Lundin Mining Corporation (LUN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Lundin Mining Corporate Update Conference Call. [Operator Instructions] This call is being recorded on Tuesday, July 30, 2024. I would now like to turn the conference over to Jack Lundin, President and CEO. Please go ahead.

Welcome, everyone, and thank you for joining Lundin Mining's conference call. Yesterday, we announced a transformational transaction for Lundin Mining, where we have partnered with BHP to jointly acquire all of the outstanding shares of Filo and combine the Filo del Sol project and the Josemaria project to create a 50-50 joint venture for the development of the Vicuña District in Argentina. As consideration for vending in the Josemaria project, BHP will pay to Lundin Mining an upfront cash payment for the asset for its 50% ownership of the JV. We will discuss the transaction in more details on this call. A copy of the transaction announcement and presentation are available on our website under our Investors section. Before we start the presentation, I would like to remind our listeners that this call will contain forward-looking information, including details on the proposed transactions and the future prospects of the assets involved. And this information, by its nature, is subject to risks and uncertainties. As such, actual results may differ materially from the information expressed today. I would encourage you to read the cautionary note that accompanies our second quarter MD&A and our annual information form, along with other relevant filings, on SEDAR. These documents are also available on our website. Today with me on the call are members of our executive team: Teitur Poulsen, our Executive Vice President and CFO; Juan Andres Morel, our Executive Vice President and COO; Dave Dicaire, our Executive Vice President of the Josemaria project; Quinn Yong, our Vice President of Corporate Development and Strategy; and Tim Walmsley, our Vice President of Exploration. Moving to the agenda slide. We will go through the presentation as follows. Starting with item #1, which is just describing how we're delivering on our strategy at Lundin Mining. We'll then get into the transaction highlights. We'll talk more specifically about the Filo del Sol project. We'll get into details of the Vicuña District. We'll then get into deal terms, followed by next steps for this transaction. Starting with our strategy of disciplined copper growth at scale. Over the last 6 years, we have steadily grown reserves, production and revenue through exploration success and through various acquisitions. As illustrated on the left-hand side of this image, we have grown production by almost 50%, and revenue has grown by almost 100% over the last 6 years from 2018 to 2023. In 2022, we acquired the Josemaria project in Argentina and have derisked this large-scale deposit through engineering and trade-off studies since the acquisition. In July 2023, we acquired operatorship of Caserones in Chile and strengthened our toehold in this region. Through these acquisitions and through resource replacement and resource extension, we have been able to grow our reserves by nearly 3x. During this period, exploration success on a neighboring property to Josemaria and a new discovery to the north of the Filo del Sol property has proven the thesis that the Vicuña District in Argentina has the potential to become one of the world's largest base and precious metals mining complexes. Adding the world-class Filo del Sol project to our existing asset base solidifies our commitment to growing in the region where commercial and sustainable development synergies will create lasting benefits for all stakeholders. Importantly, forming a long-term partnership with industry-leading BHP will enable us to together drive value through combining complementary skill sets and the opportunity to truly think of this as a giant metal district with a phased or sequenced development strategy. We are excited to be forming a multi-decade partnership with BHP. The opportunity to build the world's next large-scale copper mine with our partner from grassroots will transform the business for Lundin Mining. We will now get into the highlights of this transaction, and I'll hand it over to our CFO, Teitur Poulsen.

Thank you, Jack. So as I outlined in the press release from yesterday, Lundin Mining and BHP have entered into an agreement to jointly acquire Filo for a combination of cash and Lundin Mining shares. The proposed acquisition involves an offer price to Filo shareholders of CAD 33 per share, representing a 32% premium to the unaffected 30-day VWAP price as of 11th of July and a 12% premium to the 30-day VWAP price as of 29th of July. The proposed acquisition price of CAD 33 per share increased on implied valuation of Filo of CAD 4.1 billion on a basic share outstanding, not inclusive of the interim financing that Lundin Mining and BHP will provide to Filo in the form of a private placement, with Lundin Mining and BHP subscribing for an equal amount of new shares in Filo. The Lundin Mining portion of the Filo consideration will consist of 60% shares and 40% cash, net of the shares that Lundin Mining already holds in Filo. On this basis, the cash element to be paid by Lundin Mining to Filo shareholders will amount to CAD 859 million. So Lundin Mining share exchange ratio with Filo will be 2.3578 Lundin Mining shares for each Filo share, resulting in Lundin Mining issuing approximately 92 million new shares. The Filo shareholders will hold approximately 11% of Lundin Mining post completion. The BHP consideration for Filo will be in cash amounting to approximately CAD 1.9 billion, net of the shares that BHP already owns in Filo. Our Board of Directors have unanimously supported the transaction, along with the Board of Filo and Filo's major shareholders. As part of the transaction, Lundin Mining and BHP will form a new joint venture, where each company will hold a 50% ownership stake. The joint venture will hold 100% of Filo del Sol project and 100% of the Josemaria project. Turning to the transaction rationale. We believe there is a compelling rationale for all 3 companies involved, and it truly represents a win for everyone. For the Filo shareholders, the deal represents a compelling premium while allowing them continued exploration and development exposure through equity ownership in Lundin Mining, in addition to cash flow generation coming from our producing assets. This transaction will consolidate the Vicuña District and create a leading platform in one of the most geologically prospective regions in the world. This will transform the Lundin Mining growth story, enabling us to have one of the leading growth profiles in the copper space globally. We have always talked about disciplined growth, and a partner such as BHP supports this approach. And with BHP becoming a 50% owner of the joint venture, this means that we have secured a funding partner with as solid a balance sheet as they can. With the proximity of our other assets, we believe there are significant commercial and development synergies through an integrated project, and we will talk a little bit about this later on in the presentation. Lundin Mining continues to carry a strong balance sheet and ample liquidity. At the end of Q1, we reported net debt of USD 981 million, net of leases, and a leverage ratio of 0.7, with a liquidity headroom within our RCF of USD 1.45 billion. This transaction we announced yesterday will be marginally cash positive for Lundin Mining, with cash receipts of 900 -- sorry, USD 690 million for a 50% sale of Josemaria versus a cash payment of USD 620 million for the cash portion of the consideration to the Filo shareholders. Lundin Mining will continue to fund the Josemaria project on a 100% basis up to year-end 2024, subject to certain adjustment mechanisms, with the 50-50 funding arrangement commencing from the beginning of 2025. Jack will now talk briefly about the Filo del Sol project and the region more broadly.

Thank you, Teitur. I would like to draw the audience's attention to a map of the region on the right-hand side of this slide. Lundin Mining is well positioned in this prolific copper-dominant region. Our Candelaria mine, which we acquired in 2015, located 155 kilometers to the northwest of the district, which, this year, will produce between 160,000 to 170,000 tonnes of copper, and our second operation in the region, Caserones, is forecasted to produce between 120,000 to 130,000 tonnes of copper this year. The Filo del Sol deposit is located to the south of Caserones over the border and to the west of Josemaria in the San Juan province of Argentina, with a small portion ofe the deposit held within the Atacama region of Chile. These assets are located between the prolific Maricunga belt to the north and the El Indio belt to the south. Candelaria has a dedicated desalination plant that supplies water to the site and a port facility in Caldera, where we transport the produced concentrate from. We have recently established a regional office in Santiago that leverages on the synergies between Candelaria and Caserones, including supply chain, logistics, technical and nontechnical expertise. Combining these assets in this region will unlock economically sustainable benefits that include sharing infrastructure and ultimately minimizing environmental disturbances through a responsible phased development approach at scale. Moving to the next slide. In 2017, Filo Mining was formed to focus on the exploration of the Filo del Sol discovery. Original Filo exploration was targeting the shallower oxide zone. A prefeasibility study was completed on the oxide component in 2018 and updated in 2023, which highlighted an economically robust heap leach operation producing copper and gold. However, it was discovered -- it was the discovery of the deeper sulphides that was made with drillhole 41 in mid-2021 that significantly changed the understanding and interpretation of this deposit. Drillhole 41 intercepted 858 meters of 1.8% copper equivalent. Since then, drilling has continued and has hit major intersections of over 1 kilometer in length, containing approximately 1% copper equivalent, outlining a world-class base and precious metals deposit that now is seen as the crown jewel of this giant metal district. Filo del Sol is located approximately 11 kilometers away from our Josemaria project. On this satellite image, you can get a sense of the topography and proximity of the 2 assets. Josemaria is located several hundred meters downslope and in an area that is more favorable to large-scale fixed infrastructure, such as mineral processing facilities, maintenance warehouses and other storage infrastructure. In the next slide, what we are seeing here is a panoramic photograph of the surface above the Filo del Sol deposit looking north. From the drill roads and the blue green copper oxide at the left side of this image, through to the right-hand side, we are looking at about 5 kilometers of continuous mineralization that is formed through the tight overlapping cluster in a row of several separate centers of mineralization. This structural corridor from the top of the hill to the valley is approximately 1.5 kilometers wide. Going beneath the surface, on this slide, we can see a sectional view of the drill results and the different mineralized zones in this large deposit. The Aurora Zone shows abnormally high copper grades as compared to the other copper porphyry mineral deposits. This zone has grown into one of the world's largest and highest-grade copper-gold zones and sits within a large mineralized envelope that further demonstrates the uniqueness of a deposit like Filo del Sol. For reference, the discovery hole 41 is at the center of this slide. Moving to the next slide. Over 150,000 meters and 360 holes have been drilled into the deposit and intersected kilometer-long intercepts of over 1% copper equivalent. Notable drill intercepts are listed here, like holes 55, 64 and 54, all showing more than 1.2 kilometers of over 1% copper equivalent. Further drill results are available in Filo's filings. Pivoting back to Josemaria. Significant progress has been made on the project, including advancements in engineering, permitting and hydrogeology. Over the past several years, the Josemaria team has been dedicated to moving the project forward, and we plan to build on this foundation in collaboration with BHP. The partners will look -- will work together to form a comprehensive execution plan, incorporating studies which will lead into a phased development strategy. The joint management of both assets will not only enhance the prospects of each project but also leverage the improving foreign investment conditions in Argentina. Now looking at the Vicuña District more broadly. The district is a cluster of 4 known deposits, and the recent Lunahuasi discovery that represents a 35-kilometer-long mineralization trend. The figure on the right illustrates where all these deposits sit in relation to each other and their respective approximate distances. Large metal districts like the Vicuña District are extremely rare. They share similar characteristics, however, major structures and multiple mineralization events, all of what we have seen across the district, giving it size, scale and high grades. The alteration footprint of the Vicuña District compares favorably to other notable large producing mining districts in Chile, and this is the potential that we see here in the Vicuña District, a world-class mining complex in the making. On this slide, the world's largest copper-producing mining complexes are presented. The assets within our JV, once in production, will have the ability to compete with the largest mines in the world. The highly prospective land package gives a high probability that more minerals will be discovered in addition to what has already been defined. Large deposits tend to form in clusters, and big resources tend to get bigger over time through further definition drilling. I will now pass the call over to Quinn, VP of Corporate Development, to go through the terms of the deal in more detail.

Thanks, Jack. I'll go over some of the transaction highlights. Lundin Mining and BHP will jointly acquire 100% of Filo's outstanding shares not already owned by each company. BHP and Lundin currently hold about 5.9% and 0.4% of Filo's outstanding shares, respectively. The acquisition price is $33 per share, for total consideration of $4.1 billion on a basic shares outstanding, excluding shares already owned. BHP's share of consideration will be $1.908 billion in cash, while Lundin's share of consideration will be approximately $859 million in cash and $1.289 billion in Lundin Mining shares. The premium is 32.2% to a 30-day VWAP on the unaffected price of July 11 and 12.2% premium to close on July 29. Lundin Mining and BHP will also provide $115 million in interim financing of Filo in the form of a private placement. Concurrently with the Filo acquisition, BHP will pay Lundin Mining USD 690 million in cash, subject to closing adjustments, for a 50% interest in the Josemaria project, which will be included in the 50-50 JV that will hold the Filo del Sol project. The 50-50 JV, holding both the Josemaria and Filo del Sol projects, will be set up to have an independent management team, with the JV board comprising of both Lundin and BHP representatives. The JV will have the ability to leverage skills from each respective company. Jack, back to you for next steps and final words.

Thank you, Quinn. We anticipate the deal to close in early 2025. Planning for integration studies, trade-off analysis and permitting will begin, and we will be in a position to provide the market with an update on timing of these activities in the first half of 2025. The creation of a long-term partnership between Lundin Mining and BHP, and combining the mineralization of the Josemaria and Filo del Sol projects as well as the prospectivity of the region surrounding these deposits, with that, we firmly believe the Vicuña District in Argentina has the potential to become one of the world's largest mining complexes once in production. I want to thank everyone for joining the call, and we will now open the lines for questions.

[Operator Instructions] And your first question comes from the line of Orest Wowkodaw with Scotiabank.

A couple of questions, please. First of all, are you planning to update a technical report now that would be integrated for the district with the 2 assets? I'm just wondering also now, is the permitting going to be on an integrated basis? And I'm curious what the timing could look like for an integrated study.

Thanks, Orest. I can take that. So right now, what we're planning on doing, obviously, is focusing on creating the integration of both assets once the deal can close, but we still have a work plan at Josemaria, which incorporates a lot of the items that we budgeted for in 2024. So we're still going to continue advancing with trade-offs. We're still working on our water studies and still looking at derisking the Josemaria project. But now we have the opportunity, by putting these assets together, to look at it in a more phased approach and in a sequenced manner. So there will be elements that stay the same. But now we get to scale up and look at this development in a much larger scale. So a lot of things we continue on the normal track. And then now we also start to look at things that would be done with Filo concurrently.

What -- and can you share what would be the timing of, call it, even an updated Jose study that would incorporate some of these integrated changes?

Yes. We're targeting the first half of next year to have a more fulsome update on Josemaria and as it pertains to how we sequence the development. So still a lot of work to be done, but we're still on track for probably the first half of this -- of 2025 to give an update on how this development will take place.

Okay. And with the 50-50 JV, are there any conditions that would give you the right to push Jose ahead earlier rather than later? I'm just wondering how that's going to work between sort of Lundin's initiatives to push development forward as sooner rather than later versus, say, a more -- a longer approach that could be coming from BHP. I'm just wondering if there are any conditions that would require development to start under any specific time line.

I think both parties are aligned on wanting to develop this district and wanting to do so in an efficient way. And there's a lot of derisking that's been done when -- with Josemaria under 100% ownership of Lundin Mining, and I think that's also been leading into getting this deal done. So I think there is alignment that we want to move the district forward. But now by putting Filo together with Josemaria, we get to do so in a way that will ultimately create much more value for the stakeholders involved. And so I think we're going to be looking at doing this on an efficient time line and there is alignment to do so. So I'm not too worried about having kind of a big delay on advancing the development phase of this.

And finally, for me, assuming permits are received in a fiscal stability agreement, should we anticipate development to begin in '26? Or could it even be later now?

I think we'll have to wait for the update in the first half of 2025 for that. But of course, with the investment conditions in Argentina opening up and being quite favorable with the recent bill that was passed through Congress. We definitely want to leverage off of that and take advantage of the favorable investment conditions. And I think, again, there's alignment from both sides that we should very much plan to do that. So we're still working towards advancing towards a development scenario. But now we have to focus on advancing Josemaria, letting Filo continue to advance their work, closing the transaction and then coming up to the market with a pragmatic approach on how to deliver this development.

Your next question comes from the line of Ralph Profiti with Eight Capital.

Thanks, team Lundin, for the comprehensive presentation. Jack, there's -- you spoke about continuity of Josemaria and the work that's going on there. And just wondering if that 150,000 tonne per day is sort of the right size in terms of the concentrator? And just wondering if what you see now, there could be opportunities for a material scale-up of that capacity and if that's going to be part of the trade-off studies?

Yes. That's a great question. I think all of that will be incorporated in these trade-off studies. But as we've mentioned, and as we continue to believe, how to unlock this district is to really do so in a phased or sequenced manner. And so the initial starter project won't be something that we can just scale up to a magnitude of beyond, I would say, 150,000 to 200,000 tonnes per day. But there's still a lot of work to be done to see what's achievable. We'll want to scale up as quick as possible, but we'll need to do so in a pragmatic manner. And there's a lot of studying to do when we look at Josemaria and the concepts that we've designed as a stand-alone. And now we've got Filo and the drilling that's been done, the understanding of the oxides there. So there's a lot of opportunities to incorporate many components of this district now. And of course, scaling up will be key, but we want to do so in a phased approach.

Got you. And I don't want to stray too far off topic, but there's been comments in the press about your position on the European assets and how that sort of fits with growing this type of project and these type of districts. I wonder if you can comment on where you stand on the European assets? And -- because it just -- it seems like a very robust valuation and a very -- a quite compelling balance sheet perspective that this is not really something that needs to be done. Just wanted to get your comments on that.

Yes. What I will say is Lundin Mining is in a very strong position today to continue operating all of the assets that we have in our portfolio. We're not in a position where we need to divest out of anything. But we remain opportunistic on seeing what we can do in the market, and that's how we have to look at all of our assets. As it pertains to our European assets, these are still important for our portfolio, and we'll continue to run those for as long as we have them with operations excellence in front of mind. But again, we don't need to sell any of our assets in order to make these ambitions here in the Vicuña District a reality, but we will continue to remain opportunistic and see if there are opportunities for divestitures or for maintaining all of our assets.

And your next question comes from the line of Dalton Baretto with Canaccord.

Congrats on this deal here. Jack, I think you touched on this a little bit. But with this Argentine RIGI bill passing, my understanding is that you've got to kick off the project, whatever project you designate, within 2 years and then spend about 40% of the CapEx within the first 2 years. And I'm just wondering, like it makes sense to me for Josemaria, but is there an opportunity to get Filo into this as well? And how you're thinking about that?

Yes. Of course, we're monitoring the developments in Argentina, and understanding this RIGI bill will be really a foundational step for us in forming what will be fiscal stability for this combined project. And so we want to tap into that window of opportunity. And of course, there's a lot of discussions to be held now with the authorities, both locally in San Juan and federally in Buenos Aires. And I think there's an opportunity to combine both of these assets so they can benefit from the RIGI bill, and we know that there's an incentive to invest in the near term. So all of that plays into how we develop our strategy for ultimately going into development on the district here in Argentina.

Okay. Great. And then maybe just thinking a little bit further ahead. Where does -- or how does Lunahuasi fit into all this as well as Los Helados? Are you planning to keep the JV purely Argentinian? Or are you okay to include Chilean assets in there as well eventually?

Yes. Right now, we're focused on the assets that are going to be held within the JV, so Filo del Sol and Josemaria. We'll seek opportunities as they come our way. But right now, we've got a big, big workload ahead of us to consolidate with both Filo and Josemaria coming together and really putting our best foot forward on coming up with a sequenced development scenario for these 2 assets. And we're focused on the Argentinian side of the district with this JV. And right now, I think, with what we have, the advancements and the derisking that we've done on Josemaria and the tremendous opportunity that Filo presents, we're very excited about these 2 assets. And we'll assess opportunities beyond that at a later time.

Great. And if I can just squeeze one last one, in the Filo oxides. Could we see a situation, just given what we talked about with the RIGI bill, where you progressed the Filo oxides in parallel with Josemaria? Or will you sequence them?

I don't think that that's out of the question like nothing is off the table right now. We have the opportunity to look at kind of a lot of combinations on how we can create the most value here and really do so in a sustainable and responsible way. We're really wanting to tap into economies of scale. We're wanting to ensure that we can utilize infrastructure and share infrastructure. And I think being able to run multiple projects in parallel is something compelling that we'll look into. But ultimately, the strategy or the sequence of how we develop these assets hasn't been fully determined yet.

Your next question comes from the line of Bryce Adams with CIBC Capital Markets.

I understand the work plans will become clearer next year. But as a follow-on to this discussion around integration, under the JV, how soon do you think Filo could be an ore source? Would that be within the first 10 years of production? Or would it be phased later than that with Josemaria being the only source upfront and then Filo coming in later? When you optimize the combined properties, what year could those Filo sulphides be feed for the plant, potentially?

Yes, that's a great question. I mean, we're focusing on -- and Filo has been doing a great job on defining kind of the perimeters of this deposit, and they really have yet to find the boundaries of Filo del Sol. But we know that there's a high-grade core of sulphides, as shown in the presentation, really surrounding in this Aurora Zone. And so I think the best way to build this district and to build these mines together will be to focus on getting into higher-grade material as soon as possible to really rapidly advance that payback period. So we're going to incorporate a lot of different ideas to make sure that we can get to these sulphide ore of Filo as soon as possible. But I think that there's some lower-hanging fruit that we'll be able to tap into, ahead of getting into the sulphides in Filo. So I don't want to go and say that it's going to be 10 years from production, hopefully, sooner than that. But there's a lot to put together and a lot of engineering work to be done, which is an exciting opportunity for us.

Okay. I look forward to the future updates.

Thank you.

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

Congratulations, Lundin folks, on this transformational transaction. I wanted to ask about approvals. Which countries are expected to have to provide approvals for these 2 transactions? And then do you have a sense if the relevant countries, from which you require regulatory approvals, will be viewing both the JV transaction and the acquisition of Filo as one or separate transactions?

Lawson, it's Teitur here. So the countries we are seeking approval from are South Korea, China. In Europe, I believe it's Poland and Germany. And yes, not in Australia. I think those are the key countries. There might be one or two I missed out. But in essence, there are quite a few countries where we need antitrust approvals from. And it's on that basis, we have said closing to be in Q1 next year because I think that will be the lowest common denominator on getting approvals on everything.

Yes. Okay. That makes sense. And then any sense on whether they view the 2 transactions as one or separate? Or I mean have you had those conversations yet? Or is it too early to judge that?

Yes, I think it's too early to comment on that. But clearly, the agreements are conditional upon each other. So we need approvals on everything across the board for the transaction to complete.

Got you. Okay. And Teitur, while I have you, are you able -- I mean, I know we're going to get results tonight, but are you able to just give us a little preview on the updated net debt position and leverage ratio post the acquisition of the increased interest in Caserones? So sort of where we were standing yesterday before this deal was announced?

No, you got to watch this space. We're going to come out with that this evening.

Yes, fair enough. And then just one final question, sort of in light of the prior question on divestitures or potential divestitures of the European assets. The color there was very helpful. But just conversely, this is Lundin Mining's second major transaction of 2024. How might investors handicap the potential for further transactions this year?