JX Advanced Metals Corporation (LUN) Earnings Call Transcript & Summary

Ladies and gentlemen, and welcome to the Lundin Mining to acquire majority ownership of Caserones Copper Mine in Chile Conference Call. [Operator Instructions] This call is being recorded today, Tuesday, March 28, 2023. I would now like to turn the conference over to Peter Rockandel, CEO of Lundin Mining. Please go ahead, sir.

Thank you, operator. And thank you, everyone, for joining us today. Before we get started, for those that may have missed it, we did announce the appointment of a new Director last week, Maria Olivia Recart. Maria Olivia was Vice President of Corporate Affairs of BHP for 8 years and responsible for government relations and community engagement. Prior to BHP, Maria Olivia was the Vice Minister of Finance for 4 years in Chile. Maria Olivia's wealth of experience and knowledge will be a positive addition to our board as we continue to grow in Chile. On to today's transaction announcement. We are very excited to announce the acquisition of a majority interest in the Caserones copper and molybdenum mine located in the Atacama region of Chile near our Candelaria operations and the formation of a new partnership with JX Nippon Corporation. Before we begin, I will draw your attention to the cautionary statements on Slide 2. With me on the call today are Teitur Poulsen, our SVP and CFO; Juan Andrés Morel, our SVP and COO; and Quinn Yong, our VP of Corporate Development. The acquisition of a majority interest in the Caserones Mine is in line with our growth strategy of increasing our corporate production profile and exposure to long life based [ metal mines. ] We are very constructive on the outlook for copper. This opportunity on these attractive terms is immediately accretive to our portfolio of high-quality mines. On our 2022 financial results that were recently reported, pro forma revenue increases by over $1 billion on a 100% basis, with copper contributing nearly 70% of the total revenues. Caserones complements our existing operations and the areas illustrated on the map, which we believe will unlock synergies in the future as we integrate our teams and resources. We have followed the development of Caserones for quite some time, and we've been encouraged and impressed by the progress achieved with the owners' efforts that have resulted in meaningful cash flow generation, which we believe will be sustainable for the foreseeable future. I've been to site and was impressed by their team, their knowledge and lessons learned since their commencement of operations. Our due diligence team has worked hard to understand all the intricacies of the operation, potential risk and the potential upside opportunities, which we believe will be significant. We view Chile as a Tier 1 mining jurisdiction in which we have made considerable investments over the years and have established strong relationships with the communities and governing authorities. We continue to view the surrounding Candelaria district and more broadly, the [indiscernible] Valley, extending over the Vicuña district in Argentina as central to our long-term growth plans and believe it will ultimately prove to be a meaningful supplier of copper to the global markets at a crucial time in the energy transition. We're very pleased to be forming a new partnership with JX Nippon and believe the arrangement will be beneficial to both parties. We look forward to working with them to realize the full potential of Caserones. Turning to the next slide. We believe this arrangement has strong industrial logic for Lundin Mining. We are adding another long life, large-scale producing operation to our base metals portfolio in a region in which we have considerable experience and knowledge. When considering our 2022 production, the addition of production from Caserones would have shown an increase to copper production by approximately 50% on a 100% consolidated basis. The proximity of Caserones in relation to Candelaria will allow us to leverage our knowledge, experience, relationships, supply chains and potentially existing infrastructure in the region and country. The transaction is immediately accretive on key cash flow and other financial metrics, and we will continue to maintain low financial leverage post the acquisition, given the growth in EBITDA versus the expected debt drawn to fulfill the purchase obligations. Exploration opportunities will be significant as drilling to date has been limited on the property with several nearby targets untested. We're also purchasing a call option, which gives us the right to increase our exposure in future years, and that will allow us to acquire even more copper production and the associated cash flows. We already have a great relationship with Sumitomo at our Candelaria operations and welcome the addition of JX as another well-respected Japanese partner. I will now turn it over to Quinn to provide highlights of the transaction agreement.

Thanks, Peter. Moving to the next slide, summarizing the transaction. Lundin Mining is to acquire 51% of the issued and outstanding equity of SCM Minera Lumina Copper Chile, a wholly owned subsidiary of JX, which operates the Caserones Mine. JX will receive upfront cash consideration of $800 million and in addition, $150 million in deferred cash consideration payable in installments over the following 6 years. Lundin will also retain a call option, whereby it may acquire from JX additional shares in SCM, constituting up to 19% of the equity over the next 5 years. We will be able to exercise the call option once every quarter and able to incrementally increase our ownership level. Both JX and Lundin will be entitled to pro rata offtake from the Caserones Mine. Based on our extensive due diligence completed to date, we believe our purchase of a majority stake in Caserones, the purchase terms and the option right are beneficial to our shareholders. I'd like to now pass the call back to Peter.

Thank you, Quinn. Our Candelaria mine is a good comparable to Caserones. Since our acquisition of Candelaria in 2014, we have gained significant knowledge and experience operating in the region. We have significantly extended the mine life and have materially increased our mineral resource, utilizing our proven exploration strategy as illustrated on this slide. We are very pleased with our success at Candelaria and are excited about applying these learned strategies to Caserones. The acquisition of the Caserones mine will meaningfully add to our base metals production, increasing copper but also contributing molybdenum as a byproduct. Based on our 2022 reported figures, copper production would increase 50% on a fully consolidated basis and on a copper equivalent basis, we would exceed 0.5 million tonnes. This positions Lundin Mining favorably in the list of publicly traded copper producers globally. And with our project pipeline, we will even add more scale in the future. Caserones has been an open pit mine and a significant porphyry [ copper and ] moly deposit in a highly prospective Atacama Region. The operation utilizes conventional mining and processing methods suitable with our current operational experience. It has located 160 kilometers southeast of Copiapó at an altitude of approximately 4,500 meters and is situated between Maricunga and [indiscernible] belts in the emerging Vicuña district. Construction began in March 2010 and first copper cathode is produced in 2013, followed by copper and moly concentrates in 2014. Looking historically, the mine produced an average of nearly 130,000 tonnes of copper over the past 5 years, hitting a peak of over 145,000 tonnes in 2019. However, Caserones was not immune to the challenges and setback in 2020 and 2021 with the COVID pandemic and to a limited extent, a brief period of labor action in 2021. 2022, however, was a great year with solid production and free cash flow generation. Sustaining capital requirements have been minimal and will continue to be the case going forward with moderate waste stripping required as demonstrated by the small spread between 2022 C1 and all-in sustaining costs. An overview of the mining complex is shown on this slide. Caserones includes an open pit mine as seen on the top left, a heap leach downstream on the right side with a solvent extraction and electrowinning SX-EW plant below. The concentrator is potentially located in downhole in a pit with a moly recovery plant located just to the right in the photo. The concentrate plant has a design capacity of 105,000 tonnes per day and the cat load production capacity is 34,500 tonnes per annum. The site is well supported by established infrastructure and concentrated transported 2 ports north of our [ Padrones ] port. Power supply is reliable with a 220 kV reinforce line connected to the site and sources 100% renewable power. Our new power contract at Candelaria is a minimum 80% renewable. So our overall power supply are now 90% renewable in Chile. 85% of the water recycled and make up freshwater sourced from a series of brown water wells. Caserones and Lundin Mining, both consider ESG to be a priority and aim to achieve the highest standards with regards to the pillars shown. Health and safety are very much a core corporate value for us. We aim to mine responsibly with careful consideration given to environmental factors and the communities that surround our areas of operations. Recently, Lending Mining's Candelaria operation was awarded to Copper Mark, which is a voluntary program that recognized as copper producers for their demonstrated commitment to responsible operating practices across the entire value chain. We look to carry these best practices forward to all our operations. Slide 12 shows the prospective land package of Caserones. We will aim to achieve similar exploration success at Caserones that we have achieved at Candelaria. Caserones comprises almost 60,000 hectare land area in a highly prospective region and with several near-mine targets right for exploration programs. To put this in perspective, our land package at Candelaria is 23,000 hectares. I will now turn the call to Teitur to speak to some of our key pro forma metrics.

Thank you, Peter. So one of the levers that positioned us well to land this transaction is the strength of our balance sheets and our funding capacity. After closing of the acquisition, our leverage will remain conservative given our overall net-debt ratio and the additional contribution of EBITDA from Caserones. We remain well on side with our covenants, target ratios and with significant liquidity. Based on our latest disclosed net debt position of $15 million as of February this year and coupled with a further drawing of SEK 800 million on closing of this transaction would leave us with a net debt position of $815 million. The transaction structure is centered on the lockbox principle with the lockbox state being 31st of December 2022 with a 0 debt and 0 cash position as of that date. This means that by the time the transaction closes later this year, the company that we are acquiring a 51% stake in is likely to have accumulated a net cash position at the point of the transaction closing. We anticipate closing to occur in Q3 or Q4 this year. Moving to the next slide. Again, as can be seen on this slide, on the 2022 reported basis, Caserones is accretive to our key financial metrics, constituting meaningful revenue and cash flow. Consolidated adjusted EBITDA in 2022 increases over 25% to nearly $1.8 billion. Adjusted operating cash flow nearly 40% to almost $1.4 billion and free cash flow from operations in 2022 to over $480 million or over 25% increase. I'll now turn the call back to Peter for some concluding remarks.

Thank you, Teitur. We are pleased to be partnering with JX on this exciting opportunity to acquire a majority of stake in Caserones with the potential to increase our position in the coming years at our auction to add even more high-quality copper exposure to our portfolio. I would like to thank everyone at Lundin Mining for all their efforts, and I'm very much looking forward to having the Caserones team join us in our success going forward. And with that, operator, I would like to open the line for questions.

[Operator Instructions] Your first question will come from Daniel Major at UBS.

Just a few questions from my side. Firstly, some of production, can you give us a steer on the outlook for the next 2 or 3 years on the basis of the current mine plan? I see the [indiscernible] plant is running below capacity. Is that due to grade feed, or what should we be thinking in terms of outlook for the next year? That's the first question.

Yes. Daniel, unfortunately, we can't do any forward-looking statements. We have to get out of our own 43-101, which we're already working on. We'll hopefully get that on pretty quickly. And then that will provide all the clarity on a going-forward basis.

Okay. No worries. Next one, if I could, just on the water side, I mean, it looks like you've got plenty of headroom on drawing from the aquifers, but some water availability is clearly pretty challenging in the region regardless of current allocations for aquifers. Do you have a strategy going forward to move away from Continental water? Is it possible to utilize some of the Candelaria infrastructure going forward in terms of moving away from Continental water?

Yes. I think I'll start off by answering that. So we've done a lot of work in that area. That was probably one of the key areas. We're comfortable with the amount of water they have. If for some reason, there was a change in the future with any type of legislation matters, we've done the homework to determine if we could supplement water from some of our, what I say, existing operations. We've done -- we've looked into the pipeline, our desalination capacity, et cetera. So we don't believe that this will be any kind of challenge on a going-forward basis.

Okay. And just one more, if I could, from a strategic standpoint. Can you make any comments on what this acquisition means for the development of Josemaria, in particular or the expansion of Chapada. Is there a higher probability that you will sell greater than the 50% stake in Josemaria, given the balance sheet position has shifted post on this acquisition?

Sure. Maybe I'll break that down into 2 different answers. With respect to Chapada, I don't think there's any connection there. We'll continue to look at the studies that we're doing there, so we'll keep that as a separate one. More towards Josemaria, I would say the acquisition does immediately enhance our cash flow, which is quite positive. I think it's beneficial as we continue to evaluate what the optimal plan will be at Josemaria. Right now, we're moving forward with further engineering. And we'll continue to have some of the discussions we're doing from a partnership perspective. I have mentioned in the past that we've looked at 3 different types of possible partnerships, some of which are with larger mining entities. In those cases, it is probably a higher likelihood that they would want to be in a controlled position. So we'll continue to review all those options. There's still discussions going on, and we're heading down to [ CESCO ] in a couple of weeks. I would say this acquisition does give us the immediate growth, which is great and provides further flexibility to ensure that when we make the appropriate decision for partnerships and timing at Josemaria, it will be nice to have this cash flow to support it. I'm not sure if that's -- is it well enough?

Yes, great. That's useful color.

Your next question comes from Ioannis Masvoulas at Morgan Stanley.

Good morning, Peter and [ Tim, ] congrats on the planned transaction. Just a couple of questions from my side. The first, going back to Dan's point around the strategic rationale here. Beyond Josemaria, how does this acquisition fit into your vision of developing the broader Vicuña district?

I think the way I'd add to that is, clearly, we now have a path all the way from Caldera up to Caserones where we control the port to desal the pipeline up to Candelaria and now up all the way to Caserones. So we're in a very, very strong position. I think the fact that between Josemaria on one side of the border and Caserones is on the other, which is an extremely strong and strategic position. But how it unfolds over time, I think we'll have to wait and see.

Okay. Fair enough. Second question, this asset, I believe, has been up for sale for a number of years. So why now, why are you announcing the transaction now? And more broadly, has there been a competitive bidding process here? And if so, are you seeing competing parties beyond the typical suspects that you've seen in the past?

Yes, I think a couple of different answers. When it first came to market, it was actually a minority interest, which I didn't think was attractive to us. So that's probably why there wasn't a lot of movement originally. Once they consolidated it and we were able to get control of the asset, that was more intriguing to us. Also, we believe that once the seller's expectations came in line to where we saw value, that was one of the reasons we also decided to move forward. When you look at the possible pipeline right now of opportunities, and I'm sure a lot of people on the call know what they are, to get in mind of this scale, cost structure, mine life, that's really right in our own backyard is extremely rare opportunity. It's one of those few times where you can actually purchase something that has industrial logic and potential synergies. So I think a number of the other companies that were looking at this asset and there were other people looking at the asset, they knew that we were the logical buyer because of our footprint in the area. So why now? It's difficult to predict the headlines. Obviously, there's a lot of stuff going on in the banking industry. But regardless of some of this short-term volatility, we haven't changed whatsoever in our long-term view on copper. And I think if it's only going to get stronger in the future, the price to purchase an asset of this quality is only going to go higher. So I think it's a great opportunity for us, and the timing is perfect.

Great. Very clear. And maybe if I can squeeze one last question on the track record of the mine. I mean it's a fairly high cost operation. It's had some environmental and ramp-up challenges in the past. Are there any lingering issues that you have to address early on? And any obvious levers that you can pull to bring down unit costs over the next couple of years?

Yes. So if you look at the C1 cost, the one year where they did pop up, that was 2021 and similar challenges we faced at Candelaria with COVID. So that didn't really help the cost profile, and they also did have a labor disruption of about 25 days. If you back that out, the C1 costs are a little bit lower. But I would also say that you should -- you keep your eye on the all-in sustaining costs, a lot of people focus on C1, but then don't really generating free cash flow. The all-in sustaining cost here over the last 5 years has been about $2.46. So it does generate good free cash flow, in particular, quite a bit over the last 5 years. I'm sorry, on the second part, yes, we did extensive due diligence. We had our entire environmental team down there. I think we're very cognizant of any of the historical challenges. And I think that the site has done a very, very good job of addressing those. So no concerns on a going forward basis.

Your next question comes from Dalton Baretto at Canaccord.

Congratulations. I wanted to start by asking whether this transaction is restricted to Caserones only? Or does it -- do you get any preemptive rights into the Japanese stake in [indiscernible]?

This is purely a transaction on Caserones.

Okay. Great. And then my second question. Your press release mentions potential synergies with Candelaria, 160 kilometers away. Are there any synergies with Josemaria, which is much closer, or is the border an issue?

No, I think on the Josemaria, I think there's a few obvious synergies, but one of the things -- the bigger synergies will probably require some progress from bilateral position, if you will -- sorry, binational agreement is what I meant to say. So there definitely are some potential synergies going forward, but there's some things that would need to be ironed out there. Beyond that, I think one of the areas where there would be synergies is actually on the transfer of operational skills and knowledge, because they're similar projects, similar altitudes. And so I think we can definitely learn some lessons from how they've been successful at Caserones and apply that to Josemaria.

Great. And then I guess one more on deal structure. I mean this deal seems like a bit of a no-brainer to me. Why the staggered ramp up to 70%? Was 51% all that was on the table right now?

Well, when we first discussed, the original number was 51%. I think both sides are comfortable with that. We started to move that number up, and when we were kind of getting near the finish line was also when there were some pretty big challenges going on in the global markets. And we felt that this gave us the flexibility to make sure we didn't stress the balance sheet in any way, shape or form. So we thought it was the best of both worlds, quite frankly, where we can pull the trigger to get it up to 70%. And for some reason, the world is going in a different direction. We'll keep our balance sheet rock solid.

Your next question comes from Ralph Profiti at Eight Capital.

Peter, I just want to maybe follow up on some previous questions and maybe get a little bit more clarity. This 19% call option, you just talked about it being mostly balance sheet related. Are there any operational dependence milestones that you look to achieve that extra step up? Or is this strictly a balance sheet consideration?

Yes, it's -- I mean, we didn't just say it's only a balance sheet, this also give us flexibility for other things that the company may be doing. But no, nothing operationally that would have impeded us from going for 70% by [indiscernible].

Okay. But that also was on the table, and you would have executed on that, had that been part of an upfront transaction structure.

Sorry, can you reword the question? I didn't really...

I guess my question is, was the 19% an option to have it on the upfront capital -- or sorry, on the upfront take up? Was that on the table?

That was our proposal to add that in.

Okay. Great. Okay. You talked about upside opportunity. I'm just wondering from a technical perspective on operational improvements as you attack sort of the C1 and the ASIC cost structure, is there anything particularly incremental that hasn't already been done that potentially you're looking at from a technical perspective?

I'm going to see if Juan Andrés is in Santiago, wants to take a shot at this one.

Yes. Thanks, Peter. Absolutely. I think we have mentioned the proximity to Candelaria, and it's a very short driving distance. So there is some obvious opportunity to leverage the capabilities that both companies have. So we will be looking at potential synergies and economies of scale in the district. This is something that we'll do once the closing happens. So we'll probably mention that later in our technical report.

Your next question comes from Gordon Lawson at Paradigm Capital.

Congratulations again on the acquisition. You've not been with this already, but in terms of the synergies of Josemaria, do you expect that to have more clarity in the feasibility with the Josemaria feasibility later this year? Or will that be discussed in the technical report for this asset?

No. I mean the Josemaria technical report was a complete stand-alone report.

Okay. Okay. And just an easy one, when do you expect to have the report out for this asset?

Sorry, when you say this asset, are you talking Caserones now? Are you talking Josemaria?

Yes, sorry, Caserones.

We have to put a timeline on it, but working pretty hard. I think it's going to be approximately 45 days, maybe a hair over that, but around that timeline.

Okay. So in the near term, that's great.

Your next question comes from Stefan Ioannou at Cormark Securities.

Congratulations. Just I'm not sure if you can answer this. But just thinking ahead, when we think about Caserones and the purchase, is it really driven off of sort of what you see is what you get right now with some modest improvements to cash costs and all that sort of thing? Or can we anticipate in time, maybe a scope change even given [indiscernible] next door and those types of considerations. Is that -- did that factor into your thinking here?

No. We bought this as a stand-alone opportunity, thinking it's a great asset. We think there's huge upside just with Caserones, and particularly on the exploration side. Operationally, we think there are some things that we're going to be reviewing to potentially tweak and obviously, the synergies of Candelaria. I mean clearly, to have this at the gateway, if you will, of the [indiscernible] district is also very, very strategic, but this was primarily focused on the merits of this asset.

Your next question comes from Jackie Przybylowski at BMO Capital Markets.

I was first going to ask just a really quick modeling question, if you don't mind. I know you've given us a little bit of info on costs, including all-in sustaining costs. Can you just maybe talk about what the run rate is for development capital at Caserones? Do you guys have any sense of that?

Well, we can give you the historical lens, because I didn't really call it but it can be forward looking, but it's been pretty consistent.

Yes, it's Quinn here. It's been about $150 million last year, the year before, similar. Earlier years, lower, closer to $100 million.

Okay. That's helpful. And in terms of your overall balance sheet, so I know this is being funded from the revolving credit facility that you have, and it's a good sized revolver. But you do have the CapEx for Josemaria coming up in the next few years, assuming you choose to go ahead with building that. Can you talk about how you're looking at financing options overall? Do you need additional borrowing capability to do the Josemaria project at this point, and sort of how you're thinking about solving that gap?

It's Teitur here. I mean the premise of this deal, of course, is that we started off with the balance sheet with 0 debt on it. So we are leveraging against a producing asset at a very attractive acquisition cost as we see. So as Peter said, this is going to be immediately accretive on all our key financials. And importantly, our free cash flow outlook is going to improve materially with this addition. So in that sense, it improves our look forward outlook on financing capacity, whether it's Josemaria or any other opportunities we're looking at. And on Josemaria, we were always going to assess whatever joint venture partnership we enter into, and that will dictate the funding requirement that comes on the back of developing Josemaria. So that assessment will have to take place later this year as it would have done with or without this deal.

Got it. And sorry, if I can just sneak in one last question. Does this transaction change your thinking in terms of a partner for Josemaria? Meaning, I think previously, Peter, you had said that you're looking sort of equally at joint venture partners for Josemaria that would be either a strategic investor or an operator mining company. Is that still the way you're approaching Josemaria, or does this inform your thinking any differently?

No. I think at the end of the day, we'll make the right choice that is the most beneficial for Lundin Mining, and I don't think we're in a challenging situation to change that. There are actually some other entities that have been coming forward as well with interesting proposals. But we just have to wait until we get through that engineering, as I mentioned earlier, and we'll make the appropriate decisions at the appropriate time. Sorry to be so vague.

No, that's helpful.

We're not helpful, sorry.

Your next question comes from Daniel Major at UBS.

Just 2 small follow-up questions from my side. Is the asset covered by any stability agreement, or will it incur any changes in the mining royalty that will most likely start in 2024?

Yes. It's Quinn here. There is a tax stability agreement until 2027. And there's also net operating losses, which will minimize taxes.

Very useful. And then just one other follow-up. Is there any -- what's the balance sheet position of the asset, or will it be at the time of acquisition? And should we assume that the free cash flow will be evenly distributed based on the ownership structure in terms of dividends and minorities?

Yes. I mean the dividend will be according to respective ownership, so 51% to us. And the company we're buying into will be recapitalized ahead of closing, as I said, to the basis of the deal is that we are entering into a 0 cash share of that [ vehicle ] from 1st of January this year.

Our next question comes from Dalton Baretto at Canaccord.

Peter, most of my questions have been answered, but just maybe one for me on Candelaria. I recall from a site visit a few years ago that one of the restrictions to a meaningful expansion there was the cost of the water pipeline. And I'm just wondering with this acquisition now, is there an opportunity to unlock that?

Juan Andrés, do you want to speak to that one? If not, I can.

Sure. I can take that, Peter. Thanks, Dalton. Definitely, looking at the district opportunity and the synergies and the potential for growth of both assets, we will reassess the potential for a new pipeline or increasing the capacity of the desal plant in Caldera. So that is definitely one option that we'll be studying right after we closed the deal.

Okay. Great. And just maybe one follow-up. I know you guys are working on the 43-101. I'm wondering if you can comment, is there going to be a meaningful adjustment to the reserves as you mark-to-market on the operating costs?

Just that I'm not sure if I can speak. It can be forward-looking.

Yes. probably prudent not to.

Unfortunately, we can't really say much on forward-looking numbers. But I think the answer -- the short answer is no.

[Operator Instructions] Your next question will come from Ioannis Masvoulas at Morgan Stanley.

Great. Just a quick follow-up on the operating cash flow to free cash flow bridge from 2022. I see that there is about a $300 million difference between operating and free cash flow. I think you mentioned CapEx about $150 million. You also mentioned that taxes are minimal. So I'm just trying to figure out what's the split of this $300 million, if you could provide that?

To give you the exact number, can we give you a buzz right after this call? I don't want to give you one that is off by a little bit, so I'll call you right after this.

There are no further questions at this time. So I will turn the conference back to Peter Rockandel for any closing remarks.

Thank you, operator. As everyone can see, we're very excited about this acquisition. I think as I mentioned earlier in the presentation, it has extremely strong industrial logic. I think it's pretty transformational for us with respect to our production growth, and we can see that there's certainly synergies to be unlocked here on a going-forward basis. So we look forward to updating everyone as we get through the 43-101. And also, as we close the deal, we'll be giving further updates. So thank you for everyone's participation.

Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you all for participating and ask you to please disconnect your lines.