Antofagasta plc (ANTO) Earnings Call Transcript & Summary

It is now 1:00 and time to start the webinar. Welcome to the Antofagasta live Q&A webinar and conference call. I'd now like to pass across to Andrew Lindsay of Antofagasta. Andrew, please go ahead.

Good morning or good afternoon, anywhere you are, and welcome to our half year question-and-answer call. We have with us today Iván Arriagada, our Chief Executive; Mauricio Ortiz, our CFO; and Rene Aguilar, our Vice President, Corporate Affairs and Sustainability. We arranged a Q&A facility here. [Operator Instructions] We will video and some people are telephone in. If you're joined by video, if you want to ask a question, raise your hand and then you'll be asked to say your question when you get to the top of the queue. [Operator Instructions] We're encouraging everybody to -- who's joined by video, if you can please use your video and yourself to make this more interactive. Okay. With that, I'll hand over to Iván, who will just do a short introduction before the Q&A starts.

Thank you, Andrew, and hello to everyone and a warm welcome. And thank you for joining us as we announce our midyear results for this year 2021. Before we speak about our results, I must tell you that sadly, after 3 years without an accident, we had a fatality in July at Pelambres. So our condolences go to the family and friends of Fernando Silva, who worked for Pelambres contractor company, Besalco. I would like now to talk about our results and the key highlights of the midyear. I think we are reporting a strong set of financial results with a record EBITDA of $2.4 billion and an EBITDA margin, which is close to 66%. This has allowed us to continue to strengthen our balance sheet. We have a strong financial position, and we have a net cash position of just over $700 million at the close of midyear. Turning to our production. As we released in our quarter 2 production report, group copper production for the first 6 months of the year was 361,500 tonnes, and this was in line with our expectations, programs and guidance. In terms of cost performance, we've had a strong cost performance during the first part of the year and achieved a unit cost -- unit net cash cost of $1.14 per pound, which was ahead of guidance. So we continue to perform very well on the cost side, and this, we think, will carry on for the balance of the year. We remain committed to delivering shareholder returns and, therefore, have increased our interim dividend to $0.236 per share, equivalent to a payout ratio of 35%, which is fully in line with our dividend policy. And this represents an increase of around 280% compared on last year's interim as a result of the increase in net earnings base. We have continued to progress our projects and most importantly, the project at Pelambres, which involves the expansion of the plant, but most critical the construction of a deselination plant and a water system for Pelambres, which is now 52% complete, and we expect to be able to finish in the second half of 2022. We have, as in conjunction with the release of our results, introduced a revision to production guidance based on potential water availability restrictions at Pelambres. As you will know so far this year, precipitation at Los Pelambres has been significantly less than in 2019. And we do quote this year because '19 was up until now one of the driest years in the 12-year drought period that we are experiencing. And during the first part of this year, we've seen unprecedentedly high dry conditions with almost no rainfall. As a result of this, and if there is only minimal precipitation in the balance of the year, we do expect to have an impact on production at Pelambres, and therefore, our production guidance has been adjusted to a range between 710,000 tonnes and 740,000 tonnes as the winter rainy season is now coming to an end. And this is important, the winter season comes to an end in September -- in mid-September, which is when we expect rains to be prevalent, and that is now coming to a close. However, we have maintained, despite this change, our cost guidance at $1.25 per pound. Looking into 2022. We also are running different scenarios ahead of the water system being available and finished as part of the INCO project. And therefore, we've estimated that if there is no rainfall continuing until that date, that around 50,000 tonnes of production at Pelambres could potentially be at risk in that worst-case scenario. So we've also noted that in our guidance commentary. Finally, I would like to mention that we continue to make significant progress on our sustainability strategy. We announced earlier this year our revised emission reduction target by a further 30% to be accomplished by 2025 as we had achieved our earlier -- target earlier than anticipated. And this comes along also a target of carbon neutrality by 2050, which is the same or in line with what the Chilean government has set for the country, and therefore, we are working with the government in the different technology and policy elements of being able to achieve that target, developing a pathway for that purpose. If technology and regulations allow, we will bring that forward. And we've also, and I'm glad to share, recently obtained international Copper Mark certification or validation for Centinela, and we are progressing the same for all our other sites, which is good news, and we expect to get it very closely for -- shortly for Zaldívar and then the other companies. So in summary, we continue to make progress on our sustainability strategy. By the end of the year, we should be on 100% renewable power, and our desalination plant will be completed and that's in the second half of 2022, and that will be one step closer to having 90% of the group water requirements being CO recycled water. We ended the half year in a position of financial strength with a record EBITDA of $2.4 billion, up by 133% and a net cash position of $700 million. And we have also made good progress in advancing our growth projects. So I think that's the sort of summary and highlights I wanted to share with you ahead of beginning the Q&A as we sort of release our results today.

Thank you for that summary. And we're now going to move on to the Q&A section of the webinar and conference call. If I could just remind people that questions will be from the webinar will be video. [Operator Instructions] Now we have our first question from Jason Fairclough from Bank of America. Jason, you're being promoted to panelists.

Okay. I think I'm in. Okay. Look, just a follow-up on the water issue. How acute, how serious is it right now in the Central region? Are you really worried? Or are you just being conservative? And I guess as we look out to next year, is it possible for your desalination plant to fully supply the needs of Los Pelambres once it's up and running? And last question on water. Are we going to see any further evolution in the government's approach to water use permits?

Okay. Thank you. Jason, so let me address the -- how significant is the water issue? I mean I think we have been observing the evolution of certainly rainfall and weather conditions this year. And they are quite significantly dry. And I would say we've had a quite unseasonably high temperatures as well. So the situation, I think, is quite significant from the point of view of this being a very dry year compared even to 2019. Now having said that, we're actually in the course of this week going through some rain for the first time as we sort of finished the winter. So there is a slight improvement in the course of this week. How significant it might be? It still remains somewhat unclear. But I think the general trend undoubtedly is that we are traveling into much more of a drier year and, therefore, this is an issue. Now in our estimates, I think we have been prudent in the sense of looking at scenarios in which we have little, minimal or very small rainfalls. So they're predicated on that basis, and therefore, are catering for that extreme case, both this year and next. Now once we have the plant in place and operating, and we expect that to be in the second half of next year, as I've mentioned, we are making good progress in the construction, which is most -- more than half -- more than 50% complete. Yes, we would expect basically to be able to have addressed the water requirements at Zaldívar, which made the shortfall, considering that the water balance is a blend of other sources as well. So by then, we expect to be in a safe territory from the point of view of water supply. In terms of government policy, I think what we've seen is that there's been recently a bill to amend the water rights situation in Chile. I think that's still in process. So it's still being developed. But in the case of desal water, there is no impact. I mean the desal water that we are providing -- constructing for the purposes of supplying Pelambres is, in fact, a very good climate change response or adaptation to the condition. But also from a legal point of view, it does remove any risk of these changes in law having an impact. So from that point of view, we feel we're well protected from any changes in that aspect.

We're going to promote our next question from Daniel Major. Daniel, promoting you to panelists.

Yes, I guess question just to follow on from Jason's around risks to 2022 in terms of water. If I look at the revised guidance for Los Pelambres about 320,000 tonnes to 330,000 tonnes for this year. When you talk about the 50,000 tonne risk, is that 50,000 tonne lower than this year? Or would you have been expecting some incremental production uplift in 2022 on the basis of either grow it or completion of the expansion? So is that a risk to the downside or risk to what you previously had anticipated? That's the first question.

Yes. So in the case of Pelambres remember that we were not expecting to get an upside on the INCO project in 2022 because it's expected to be finalized towards the end. And therefore, we were not expecting from that point of view a specific improvement because of extra capacity. Now what will drive, therefore, production for Pelambres next year is essentially grade with existing capacity. And now with the limitation of water, if that were to eventuate in the worst-case scenario, then that would be the outcome of production at Pelambres. So we're not expecting, as I say, to have extra capacity available from INCO until very late in 2022, and therefore, would not be a factor next year. So we were, from that point of view, not expecting extra capacity, just the grade performance. And what we're thinking for next year in grade is the grade for Pelambres will be similar to what we've seen this year, slightly lower maybe, but in that sort of range.

Got it. So in the worst-case scenario, it's 50,000 tonnes less year-on-year. Okay. And then the second question around projects. And I noticed the planned Board approval for the Centinela expansion is now 2022, not first half of 2022. Can you give us a bit more detail on that? Is that associated with or dependent on the outcome of the review of taxation? Is any delays to the approval of that project is associated with perhaps waiting for some very high input costs we're seeing at the moment to moderate and further the economics of the project? And is there any early steer you can give on where the original $2.7 billion CapEx number might be shaping up at?

Yes. So on the DMC, I think we've continued, just to be clear, to work on the sort of detailed engineering. We've been awarded on a limited or conditional basis some of the key contracts. We got a key contractor working for us on this. So we are working on the readiness to be able to undertake the project at the time that we make the decision or choice to do so. So that's on the preparatory phase. So work has not stopped, and we continue to work on the design, which derisks the execution. Now I think the key thing is we want to get, from a project point of view, to a level in which we have at least 65% of detail engineering complete, and that will be achieved early in half 2. On the other hand, we've said we want to sequence our construction efforts in a way that we have most of Pelambres built when we undertake DMC, and that will happen now in the course of 2022. So the sequencing also has, from that point of view, moved things slightly back. And then obviously, there is a lot happening in terms of royalty discussion and the constitutional assembly work. And I think it's prudent also from a point of view of understanding the landscape for a long tenure project like this one in terms of both aspects, taxation and any potential changes to mining regulations. So because that work is due to be completed during the first half of 2022, then by the time this is taking for a decision, all of those aspects will essentially be dealt with. And therefore, we will have a full set of information to allow us to make a decision on a more informed basis on those aspects. So all of that comes into play. Now in terms of capital estimate, I think we have worked on updating our capital estimate, and the number is still similar to what you've quoted. So even though pieces may have changed, we are essentially in a number, which is not too different than the number that you mentioned. And on top of that, as we've also mentioned, we have been making progress and work on looking at the way of eventually divesting of the seawater system as a way of reducing the front-end capital. And we are now in the process of actually bidding for a potential interested party to take that contract or that possibility. We will assess whether it's attractive once we get the bids, but that will, on the back of a similar figure that you mentioned, reduce also the front-end capital spend if we manage to divest the water system. So that structural approach to the project, it's capital estimate have not significantly changed to the numbers that we've talked in the past. And we believe early, probably in the second half of next year, it's a good time to look at the project for a decision because a lot of this information that I referred to would be clearer for a choice of investment at that time.

Great. Just a final one. Based on that information, I guess, it's fair to assume you won't spend really any CapEx associated with the Centinela expansion next year if you're only planning to move it to approval back half of the year. Is that fair?

No. I think there will be some, but not significant, but there will be some. I mean we are spending some capital in the way of advancing the detailed engineering already. So we're not posting in the sense that the work in terms of being able to get ready for a good execution of the project is still progressing. So we are spending some capital. But obviously, that will increase significantly only after the approval. And therefore, we would expect that a much heavier year spend would be 2023 if the project gets approved. So some capital expenditure next year, but most significantly after that if the project is approved.

Our next question is going to be coming from Ioannis Masvoulas from Morgan Stanley.

A couple of more questions from me on the water situation. The first on the production risks of up to 50,000 tonnes that you flagged for 2022. You don't seem to be factoring in any mitigation strategies such as high-grading the mine for a few quarters or using any third-party water source. Could you verify if that's the case? And is that something that could possibly mitigate the risk if you were to consider that?

Okay. Ioannis, yes, I think the assumption is that the -- in quoting that number, is that there is no rainfall, and therefore, that it is a sort of worst case scenario. Now in terms of mitigation what we are doing and implementing is improving and stretching as much as is technically possible the efficiency with which we recycle water. And I think because we've worked on that over the last couple of years, I think the scope for that is more limited because we are probably recycling as much water as you can and are at the higher topper end of performance in that aspect compared to other mining companies, both in Chile and globally. Now in terms of adjusting the mine plan, yes, that is not factored in. So there will be probably somewhere that scenario to come into place, there would be some changes in the mine plan, which could probably provide some change in grade. However, we like to think of the mine development as we develop our mines in the long term, and therefore, we would not compromise in any way the way that we develop the mine, which is really planned on a long-term basis. And I think that's extremely important to stress that. I mean, we see this as a short-term situation. We've been working on the permanent solution to water since 2016 when we first filed the permit for the seawater system. And we want to take a long-term view in how we address this shortage if we have an impact. So some changes in the margin, but I would not expect that we would go and make significant changes. Certainly, we would not high grade the mine in a way that it would involve any sort of long-term compromise. That's not the way that we would do it. And in terms of third-party water, I mean that's limited. We work within our community. And obviously, this is something which is impacting us and the community. And therefore, we are jointly working in addressing this challenge. On the one hand, we are ensuring that there is water available for human consumption by means of ensuring that every small town and village has got the water requirements filled and that's happening. And from an agricultural point of view, we've been working also with the people in ensuring that the water is used efficiently, that the wastewater is minimal, that the way that the water is used for agriculture is optimized. So a lot of this is about engaging with the community in that constructive way and facing this jointly. So we're not planning on buying water from other sources, one, because there's limited availability. And certainly, we would not want to do that in a way that it would compromise the ability of others to perform their business like the crops and agriculture. So that's not something that we're contemplating at a scale, which is material or different -- or would make a difference.

That's very clear. And maybe a question related to the desalination plant. Is there any visibility on the exact timing because you mentioned second half of next year. But I guess if it's middle of next year, that gives you far greater visibility on the production risks; if it's towards the end of the year, that 50,000 tonnes could be even worse. So maybe -- how do you think about the scenarios that you've run around the exact timing of commissioning and, I guess, the ramp-up of the desalination plant?

Yes. We think that the -- so far, I mean, when we say half 2, say the midpoint of that is quarter 3 so that we would expect that in quarter 3, we would be doing the commissioning of the plant. We expect that the ramp-up would be fairly quickly. This is no known technology, and we are expecting that and planning so that we can ramp up the plant pretty quickly. Now -- so that will be the base situation in which we are performing our programs and plans. If there is opportunity to bring some of that forward, we will look at that and I'm looking at those possibilities. But so far at this stage, I would say, it's safe to say that it's quarter 3 for commissioning.

That's great. And maybe a very last question from me on Zaldívar. So you're guiding to a 10 percentage point improvement in grade -- in recoveries that would lead to a 10,000 tonne to 15,000 tonne output increase. But at the same time, you are running the process grade significantly above reserve grade. So if we take everything into account, how should we expect finished capital output to develop for the mine over the next 2 to 3 years? Will it be up or will it be down relative to the past 2 or 3 years?

Do you mean the production?

The production, yes.

Yes. No, look, we will provide more detailed guidance on each of our mines in October. But I think that in Zaldívar what we've experienced is an ore body, which has got into phases where we have low solubility. And as you know, leaching is the process that we use there. So the key is being able to transform the process such that we're able to leach essentially secondary sulfide. And the way of achieving that is through the project, which -- with the chloride leach. Now that will, therefore, improve recoveries in the way that we've described before. Now I think in terms of going forward, therefore, we should expect to see that build into the production and, therefore, some -- a net increase. This will, however, change year-on-year because, as we know, rates may change, and therefore, it may change year-on-year. So we will provide detailed guidance in October, but those are the factors at play. And I think we're positive about Zaldívar from the point of view of being able to achieve a step-change in recoveries on which we have the project implemented. The project has progressed well. I mean we are close to 80% advance in construction, and therefore, we will be able to have it ready early next year. And then we'll see the benefits of the change to chloride, which I think will be important.

[Operator Instructions] Our next question is from Jatinder Goel from BNP Paribas.

A couple of questions. First one, on Pelambres concentrate pipeline. It's indicated that it's reaching end of its life. So are you able to indicate total CapEx required to replace that pipeline? And what's the time line to replace this? Because it looks like it's all bundled into the EIA of second desalination plant of Los Pelambres. So does everything, including those, Mauro enclosures that you need to build need to happen by 2025? And what's the total CapEx we need for this pipeline replacement and those Mauro enclosures? That's the first question, and I'll ask the second one afterwards.

Yes. Okay. So you're right in the sense that it's a key piece of infrastructure. And we expect to be able essentially to build it after we get the permit, which is in process that you referred to. So it will be ready by 2025. So between 2023 and '25, we'll be able to build a replacement pipeline. It's not dependent on the other components. So each of them, the expansion of the desal plant and the other works required at the Mauro are somewhat independent, but the permit is sort of it's one. And that's why we've called this the project to adapt operationally, the operation to basically be able to be ready for the next phase of production. The capital cost, I think the -- and I'm going to give you sort of a range because I think we're working still on the estimates, final estimates, but it's probably around $350 million for the full pipeline. That's, as I say, a preliminary number, and I think we're still working on that final figure. Mauricio may be able to comment on that. But it's an important project, and we think certainly for the life of Pelambres, it's a key piece of infrastructure, which we're going to build. And we're going to also doing it in a layout, which is friendlier because it's removed from sectors, which are now close to communities, and therefore, it will provide more operational independence as well.

Understood. That's very clear. Second question on water infrastructure tender. You're aiming to conclude it by 2021, while the new concentrator approval doesn't come until second half of next year. So will the tender be contingent on the company actually going ahead with the project? Or are you happy to outsource the current infrastructure and monetize even if next concentrator were not to be built? Or does it imply that the decision is implicitly made that the company will go ahead with this one? And related to that, is the water infrastructure, both current and future stays within company's balance sheet? Has Centinela got enough debt capacity to fund the project?

Yes. So the -- yes, the bidding, as you say, will probably come to a close sort of this year and then the award will probably happen in the course of the first part of next year, but it's conditional on the project. Now we got to see the offers that we have requested both with and without the project, and therefore, we will look at them in those -- in that way. However, I am of the view that we would have -- we would have a preference to look at this decision as a joint decision associated to the project because what's more attractive probably for an incumbent -- I mean, from an incoming party is to be able to not only take the water system, but actually do an expansion in the water system, which would be associated to the project because you know there is probably the prospect of some extra return there. And on the other hand, for us, the construction of such, we can reassign that risk in a different way where we do build it ourselves. So I think it's progressing, but I like to think that in the end, these are decisions that go jointly and, therefore, that they will -- that we will make that timing match as we sort of move forward. In terms of debt capacity, I think one of the interesting features is that over the last 3 years, we've seen a significant improvement in the performance at Centinela. I mean, if you look at every indicator across Centinela, the numbers are performing well. We used to have this issue of the thickening of tailings, which is now very stable. The plant is actually achieving throughput rates, which we have not seen before, over 105,000 tonne a day as sort of we've reported. And the financial numbers come along the same sort of line. If you look at net earnings and profit -- I mean, after tax for Centinela, very significant for the first part of this year. So we have an asset which is now performing very well. We think it does provide, therefore, a good platform to be able to eventually undertake an expansion if the conditions are right. And from a debt capacity point of view, therefore, we think that it's -- Centinela is able to basically undertake the requirements for the project to move ahead, especially if we're thinking of carving out the capital required for the water because we will deal with it in a different fashion.

Excellent. If I could just follow up briefly on that water infrastructure outsourcing, then is -- do you think you can achieve an NPV positive outcome or will it more be NPV neutral because you'll add up unit cost, but you'll get some upfront cash?

Yes. We think that we would certainly not do this if it's not NPV positive, albeit it may be marginally positive. But we are looking at the project on a basis of we construct everything. If we have a better case from an economic return point of view, a value point of view, which we can achieve by means of having someone else take over the water system, we would do it. If not, we will build it ourselves. So it's really a condition that we get value out of this transaction and not only of risk shedding or risk mitigation.

We have our next question from Abhi Agarwal.

I have a couple of questions related to the Chilean situation. The first one is what's the latest on the royalty discussion? Are you aware of what the proposal in the Senate is -- what the recent proposal in the Senate is? And what the time line around this? And is there a chance that the new bill could be passed ahead of the presidential elections in November? That's my first question.