Lundin Mining Corporation (LUN) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Lundin Mining 2022 Operational Outlook and Update Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Peter Rockandel, President and CEO. Thank you. Please go ahead.

Thank you, operator, and thank you, everyone, for joining us on our operational outlook and update call. I will draw your attention to the cautionary statements on Slide 2 as we will be making several forward-looking statements during the prepared remarks and most likely during the Q&A as well. On the call today to assist with the presentation and answer any questions are Jinhee Magie, our Senior Vice President and Chief Financial Officer; Peter Richardson, Senior Vice President and Chief Operating Officer. As I mentioned previously on our Q3 call, during my transition and now as I assume the executive leadership position, I've continued to spend valuable time at Chapada, Neves-Corvo and Zinkgruvan, meeting with our site MDs, senior management, union leads and government officials where possible. We are on the road again and in the coming days, I will be spending time in Santiago and with our Candelaria and Eagle teams as well as meeting with a number of our shareholders in Europe. Before turning the call over to Peter Richardson [indiscernible] to our annual guidance outlook. I'd like to reiterate our strategy at Lundin Mining. As detailed in our guidance release, we will continue to focus on creating value by investing in our own assets, and we remain disciplined in our approach for external opportunities to be added to our portfolio of high-quality assets. This strategy of investing in our own assets is now bearing fruit as during the current metal price environment, we are setting quarterly records with over $760 million of free cash flow during the first 9 months of this year. Of this cash flow, we have declared over [ $240 ] million of dividends from our shareholders while also repurchasing [ $36 ] million of our shares in the open market. We believe this sets us apart from our peers. I will now turn the call over to Peter Richardson to discuss the production, cash cost and capital investment guidance for our operations issued yesterday.

Thanks, Peter. I'll spend the most time on Slide 5, discussing the key aspects of our guidance for Candelaria. Copper production for the next 3 years is to increase over that of this year. The main drivers to this are improved copper head grade feed to the mill as more ore is sourced directly from the open pit as we have achieved planned processing rates. Consistent with prior mine plans, we will continue to source ore primarily from Phase 10 of the open pit next year. As the year progresses, we will be beginning sourcing from Phase 11 pushback on the north side, the [ offset side ] of the pit. In 2023 and 2024, Phase 11 is to be the primary ore source from the pit. Open pit ore is to contribute roughly [ 16 million ] tons to the mill feed next year and in 2023 before increasing to approximately 18 million tonnes in 2024. In aggregate, the underground mines are to contribute roughly 8 million tons each year, and we will keep the Candelaria mill [ full ] with stockpiled [ ore making up the dot. ] As previously outlined on our third quarter call, initiatives to debottleneck the Candelaria plant pebble crushing circuit are to be completed by late 2022 and will increase mill capacity starting in early 2023. That considered, we expect annual throughput for the [ complex ] to range between 27 million to 28 million tonnes per year between '22 and '24 based on the planned mill feed blend and ore hardness model. Mill throughput is expected to further exceed 28 million tons per year in 2025. We are continuing with basic engineering of the pebble crushing debottlenecking initiatives and anticipate procurement and construction to be completed next year. Consistent with our prior messaging, production guidance considers a mine to mill grade discrepancy of 8% in 2022, reducing to 5% in '23 and '24. With focus on operational practices in the last several months, we saw a noticeable improvement in grade discrepancy during the third quarter. The positive trend has improved further so far in the fourth quarter as we continue with our methodical approach to identify and address sources of unplanned dilution and discrepancy across the mine-to-mill process, which we outlined on the third quarter conference call. Copper production guidance for Candelaria in 2022 is 155,000 to 165,000 tons and is expected to be modestly weighted to the second half of the year, owing mainly to the copper grade profile. Gold production guidance for 2022 is 83,000 to 88,000 ounces, and similarly to copper, modestly weighted to the second half of the year. Cash costs are expected to be similar to this year, an average $1.55 per pound of copper next year after by-product credits, which have been adjusted for the terms of the streaming agreement. Details of the byproduct metal price and foreign exchange rate assumption for cash cost guidance for all our assets can be found in the press release and on Slide 10 of this presentation. Operational capital expenditures at Candelaria are forecast to total $370 million in 2022, other than the addition of the pebble crushing and debottlenecking initiatives, the scope of the 2022 investments are consistent with prior plans, including waste stripping, underground development and continued build of the Los Diques tailings plan. While the scope is consistent, the guidance reflects some inflationary pressures on key inputs such as fuel, freight and logistics. Lastly, on Candelaria. We plan to invest $15 million in exploration in 2022, including drilling of over 54,000 meters. Focus of the program is on expanding the near-mine mineral resources of the underground mine as well as testing some district targets. Moving to Chapada on Slide 6. Copper production guidance for the next 3 years is consistent with prior outlook. Gold production guidance has been increased for 2022 on the refinement of near-term operating plan. While we continue with our expansion studies to optimize the life-of-mine of the asset, the current guidance is based on the existing 24 million tonnes per annum throughput capacity. Chapada's copper production is forecast to increase to 53,000 to 58,000 tons next year and be modestly greater in the second half of the year, given forecast grade profile and seasonal operating commissions. Gold production guidance is 70,000 to 75,000 ounces and, similarly, modestly weighted to the second half of the year on a grade profile and seasonal operating considerations. Cash costs are expected to approximate $1.60 per pound of copper in 2022, after reduction of gold by-product credits. The forecast increased compared to this year guidance of [ $1.10 ] reflects higher consumable costs and lower stockpile values. Operational capital expenditure are forecast for a total of $65 million next year. The scope for the 2022 investment includes primarily waste stripping and TSF and water management works. Chapada is the operation where we have seen the greatest general inflation pressure such as consumables, freight, logistics and electricity to [ an extent ]. However, much of this has been offset in U.S. dollar trends given the currency movement. We will continue with our aggressive exploration programs of Chapada next year, investing $10 million, including 60,000 meters of drilling. The [ 2022 ] program is to focus on defining near-mine mineral resources as well as following up on recent drilling success in the Formiga area to [ inform ] our ongoing expansion studies. We're aiming to issue an exploration update early in the new year. On Slide 7, nickel production guidance for Eagle is modestly lower for 2022 and consistent with prior outlook for 2023. Copper production guidance is directly in line with last year's outlook. The mine plan continues to prioritize high-grade ores from the Eagle East and Eagle orebody. 2022 production guidance is for 15,000 to 18,000 tons of nickel, and the same amount for copper. Production of both metals is expected to be modestly weighted to the second half of the -- of the year, given the forecast grade profile. Cash costs are expected to remain in the first quartile of the global cost curve in 2022, a negative $0.25 per pound of nickel, considering the significant by-product copper credits. The forecast year-on-year increase is primarily a reflection of the lower volumes. Capital investment is minimal again in 2022, estimated at $10 million, composed mainly of underground mine development, mobile equipment and mill water treatment plant sustaining initiatives. We have reinstated an exploration budget for Eagle in 2022, so smaller than our other sites, we plan to complete over 6,000 meters of highly efficient drilling from underground as a part of a $2 million program. Drilling is to focus on extending the life-of-mine delineating extensions of known mineralization of Eagle East and following up on previously identified targets. Moving to Neves-Corvo on Slide 8. We have increased the copper production guidance for 2022 and 2023 compared to last year's outlook on refinement of the near-term mine plan, positively impacting the forecast copper head grade. Production has to increase to 33,000 to 38,000 tons in 2022, modestly weighted to the first half of the year. For zinc, construction of the ZEP is progressing on schedule and on budget to be substantially completed by the end of this year. Production guidance has been tweaked for 2022 and 2023 compared to last year's outlook on refinement of the ZEP plan is on schedule and recovery assumption for these years. Zinc production is to increase over 65% and next year as production ramp up from ZEP is to be completed in the first half of the year. With the ZEP contributing to a full year of production at design throughput, 2023 zinc production is forecast to be over double [indiscernible]. On the increased zinc production volume, 2022 cash costs are to improve approximately $1.80 per pound of copper, after the zinc and lead byproduct credit. Capital expenditures are in a total of $125 million next year, of which $30 million is expansionary capital to complete the pre-production works on the ZEP, and $95 million is forecasted sustaining cash flow. Scope of the sustaining cash flow investments include underground mine development, TSF works and water initiatives, and mine and mobile equipment. We are increasing our exploration investment at our Neves-Corvo for 2022 to $8 million, which is to include over [ 33,000 ] meters of drilling. Primary focus, we are replacing mineral resource depletion with emphasis on further delineating non-mineralized zones and ore bodies. Lastly, Zinkgruvan on Slide 9. Zinkgruvan has had a strong performance this year, and we expect that to continue. We have increased zinc production guidance 14% for 2022 and 11% for 2023 compared to last year's outlook at the midpoint of the ranges. This comes minor refinement of the mine plans from which we are forecasting higher head grade and improved metal recovery. Next year, zinc production is forecast to increase to 78,000 to 83,000 tonnes. Copper production guidance for 2022 and 2023 is generally consistent with the prior outlook. Cash costs next year are expected to improve to $0.55 per pound of zinc after copper and lead by-product credit. Sustaining capital expenditures are to total to $60 million, including $35 million for underground development, including the Dalby orebody and the remainder primarily for mine and mobile equipment, TSF work and other improvement initiatives. Lastly, we plan to invest $5 million in exploration in 2022, including drilling over 20,000 meters. Drilling will primarily target near-mine mineral resources expansion around the Dalby and Nygruvan ore bodies. On surface, we also plan to test some high-risk, high-return targets previously identified. With that, I'll turn the call back over to Peter to sum up.

Thanks, Peter. Slide 10 provides a detailed summary of our 2022 guidance, which Peter has spoken to. I believe it is clear looking at this slide that prior investments have created a highly-desired portfolio of high-quality, free cash flow generating base metal mines, which sets us apart from our closest peers. Lastly, as outlined by Peter, we've been investing $45 million next year through our exploration programs, including over 170,000 meters of drilling, primarily on near-mine targets at our own assets. We intend to provide an update on some of these efforts in Q1. As I assume the executive leadership, continuing to add strength to our existing technical team while creating value by investing in our own assets and remaining disciplined in our approach for external opportunities remain core to our strategy. And with that, operator, I would like to open the line for any questions.

[Operator Instructions] Your first question comes from Greg Barnes with TD Securities.

A question to Richardson. It says on the press release that you don't expect milling throughput at Candelaria to get above 28 million tons a year until 2025. Do you think you can get the mill in total up to 30 million tons a year as was in the 2019 mine plan once you've got the pebble crusher fixed, the optimization was done?

The forecast that we have now is considered the increases that we're planning after the upgrade of the pebble crushing circuit, but we're also [indiscernible] the ore hardness model. I think what you're referring to is 30 million tons is -- that the combination of both mills.

Right. So is that achievable?

Sorry?

Is that achievable with the combination of the PAC mill and the [ main mill ], you can get to the 30 million tons you mentioned?

Yes. Yes. Should be.

Yes, you can do that?

Yes.

Okay. The cash cost of [indiscernible] out of $1.60, is that higher consumable costs primarily? Or is it a combination of that and a slightly lower gold production coming through? It does seem like a big jump year-over-year.

Yes. It's -- Greg, it's a combination of both. The combination of the higher cost that we are seeing and the global overall inflation as well as the slightly lower gold as you've indicated. So it's a combination of both.

Okay. I'll pass it on.

And I might add, Greg, before we move forward. If anybody here is hearing loud noises, we apologize. We're in the conference room, and they've decided to start a construction project about 3 minutes ago.

Your next question comes from the line of Ioannis Masvoulas with Morgan Stanley.

This first question for me is on Candelaria and grade dilution. So you guided an improvement from 8% to 5% over the next couple of years. Shall we extrapolate this 5% through the mine life? Or are you still comfortable with the assumptions on the original technical report?

So as I said earlier on, we've included 8% for next year and then 5% for '23 and '24. And then we have included [ discrepancy factor ] going forward at a lower rate than 5% to 8% going forward, but we're not guiding more than 2 years.

Okay. Okay. Understood. And the second follow-up question, just on -- going back to Eagle. There is a meaningful step down in production in 2024, and my understanding was that you were expecting to continue operating at least until the end of 2025. So can you talk about the step down in '24? And shall we expect another step down in '25? Assuming that the [ skill ] zone doesn't go ahead just in terms of the current mine plan.

So the current life-of-mine of Eagle [indiscernible] is ending at the end of 2025, and we're mining -- we're mining the grades that are there, so we're going to keep declining grades, and that's what you see in the grade profile and production profile is declining grade.

And I might add that we do have a $2 million exploration project for 2022, so that is focused on extending along about 6,500 meters. So we'll target the Keel zone that we spoke to previously, and then there's 3 new underground targets that we'll be going after as well.

Your next question comes from Jack O'Brien of Goldman Sachs.

First, I just want to focus on your copper production. If we take a step back, production is forecast in 2024 to be roughly flat versus the 2022 levels at the midpoint, and this comes from a reference point 12 months ago where we expected Lundin to be offering more significant production growth. So perhaps you can just share with us some of the optionality you have there to increase that 2024, 2025 copper production? Because as it stands, there isn't really any growth coming through.

Well, we've guided 2024. We don't guide more than [ 2 ] years, right? So could you repeat the question because [indiscernible].

The question, I suppose, is at the moment, there's no -- nothing from the growth side to get excited about when we think about copper production. So perhaps you could just help us understand some of the moving parts in terms of, should we say, the optionality you have at various mines and how that could look beyond '24?

Maybe I'll tackle that one first. So there's a couple of different items that we're reviewing right now. One at Candelaria would be [indiscernible], so we continue to advance the [indiscernible] internal studies at feasibility level. The study works -- substantially complete right now, and I would say the project economics looked very robust under the current taxation and royalty regime. The study has going from 14,000 tons per day underground to 26,000 tons per day. That being said, we were looking to some stability with effect the discussions on the mining loyalty bill. Arguably, the results that came out of the election yesterday were quite positive, so we're hoping that's going to trend in the right direction and that would provide us an ability to have more growth, if you will, at Candelaria. But I'd also add that we are looking at some regional opportunities in Candelaria, in the region. I'm going to be in Santiago on Monday, and at that time, meeting with various people about potential future opportunities as well.

Okay. And just a follow-up, if I may. Your balance sheet [indiscernible] exceptionally strong position. It feels like you could be much more aggressive in terms of distributions of that excess capacity. So given that that's not the case today, should we [ reduce ] that, really, either CapEx and/or M&A is going to sort of bridge that gap and that your balance sheet will become more levered in the next year or 2?

Well, I think I'd answer that by saying we have provided guidance on our CapEx, so that's definitely what you've been provided with is not going to change. To date in 2021, albeit small, but we did purchase [ 3.8 million ] shares, so we'll keep the NCIB in place, and we'll kind of look at the capital allocation between that and the dividend policy. With the dividend policy, we have it at $0.09 per quarter, I believe this is probably one of the strongest dividends in our immediate peer group. And then we have the performance dividend, it's designed to top that up in higher parts of the price cycle. So we'll have a combination of those returning capital to our shareholders, which we're quite excited about because I think there's a lot of companies out there right now that aren't doing that. M&A is just always ongoing. We've never really changed our M&A strategy. We've been looking solid for a couple of years, and we'll continue to do so on a going-forward basis.

Your next question comes from Abhi Agarwal with Deutsche Bank.

Can I ask a question around the Chapada cost inflation, please? So are there any one-offs in this cost number? Or is this the new base in your view?

Sorry, could you -- any one [indiscernible]

Any one-offs, one-offs yes, in the [ given ] cash cost number? Or is this a new base we should be thinking about when we think about costs post 2022?

No, there aren't any one-off in the cash guidance of Chapada. What I will add in addition to kind of the general inflationary cost that we are seeing is that the FX assumption that we have assumed in our guidance is more conservative than our current spot in the 2021 actual, so that will also have an impact to bring that cash cost a little bit higher. So if you work that in, in addition to the cost inflation, those are the 2 main factors, and it's not a one-off specific item.

Your next question comes from Daniel Major with UBS.

First comment or question is around CapEx. I guess you've explained the [indiscernible] in 2022. I guess across the industry, there tends to be a trend of stating a sustaining CapEx number and there's always a [ tailings dam ] rebuild that needs to be done or some other form of sustaining CapEx, which means that the sustaining CapEx actually never falls to the stated level. What is the long run, medium-term sustaining CapEx number for Lundin basis the current portfolio?

Yes. We only provide a 1-year guidance on our CapEx. But if you look at, historically, I guess, 2021 was about 500 -- just over $500 million is our forecast. We're up to guiding about $600 million for 2022. One of the increase there is we are taking the opportunity with our healthy balance sheet and our significant cash flow to reinvest in our assets. So where we are seeing some project with opportunities for efficiencies and a good rate of return on our investment, we are taking the opportunity to go ahead with those. So I would say that some of it does depend a little bit on the metal price environment. So with higher metal prices, we will add on some additional projects. But I guess, generally, overall, 2022 is probably higher. And then going forward, I would say, we're trending lower. And if you refer to our technical report, I think that is still our best reference point.

I would add that we also did roll over some of our 2021 CapEx into 2022.

Okay. Yes. So if we take that the [ 40 million ] you rolled over and take a little bit off that, something in the kind of $500 million to $550 million would be a reasonable number. Is that fair?

I think that's fair.

Okay. Great. And just a very quick follow-up, I hope that's permitted. You talked about the 8% and the 5% grade reconciliation. Can you just remind us where you've been running in recent quarters? Sorry, this Candelaria grade reconcile, reconciliation?

Yes. So we spoke about that during the quarter 3 call. The copper feed grade in the quarter was in line with our plan. So we have been achieving -- discussing the numbers below our forecasted number. And in Q4, that trend continues. So we've been doing better what then we forecasted on a grade discrepancy.

And where were you earlier in the year? Was it as high -- was it above the 8%? That's what I'm trying to get at. Can you remind us? I'm pretty sure you said before.

Yes. In the [ occasional ] month, it was.

Your next question comes from Lawson Winder with Bank of America.

Just on the dilution at Candelaria. So I think the work is obviously continuing to determine what exactly is causing the mine-to-mill dilution, and you were investigating obviously, whether it was the open pit underground or mill. Have you got a hunch yet as to where most of that dilution is coming from?

We don't -- we haven't been able to pinpoint exactly, but we've been making a lot of improvement on operational practices across the site, the underground mines, both the planning, the execution and the open pit, and also how we treat the stockpiles and also how we sample and you are saying, at the mill. So overall, things are improving, but we still haven't been able to pinpoint one exact source for it. But the numbers are improving. They did during Q3 and they keep improving during Q4.

Okay. Okay. So you haven't incited the issues yet. But yet you're confident guiding to a 5% dilution factor for 2023 and 2024 versus 12% in 2022. So, sorry, 8% in 2022, I apologize. What is giving you that confidence that it will get down to 5% in 2023 and beyond? And is it that you're already hitting that 5% in Q4 of 2021?

Yes. So we're seeing months that were below those numbers at the moment. So what we're working now is to be able to get consistency month after month on those lower numbers. And as Peter alluded to, it's a lot of small things that are contributing to it. So we haven't found one larger item, but the operational practices are all assisting in different ways in addition to the fact that we are taking less material from the stockpiles.

Okay. Got you. That's super helpful. And maybe if you wouldn't mind, just one final question. Is the HPGR off the table now to start as a way to address the pebbles? Or do you think you'll just stick with optimizing the [indiscernible] crushers and leave it at that?

So we're both optimized -- at the moment, it's off the table. Our main focus is on optimizing the [indiscernible], but also on our ball mill and rod mill conversion. Those are our main focused areas.

[Operator Instructions] Your next question comes from Jackie Przybylowski with BMO Capital Markets.

I just wanted to follow up with something, Peter, that you said at the beginning that there's an exploration update your plan for Q1. Is that the Chapada exploration? Or is there going to be more drill results released for other operations as well?

Yes, I think the focus, Jackie, will be on Chapada. We are going to be doing a 60,000-meter, $10 million project in 2022, but we'll probably provide a bit of color on some of the work we've been doing up in the Formiga area. We currently have 5 rigs up in that area, and we thought it would be helpful to give a bit of color on those results to the market. Just didn't want to put them out one hole at a time and the updates have been a bit slow, so I think we'll have enough volume to be able to put up the results in hopefully January. And then also, we're looking to 1 or 2 other sites where we maybe provide a bit of an update. It's just something we're trying to also do on a more regular basis with our exploration efforts.

That sounds great. And if I could ask one other question. I know your existing NCIB expires sometime in early December, I believe. Can you maybe give us an update on what your thoughts are on renewing that or bringing in another NCIB for 2022?

Yes. So going into 2022, we will look to get the NCIB approved by the Board. And much like we did in the past, we will -- hopefully we'll probably be in there buying stock. It's always a balance between that and the dividend for capital allocation back to the shareholders. So I think we'll just have to see how the markets are from January.

Your next question comes from the line of Stefan Ioannou with Cormark.

Just on Chapada, you mentioned again the exploration update early next year. Is there any sort of sight line to how that might feed into an updated mine plan for that project going forward? Or is that still sort of a milestone, it's a bit further out?

Well, what we're looking at with respect to the Chapada expansion as the possibility of expanding our existing facilities. So we're currently doing work on that, and we're hoping to provide some direction of that in the early part of Q1. But not anything -- not like a full study. But then the exploration results that are going on [ may ] feed into some different opportunities. So that's why we're holding off just now to continue with the exploration work, and we'll see how that continues. We're trying to figure out where the center of the ore body is trending because that will dictate locations for any future expansion.

At this time, there are no further questions. I'll turn it back to the speakers for any closing remarks.

Thank you, operator. And thank you to everyone who is participating in today's call. A lot going on Lundin mining right now, and are very excited to be going into 2022. We'll be providing some updates at the beginning part of the year, but we'll do a general call to everyone during February with our Q4 results. So thank you for everyone's input today. And any questions, feel free to reach out to the team. Thank you.

Thank you for participating. You may disconnect at this time.