new -- a new ore block model is being prepared and is scheduled for completion by year end. The lower nickel recovery during the third quarter of 2006 was a function of both lower nickel head grades in this section of the ore body and poor operating performance while testing the production of separate nickel and copper concentrates during the months of July and August. These tests have been discontinued.

Throughput improved 4.3% during the third quarter of 2006, compared to the second quarter of 2006, and 19.1%, compared to the first quarter of this year. Throughput was up 36.6%, when compared to the fourth quarter of 2005. During the third quarter of 2006, the plant treated an average of 125,000 tons a month. This compares to an average of 112,400 tons a month for the first six months of 2006 and an average of 83,100 tons a month during 2005. And I'm glad to report that, subsequent to the quarter, the plant processed 140,000 tons in October, which is a record. Grades of nickel and copper in the bulk concentrates during the third quarter were 6.3% nickel and 7% copper, compared to 6.8% nickel and 6.7% copper during the first six months of 2006. The reasons for this temporary decline in concentrate grades are the same as those given for the lower recoveries, namely lower nickel head grade and the poor operating performance of the plant as tests were conducted on the feasibility of producing separate nickel and copper concentrates, as opposed to the bulk concentrate, which we're producing now.

I've touched on the-- the October increase in plant throughput to 140,000 tons a month. The other bit of news subsequent to the close of the quarter is that we've been blessed with heavy rainfall and our water reserve at Aguablanca has now risen to 500,000 cubic meters. And as a result of very heavy rainfalls in October and November of this year, which I think marks the end of a record-breaking drought -- so that is very good news -- our water supplies would appear to be secure for the foreseeable future.

Turning now to our Tasiast gold project in Mauritania, West Africa, the construction of the project continues to be on time and it is expected to be completed during the first half of 2007, with first gold production shortly thereafter. Total budget for construction of the project, including working capital and earnest costs, amounts to $73 million, of which $42 million has been spent as of September 30, 2006. Remaining expenditures will be financed from the Company's existing cash resources. As we announced previously, the Company entered into a project finance arrangement with Macquarie Bank for $42.5 million, and that was fully drawn down and has been utilized. The other -- another bit of news subsequent to the end of the quarter at Tasiast is the revised resource and open-pit reserve calculation for Tasiast. This new estimate was -- included incorporated or revised gold price and revised cost inputs and these together have increased the proven and probable reserves to over one million ounces of gold -- 1.04 million ounces of gold, which is an increase of 18% over what we had previously estimated. Furthermore, our Ball Mill has arrived on-site, and this is the last critical path item remaining to be delivered.

Turning now to the El Valle and Carles gold operations in northern Spain, the Company's own gold operations produced 10,800 ounces of gold in the quarter compared to 20,700 ounces in the same period of 2005. Sales from our own gold operations amounted to $7.9 million in the third quarter, while the cost of sales of those …