Lundin Mining Corporation (LUN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Lundin Mining 2022 Production Results and 2023 Guidance Conference Call. [Operator Instructions] This call is being recorded today, Friday, January 13, 2023. I would now like to turn the conference over to CEO, Peter Rockandel. Please go ahead, sir.

Thank you, operator, and thank you, everyone, for joining us today. 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. On the call to assist with answering questions are Teitur Poulsen, our Senior Vice President and Chief Financial Officer; and Juan Andres Morel, our Senior Vice President and Chief Operating Officer. Several of us are currently in South America, ahead of analyst and investor site visits we are hosting next week to Candelaria and our Josemaria project. So I do apologies in advance if the audio quality on this is a little bit poor. While there are many headwinds in 2022, we delivered solid production results. On a consolidated basis, we substantially met our copper production guidance, producing approximately 250,000 tonnes of copper. We achieved the upper end of guidance for both nickel and for gold, producing over 17,000 tonnes of nickel and over 154,000 ounces of gold. Consolidated zinc production was slightly below guidance given the slower-than-planned ramp-up of the Neves-Corvo zinc expansion project. With that delivering sequential improvement again in the fourth quarter, on a consolidated basis, we produced roughly 160,000 tonnes of zinc or within 5% of our guidance. Our portfolio of high-quality assets produced over 390,000 tonnes of copper equivalent metal in 2022. We based this on the average commodity prices for the year. However, today's prices, this number would be higher. Operational details will be released with annual financials in late February once they have been further verified and audited. Our condition for the outlook of base metals has never been stronger. As such, we continue to focus on growth. In 2022, we made progress advancing our projects and initiatives that will benefit Lundin Mining for many years ahead. The zinc expansion project is steadily continuing its ramp up. Full mining and processing rates are expected to be achieved on a sustained [indiscernible] -- detailed engineering continues to advance on our world-class Josemaria copper gold project and the updated technical report remains on track to be published in the second half of this year. The high-grade copper gold mineralization of our Saúva discovery, roughly 3 to 4x what we are presently processing at Chapada continues to expand. A maiden inferred mineral resource estimate for Saúva is targeted for release in the coming weeks as part of our company-wide mineral resource and reserve update. And I note that this will probably be the first of many iterations of that estimate. Development of the Upper Keel zone at Eagle and the sequential flotation project at Zinc given are now incorporated into our life of mine plan and study work in engineering has been substantially complete on the Candelaria underground expansion project. Moving to our assets. On Slide 5, Candelaria's 2023 production guidance is for 145,000 to 155,000 tonnes of copper and 85,000 to 90,000 ounces of gold. Production of both metals is to be modestly weighted to the first half of the year, owing mainly to the mining sequence in the open pit and the resulting grade profiles. Consistent with prior plans, ore mining from open pit is to be primarily from the upper benches of Phase 11 this year, mining down towards the lower benches for next year. Initial ore production from Phase 12 is to commence in 2024. Initiatives to debottleneck the Candelaria plant pebble crushing circuit are to increase mill capacity starting late this year with tie-ins to occur during planned maintenance down. Based on the planned mill feed blend and the ore hard throughput model, annual mill throughput is forecast to range between 27 million and 29 million tonnes per year over the 3-year outlook. Candelaria's cash costs will benefit from approximately 50% lower electricity rates with our new power purchase agreement having commenced on January 1. The new PPA also ensures a minimum of 80% renewable in the energy mix, prioritizing wind and solar. Cash cost guidance is $1.80 to $1.95 per pound of copper net of by-product credits. I would note that it's based on the assumption of an average exchange rate of CLP 850 to the U.S. dollar. The benefit of the currency hedging strategies we have implemented will not be reflected in the cash cost. For Candelaria, we have collars in place for 900 to 1,050 on a notional dollar amount of roughly $265 million for the year. 2023 capital expenditure is forecast to total $400 million. Of this, capitalized waste stripping is forecast to be $185 million and underground mine development, including ramp works to be approximately $55 million. Lastly, on Candelaria, we plan to invest roughly $12 million in exploration this year, including drilling nearly 40,000 meters. Focus of the program is on extending the near-mine mineral resources of the underground mine. Moving to Chapada on Slide 6. 2023 production guidance is for 43,000 to 48,000 tonnes of copper and 55,000 to 60,000 ounces of gold. Production of both metals is to be weighted to the second half of the year, owing mainly to mine sequencing and seasonal operating conditions. Following 2 years in a row of 1 in 100-year rain seasons, we have taken a detailed review of the mine plan with greater consideration for mine sequencing throughout the year and water management strategies. The result is a reduction in the copper and gold production profile for the next 2 years compared to our prior plan, but one which we believe is executable, should similar conditions be experienced in office potential upside if conditions are better. Ore mining is planned from the Chapada South, Southwest, Central and North pits through 2023, followed by mining of the Peru, Chapada Northeast ore bodies commencing in 2024. Cash cost guidance is $2.55 to $2.75 per pound of copper in 2023 after unencumbered gold by-product credits. The forecast increase compared to 2022 guidance reflects nearly higher consumable costs and lower production volumes. Our assumed gold price is [ $1,750 ] versus today's price when looking at the byproduct credits. Capital expenditure is forecast to total $70 million this year. The scope of the 2023 investment includes approximately $25 million for capitalized waste stripping, $15 million for TSF and water management systems and $5 million for mine and mobile equipment. We will continue with our aggressive exploration program at Saúva. As mentioned, the maiden inferred mineral resource estimate for Saúva is targeted for release in the coming weeks as part of our company-wide mineral resource and reserve update. We plan to invest approximately $8 million, including 55,000 meters of drilling, focusing on extending the Saúva mineral resource and other high priority step-out targets along the trend. On Slide 7, Eagle's 2023 production guidance is for 13,000 to 16,000 tonnes of nickel and 12,000 to 15,000 tonnes of copper. Production of both metals is expected to be modestly weighted to the first half of the year. Ore mining is to continue this year from Eagle and Eagle East ore bodies with priority on increasing ore from Eagle East during the second half. Our life-of-mine plan and the 3-year production outlook now incorporates mining of the Upper Keel zone. Development began in early January and first order is anticipated in 2024. In addition to the Upper Keel, we will continue to evaluate the potential to improve the development of the Lower Keel zone into our future production plans. Cash cost guidance is for $1.50 to $1.65 per tonne in nickel, considering the significant byproduct credits for copper with forecast year-over-year increases compared to 2022 guidance, primarily reflecting the lower planned volumes. Our assumed copper price for by-product credits is $3.75. Capital investment is to be relatively minimal again, in 2023, with guidance at $20 million. This is composed mainly of underground mine development, including $8 million for the development of the Upper Keel zone and for mobile equipment and no water treatment plant sustaining initiatives. Planned exploration expenditures for Eagle are approximately $4 million in 2023. We plan to complete over 15,000 meters of highly efficient drilling from underground. Drilling to focus on extending the life of mine generally targeting conduits linked to the Eagle East and other high priority targets. Moving to Neves-Corvo on Slide 8. 2023 production guidance is for 33,000 to 38,000 tonnes of copper and 100,000 to 110,000 tonnes of zinc. Copper production is forecast to be equally weighted through the year. Zinc production is forecast to increase over the course of the year as the initiatives to enable ZEP to consistently achieve nameplate capacity are executed and expected to result in improved overall throughput and metal recovery rates. These initiatives include mine development, addition to increased mine ventilation capacity and installation of a redundant apron feeder amongst other items. Processing mining and processing rates are expected to be achieved in late 2023. Cash cost guidance of $2.10 to $2.30 per pound of copper, net of the zinc and lead by-product credits. Cash cost is expected to continue to improve as zinc and lead production volumes increase with improvements from ZAP. Capital expenditure is forecast to total $130 million this year. The scope of the 2023 investments include approximately $50 million for underground mine development including infill drilling and $60 million for projects to enable to consistently achieve the 2.5 million tonnes per annum nameplate processing capacity and 10 million for mining mobile equipment. We plan to invest approximately $7 million in exploration in including drilling 25,000 meters in 2023. Drilling is to focus on the Semblana deposit and Lombador North ore body. On Slide 9, Zinkgruvan 2023 production guidance is for 80,000 to 85,000 tonnes of zinc and 3,000 to 4,000 tonnes of copper. Production of both metals is forecast to be modestly weighted to the second half of the year, primarily only to mine sequencing and the resultant grade profiles. Zinc production is forecast to increase over the 3-year period refinement of operating plans. Zinc head grades are to increase over the period on mine sequencing and metal recovery rates and concentrate grades and anticipated to improve with the completion of the sequential flotation project in mid-2023. Cash cost guidance is $0.60 to $0.65 per pound of zinc, net of the lead and copper byproduct credits. Capital expenditure is forecast to total $70 million this year. This includes approximately $35 million for underground development, including further development of the Dalby orebody. Expenditure of the sequential flotation project is forecast to be roughly $8 million, and the remainder of the sustaining CapEx is primarily for TSF works, reduced emissions and energy saving programs and other improvement initiatives. Lastly on Zinkgruvan, we plan to invest approximately $6 million in exploration this year, including drilling over 35,000 meters. Drilling will primarily target near-mine mineral resource expansion around the Dalby and Nygruvan ore bodies as well as the Western field area. Moving to our world-class Josemaria copper gold project on Slide 10. As mentioned, we continue to make good progress advancing towards development. Detailed engineering continues to advance, and we are progressing through the establishment of an updated CapEx estimate and project schedule. An updated technical report remains on track to be published in the second half of this year. Capital expenditure guidance is at $400 million for 2023. This primarily includes continuation of detailed engineering, procurement of long lead equipment and preconstruction activities such as road upgrades and geotechnical work. Concurrently, we are continuing to advance multiple discussions and avenues for financing, including traditional debt sources, joint ventures and offtake partnerships. Slide 11 provides a detailed summary of the 2023 guidance. In conclusion, the investments we have made over the past several years have positioned Lundin Mining well to benefit from the current commodity price environment and what we believe will be a strong commodity cycle ahead. In 2022, we made significant investments in our assets, our fleet and our people. We have created a very desirable portfolio of high-quality cash flowing lines and are advancing meaningful growth projects that will benefit Lundin Mining and our stakeholders well past the 3 years we have outlined today. And with that, operator, I would like to open the line for questions.

[Operator Instructions] Your first question will come from Dalton Baretto of Canaccord.

I wanted to start by asking about Chapada and specifically around kind of the more conservative approach you guys are taking given the rainfall events over the last couple of years. Is this going to be kind of part of the course on a go-forward basis that should we adjust our numbers over the life of mine?

So the question came to a bit late, but I think myself and Andres will add -- answer, excuse me. So what we've made an adjustment to in the following 2 years, and that really, as I say, is changing the mine sequencing as well as we've been doing a lot of work to prepare for a possible another 1 in 100-year rain situation. And I will say that a lot of that work is already coming to benefit. I we were to receive -- we were to have a more normalized year. In fact, we probably see benefits to the numbers we posted to you.

Yes. So I will add to that, that during 2022, we made a significant improvement in understanding our assets, especially from the mill capacity. We developed a harness sac mill productivity model that will allow us to have a better prediction of our milling capacity based on rock hardness. So that is what is in part also driving the lower throughput in the next couple of years.

And then maybe if I could just ask one follow-up. Peter, if memory serves correctly, this year, you're going to -- in the middle of the year, you're going to go into a new bargaining cycle, a collective bargaining cycle with the unions at Candelaria. And I'm just wondering, have you budgeted for any labor increases, either in Candelaria or at any of the other assets in your guidance?

Yes. So just focusing on the one that would be coming down the pipe, which is Candelaria, that's due in April. As you recall, there are 5 different unions that we would be negotiating with. We've had an extremely successful quarter. The team at Candelaria has done a great job. Three of those unions have already settled well in advance of the April time line. And I believe we're just concluding on the fourth. So great progress there and don't expect any surprises in 2023.

And I presume whatever was negotiated is factored into your cash cost guidance?

But like in our budgeted numbers, not only for Candelaria, but for all sites, we have made an allowance for -- or the inflationary environment we see and we are estimating that some of that will come through on the negotiation side of salaries as well.

Because of the traveling going on right now, we're all in different jurisdictions.

Your next question will come from Orest Wowkodaw of Scotiabank.

Just when I take a look at your guidance, both for production costs and specifically for CapEx. I mean the $1.1 billion is a pretty big number. If I take a look at our projections at current spot pricing, call it, a $4 copper, we actually are predicting that you're going to be free cash negative in 2023 in the order of about $200 million. And I guess my question is, do you think that your base dividend, which is paying out more than $200 million a year is, a -- it's sustainable, but also does it even make sense anymore if you're going into a growth mode?

Teitur, you want to address that one first?

Yes. I mean I think it's pretty clear with Josemaria project sort of ramping up, but the balance sheet of the company will change shape over the next few years. We are going to build up some net debts over the next few years. But we are investing for the future, and that will accelerate our financials and to strengthen the balance sheet over time. And of course, we will manage the balance sheet in an appropriate way and make sure we always have sufficient liquidity headroom within our credit lines. But the dividend we are proposing stays intact, and there are no plans to change that at this present time.

And I would add that we are currently -- I would add that we're currently still in a net cash position. So the balance sheet is extremely strong. And we are looking at a series of initiatives across every site taking a close look at the 2023 CapEx numbers and determining whether or not there's any work we can do -- that we can do there to turn those down, but we're comfortable with the numbers that we've stated.

Okay. And as a follow-up, can you give us a bit more color on your cost guidance. I'm a bit surprised to see your cost guidance would suggest some escalation over 2022, which obviously was a very elevated year. Can you maybe speak to what's driving some of the anticipated increases in '23 from a cost perspective just given that fuel pricing has appeared to ease off?

Yes. Maybe I can take that, Peter. I mean I would say we're taking a cautious approach on cost guidance and apart from the new electricity contracts, as Peter mentioned in Candelaria, we've sort of extrapolated the 2022 diesel and electricity costs into 2023. And you're right, over the last month or 2, those prices have come off somewhat. So there could be an element of upside to our guidance numbers on [indiscernible]. And then I'd also say that we are assuming slightly stronger Chilean pesos than what we averaged for 2022. So if that will persist through the year, then there's some upside on FX rates assumption as well. And finally, on the byproduct metals, the pricing we have assumed there is again lower than what we averaged for 2022. So if you took like-for-like pricing into 2023, then these numbers would look a bit lower than what we have guided here.

But are you seeing increases in other consumables outside of fuel?

No, I would say not really. I think we sort of peaked in Q2, Q3 last year, and that is flattening out, and in some cases, it's coming back down. But it's the diesel and electricity has a major impact on the totality of the costs. And there, we have been fairly conservative in our assumptions, I would say.

So there's no underlying items. There's no underlying items, Orest. So if, in fact, we do see the pullback that occurred in Q4 and some of the input costs, we would certainly benefit from that relative to what we are showing for 2023.

Your next question comes from Ioannis Masvoulas of Morgan Stanley.

Just a few questions from my side. First on Candelaria. Looking at the production guidance, especially 2025, it does look fairly weak relative to the previous technical report. And that's despite the improvement in grade control, the pebble crushing upgrades and other initiatives. Can you provide a bit of color there? Is there an element of sinkhole impacting your mine planning? Is there anything else going on? I'd be keen to hear.

Ioannis, there are no significant changes from the previous guidance on traction in Candelaria. In general, we keep -- we're following the same plan. So Phase 11 is the main source of all feed to the mill from the open pit, then we have the underground mines moving at the same level as before. We're slightly reducing the amount from low-grade stockpile material [indiscernible] following the similar trend as the previous guidance.

Okay. And maybe if I could push you on that. So if I look at 2025, the guidance, 150,000, 160,000 tonnes. The question here is, does that reflect a low-grade year? Or would you say that this is more of a normalized year because I do see a decline at 24% to 25%. I'm just wondering if 25% is anything in particular that is not recurring beyond the next 3 years.

Mark, I'm not sure if you were to pick that up because we had a bit of a bad connection on that one. Could you hear Mark?

Yes. Yes, I can hear this question. And also I'd say, 2024 is like over the 3-year period that we provided, 2024 will be obviously higher and that is grade driven. It is really around the grade and that sequencing and we're really driven by where we are in the open pit at any given point. Because by the time we get up to 2025, as you point out, we expect to have the full capacity through the mill. But because this is a an IOCG not a consistent homogeneous copper porphyry, the -- where we are, specifically mining on any given time, impacts both the throughput and the hardness. So the other thing I'd say, Ioannis,-- just not sure if [indiscernible] Andres hear me, but we are working on doing an updated technical report for Candelaria as well as a few of our other assets. So we expect to have that out in the coming weeks, potentially or months. So we'll get more color there.

Great. And my second question on Neves-Corvo around the ZEP project. My understanding was that there was a remaining $30 million of development CapEx in 2022 and not much spending on this project in '23. But if I understand correctly, there is an extra $60 million to complete the project and fully ramp up, which feels quite substantial, given the scale of the project. Can you perhaps elaborate on the main items here in terms of additional spending?

Good. Yes, I will take that. Out of the $60 million mentioned in our presentation, actually, $30 million are related to the expansion of TSF so that was already part of our substantial CapEx. On top of that, we have some $10 million approximately of work that is being done at the mill to improve recoveries. So that is -- we can call it a continuous improvement project. So the net addition of CapEx related to ZEP is in the order of $20 million, I would say.

Understood. That's very helpful. And maybe just if I can squeeze the last one on the Eagle mine. There is a step down in production in, again, 2025. Is it a reflection of the current mine plan where it's supposed to close by that year with a potential extension? Or is there, again, anything else going on? Just looking to get a better sense on Eagle beyond the next couple of years.

Yes. So as Peter mentioned, we have included in our life of mine an area that we call the Upper Keel zone. So those are new reserves that have been included in our plan. So by doing that, we have extended the mine life of Eagle for approximately 18 months or so. You will see that on the upcoming technical report. So in general, the production trend is following the drop in the grades on a year-on-year basis, and that is following basically the fact that we're at the end of the life cycle of the asset.

And I would add that, as I mentioned during our call earlier, we're also looking at another area called the Lower Keel, which is just a continuation of the upper one. So we're doing work to determine whether or not we can add that to the mine plan as well.

Your next question will come from Jackie Przybylowski of BMO.

I wanted to ask you about some of the projects that you've got and what your plans are maybe for development CapEx spending beyond 2023. I know that Josemaria feasibility study is coming out later this year. But can you maybe just talk about do you expect a material increase to spend at Josemaria in 2024? And I guess, similarly for Chapada. Can you maybe tell us when just roughly when we might expect to see some spending on an expansion there?

No problem, Jackie. On Chapada, we're continuing to do some expansion work there. A lot of it now is taking into consideration this new discovery of Saúva. So we have some studies that are going on right now and presentations that are happening. And we're also -- we're looking at what I would call more of a debottlenecking situation with Chapada. So -- but we note too we don't have the numbers yet to present, but I would say they're not going to be significant. So there's no big CapEx coming there. The only other project outside of Josemaria that maybe be material is potentially CUGEP. And we have some options on how we may finance that outside of our regular CapEx programs. [indiscernible] Josemaria, I think it's better to wait to midyear when we're able to provide better clarity on the path forward because that will dictate what our CapEx could be for future years. Also, as we work through this year, we'll be looking at different financing options, if you will, for Josemaria. CUGEP does still require an EIA. So we're in discussions. I'm in Santiago, as we speak. We're in discussions to try moving that forward, and that time line may dictate the speed to which we move on CUGEP.

And if I could ask a follow-up, Peter. Can you talk a little bit about the expectations for sustaining CapEx spend over the next couple of years? Is it supposed to be fairly flat with 2023 levels? Or could we see it come down a little bit?

I mean it's always a challenging one, but I believe it's going to come down, especially when we look at a couple of the assets where both in 2022 and 2023, we've made considerable investment in some of the aspects of the mill, the fleet, et cetera. And those will have -- those are items with pretty long lives. So I suspect the number that we've been posting last year and this year will hopefully be peak numbers.