Capstone Copper Corp.

Good morning. My name is Joanna and I will be your conference operator today. At this time, I would like to welcome everyone to the Capstone Copper Q3 2022 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. Thank you, Mr. Gerald Ennett. You may begin your conference.

Good morning. I'd like to welcome everyone to Capstone Copper's Q3 2022 conference call. Please note that the news release and regulatory filings announcing Capstone Copper's 2022 third quarter financial and operational results are available on our website and on CDAR. If you are logged into the webcast, we will advance the slides of today's presentation, which is also available in the Investors section of our website. I'm joined today by our CEO, John McKenzie, our President and COO, Kashal Maher, our Chief Financial Officer, Raman Randhawa, and our Senior Vice President, Risk, ESG, and General Counsel, Wendy King. Following our brief remarks, there will be an opportunity for questions. Please note that comments made on the call today will contain forward-looking information within the meaning of applicable securities laws. This information by its nature is subject to risks and uncertainties, and actual results may differ materially from the views expressed today. For further information on the risks and uncertainties pertaining to our business, please see Capstone's most recent filings, which are available on our website and on CDAR. And finally, I'll just note that all amounts we will discuss today are in U.S. dollars unless otherwise specified. Now I'll turn the call over to John McKenzie.

Thank you, Gerald, and good morning, everyone. This was our second full quarter as Capstone Copper, and I'm very pleased with the progress of our integration efforts following the closing of the Capstone Mantis transaction earlier this year. Last week, Management and our board visited both Monteverde and Montes Blancos and were extremely pleased to see the advancement of the Monteverde development project and the progress and potential for additional upside at Montes Blancos. In the third quarter, we produced a total of 45.7 thousand tons of copper at consolidated C1 cash costs of $2.76 per pound across our four operations. Despite lower than planned throughput at Montes Blancos, the mine delivered substantially lower sulfide costs of $2.17 per pound, and this should further improve once the mill achieves its target run rates in the fourth quarter. As for the cathode business, all-time highs for sulfuric acid prices contracted during the second quarter and delivered during the third quarter were the main driver that impacted costs. Specifically, both Montes Blancos and Monteverde operations paid over $260 per ton for acid over the quarter. However, we're currently securing significantly lower prices to be delivered during the first half of next year, with contract pricing in the $120 to $140 per ton range. Overall, despite the inflationary pressures, I'm pleased that we managed to keep our operating costs in line quarter over quarter, with similar production to Q2, and our C1 cash costs came in lower this quarter. On the right-hand side of the slide, we show the first of four Komatsu electric rope shovels that was commissioned at our Monteverde mine in September. Concisioning to electric equipment at Monteverde will not only help reduce our environmental footprints, but will also increase the mine's productivity driven by the larger loads that these new shovels can handle. A second shovel will be commissioned imminently, and the final third and fourth to follow. Turning to slide six, we show our nine-month production and cost guidance between April the 1st and December 31st, which remains unchanged, reiterating our consolidated range for copper production of 136,000 to 150,000 tons, with C1 cash costs trending towards the upper end of our guided range of $2.55 to $2.70 per pound. We expect improved concentrated throughput levels in Q4 at Montes Blancos, as well as at Pinto Valley. The ramp-up at Montes Blancos is progressing well. The mill operated above the designed 20,000 ton per day throughput level over 20 out of 27 planned operating days in October, with copper recoveries in line with expectations. Now I'll pass over to Raman for our financial results.

Thank you, Joanne. We are now in slide 7. Our Q3 financial results were meaningfully impacted by the sharp decline in copper prices that began in late Q2 and continued into and through the third quarter, resulting in negative provisional pricing adjustments that have impacted earnings across many of our base metal peers. Our realized price for the quarter was $3.29 per pound, which was $0.22 per pound lower than the LME average for Q3 and approximately $1 lower than the LME average in Q2 this year. Our lower realized price for the quarter was due to 29.7 thousand tons of copper priced at an average of 3.75 per pound at June 30th, which final settled at lower average prices during Q3, and by 34.6 thousand tons of copper provisionally priced at an average price of 3.45 per pound at September 30th, which was lower than the average price in the third quarter. Adjusted EBITDA in Q3 of $34.1 million was impacted by a realized provisional pricing loss of $32.5 million, as well as continued inflationary pressures felt across the portfolio, particularly with respect to sulfuric acid within our cathode business, as John mentioned earlier. The $32.5 million relates to Q2 provisional pricing, thus excluding that amount, EBITDA would have been $66.6 million. Our adjusted EPS of negative $0.02 per share was also impacted by an incremental $22.5 million in realized provisional pricing losses. Going forward, we aim to minimize the impact of provisional pricing through our recently implemented QP hedging strategy, which I will describe in more detail in the next slide. Moving on to slide eight, on the left-hand side, we summarize our available liquidity. which was $711 million as at September 30th, including $196 million of cash in short-term investments, $405 million of undrawn amounts on our $500 million corporate revolving credit facility, as well as $110 million of undrawn amounts on our $520 million Mantra Verde development project facility. Further financial flexibility exists within the $100 million accordion, and the undrawn balance of our $60 million cost overrun facility with our Mantua Verde partner, Mitsubishi Materials Corp. As at September 30th, we had drawn $22.9 million on the cost overrun facility, which we were contractually obligated to do so regardless of our operating cash balance, based on the previously announced capital increase from $785 million to $825 million in Q2, which remains unchanged. On the right-hand side of the page, we highlight the proactive steps we took in Q3 to protect downside risk with additional 2023 copper hedges as we approach the final years of construction of Manto Verde. In summary, 85,000 tons of copper production next year is hedged at a weighted average price of 3.45 per pound. As previously mentioned, in late Q3, we commenced a QP hedging program, which utilizes derivative contracts to offset copper sales with the objective of fixing revenue at the time of shipment, thus eliminating significant deviations in realized copper prices from the LME average. Our recently implemented QP hedging program also enables better liquidity management, especially in periods of falling copper prices, to protect our business plans going forward and our balance sheet. We remain well-positioned to fund the remaining capex and MVDP, a project that will be transformational to our portfolio once it's commissioned in late 2023. Now I'll hand it over to Cashel for the operations review.

Thanks, Raman. Now on slide 9, Pinto Valley produced 14.1 thousand tons of copper during Q3. Mill throughput averaged approximately 48,000 tonnes per day and was impacted by unplanned downtime at the water pumping system at one of our large makeup water sources, combined with a thickener rate failure, impacting the ability to run at full rates. The mill is currently operating at normal throughput levels as we have reestablished normal operation in these areas. C1 cash costs of $2.60 per pound were on the upper end of our nine-month guidance range and 22 cents per pound lower than last quarter. As for PV4, we continue to work on engineering detail and met work, which has the goal to increase the mine life with additional tonnage from 2039 to beyond 2050. Moving to slide 10. During Q3, Cozumel achieved good grades and throughput levels, yielding solid copper production of 6.4 thousand tonnies at C1 cash cost of $1.20 per pound, both in line with guidance. The Pace Backfill and Dry Sack Tailings project continues to make good progress and will facilitate the mine's planned long-term sustainability, with project completion expected in Q4 and ramp up in the first half of 2023. To date, we have invested $41 million of the total $55 million budget for the project. Cozumel's exploration program continues to focus on testing the Malanoche Main West target from surface and underground. Testing of other targets along the San Roberto mine commenced in Q3, and the results of the ongoing exploration program will be incorporated into an updated mineral resource estimate in the second half of 2023. Moving to slide 11. Throughput is steadily improving at Mantos Blancos, averaging above design levels over 70% of the planned operating days in October. Multiple sampling and testing programs around the new Mill 8 indicate that it is operating at better than expected grinding efficiency. Specifically, this new mill is operating at 15 to 20% above design grinding efficiency and drawing 10 megawatts out of the 13 available of motor power. Our operations team are actively engaged with the mill vendor to increase the mill speed and draw more power, while at the same time increasing the throughput of the fine crushing plant to take advantage of the higher efficiencies. We are very pleased with the results and are confident that the front end of the plant can achieve higher than design throughputs. This is evidenced by October's production performance, where the mill averaged above the design throughput level over 20 out of 27 planned operating days. The highest daily mill throughput was just under 25,000 tons. In August 2022, we filed for the required environmental permits for Phase 2, which is an additional 35% expansion over Phase 1. The feasibility study for this expansion has moved to the first half of 2023 as we are incorporating recent operating performance and fresh understanding of where bottlenecks lie. Now on slide 12, Q3 cathode production at Nantoverde was 11.6,000 tons at a C1 cash cost of $3.87 per pound. As John said earlier, this was impacted by record high sulfuric acid costs, which have peaked, and we have secured acid supply for delivery in Q1 of 2023 at less than half the prices paid in Q3 of 2022. Last week I was at Manto Verde and I'm very happy with the momentum and progress of our MVDP project, which remains on track for construction and completion and wet commissioning in late 2023. As of September 30th, we achieved an overall progress of 67% and construction progress of 37%, having spent $490 million of the $825 million capital budget for the project. At this point in the project, with most major equipment delivered to site, I feel that the areas of possible capital escalation are greatly reduced. With reference to the next four slides, 13 through 16, construction activities are really ramping up. Currently 40% complete with the principal concrete foundation work near completion. As we can see from slide 13, the primary crusher and the concentrate thickener and filter building are well underway. Slide 14 shows the grinding and flotation areas. Then on the right side, you can see the ore stockpile and reclaim infrastructure area. Slide 15 shows the work at the tailing thickener and the trenching and wall construction for the tailing storage facility. On slide 16, you can see a photo of a mill shell. As of now, all major components for the wet and dry circuit have been delivered to site. You'll also note the electric rope shovel. This is number one of four and has been operating on the pre-strip for a number of weeks now with the second to be commissioned imminently and the final third and fourth to follow. Work progresses on all fronts of the Manto Verde Development Project and we look forward to hosting our Chile tour in just two weeks' time. Finally, on slide 17, work on the Manto Verde-Santo Domingo District Integration Plan continues. The plan will outline how we utilize our existing and future plan infrastructure to maximize value creation across the district. Our goal is to create a world-class district capable of producing 200,000 tonnes of copper per year. at low cost and with the additional benefit of a leading cobalt business, which would be one of the largest outside of the DRC and China. We continue to mature the overall strategy for the district, balancing the potential revenue opportunities with cost saving synergies. We know that the desalination plant, the electrical infrastructure and the operating team and the project delivery team will all benefit Santa Domingo greatly. And conversely, the port and future cobalt plant and the potential additional oxide leach production from Santa Domingo will benefit Manto Verde. We look forward to discussing this in more detail soon when this plan is released, and we can discuss it during our site tours two weeks from now. Now over to Wendy King for the sustainability review.

Thank you, Cashel. We're now on slide 18. We're proud that Manto Verde and Manto Blanco formerly became participants of the Coppermark Assurance Framework in August. In the 12 months that follow, they will complete a self-assessment and an independent assessment against the Coppermark criteria. Our greenhouse gas emissions target-setting process continued in Q3. We worked on establishing the business-as-usual forecast that will become the base case for our decarbonization pathway. We've also started reviewing Scope 3 emissions at our Chilean sites, and we'll begin to assess broadly across Capstone in 2023. We have set our initial ESG priorities, which are on the right of slide 18, and we're developing and rolling out our goals, including our emissions targets very soon. Mantua Verde inaugurated the first of four electric shovels which will contribute to reducing the site's Scope 1 greenhouse gas emissions in the expansion phase. Pinto Valley hosted its annual Old Dominions Day event, which is a celebration of the history of mining in the region. It provides a valuable opportunity for broad stakeholder engagement and for members of the surrounding area to take guided tours of the site. Pinto Valley also completed its People's Pond construction project with a liner installation and pump system to support water conservation and reuse. We are in discussions with some key corporate partners to support community investment projects in Chile and Mexico to further enhance our social impact in these regions. Pozitman advanced the remediation of the historic Chiripa tailing site, securing a final permit for the confinement cell. Chiripa is an important example in the industry as it's one of the few historic remediation projects in Mexico. Finally, Mantos Blanco successfully submitted its environmental impact statement for increasing the concentrator capacity for the Phase II expansion. Now I'll turn it over to John for final remarks.

Thank you, Wendy.

Finally, on slide 19, our nine months production and cost guidance range is reiterated. We expect to produce around 185,000 tons of copper over 12 months in 2022. We remain focused on the execution of our near-term growth profile, growing copper production by 40% to approximately 260,000 tons by 2024, with the completion of the Monteverde development project which remains on time and on budget. Following this, we have a fully permitted transformational project with a taxability agreement in place to advance at Santo Domingo, which unlocks an additional 45% of copper production growth to 380,000 tons per year, with further upside and expansions across our portfolio, including an exciting cobalt opportunity at Monteverde and Santo Domingo. With that, We're now ready to take questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. If you are using a speakerphone, please lift the handset before pressing any keys. First question comes from Dalton Barreto at Canaccord. Please go ahead.

Thanks. Good morning, everybody. John, I'd like to start by asking you for your thoughts on the proposal from the Borch government on the new mining royalty regime last week. Thanks.

Hi, Dalton.

Yeah, thanks for the question. And maybe just starting off talking about the sort of obviously there have been two processes going on. One is the constitutional referendum, and the second is the sort of new royalty legislation process. So I think we obviously saw that the draft constitution was rejected by a very significant majority, 62% against 38% a few weeks back. And I think about a year ago, 80% of Chile voted in favor of changing the constitution. So I think we believe it's... most probable that the constitution is going to continue to be adjusted and adapted and changed. But I think it seems to be heading towards a process that should land up with a far more sort of measured outcome. And that process is currently being discussed in parliament. I think with regards to the royalty proposal, certainly the new proposal is a very significant step in the right direction. I think the previous proposal would have made Chile sort of an outlier. And I think this new proposal moves it sort of very much back closer towards sort of where I suppose other jurisdictions' tax rates are. I think in our view, it's still work in progress. It will still, in its current form, act to make Chile sort of less competitive than it would otherwise be. And I think sort of we will certainly continue to engage with the governments and seek an outcome that is a win-win for both Chile and for mining companies.

Great. Thanks for that, John. And then maybe I could switch gears a little bit for my second question. The integration study that's coming out next week, can you tell us what level of detail we're going to see?

Yeah, I think, Delton, for that, I might just pass you across to Castle, who's obviously been very close to that study. So across to you, Castle.

Yeah. Hi, Delton. I think what we need to realize is since the integration of the two companies, what we've seen is a tremendous amount of opportunity that's sort of uncovering itself at the various operations, whether it's Mentos, you know, Mentos, Blancos, Cozumel, or Pinto Valley, but specifically to the integration area between Santo Domingo and Mental Verde. As we dig, we find more and With that, you know, knowing that Santa Domingo, the last technical report was 2018, and that now it's going to greatly benefit from the infrastructure already installed at Mantua Verde, that there's a considerable amount of engineering work to bring up to that quality. So I think what you can view is that you would get an idea of the scope and the benefits of what the current infrastructure is. While we'll probably lay out, we will lay out the timeframe for some of the more detailed work and more of the feasibility work, which is what is the cobalt flow sheet? You know, when do we expect to have the oxide delineated at Santa Domingo? And those types of things, but we can surely sort of give more detailed color on what the expectations or what the value might be for the addition of a port to Mantel Verde or the addition of the desalination plant or some of the electrical power infrastructure. The difficulty really comes with You know, with that technical report being dated and with new information arising, you know, it's not a deduction of what the previous capex was due to inflationary pressures and some design considerations and optimizations. So what we hope, what we're going to lay out is this sort of optimized pathway going forward and that, you know, there are some key infrastructure integrations that materially affect Santa Domingo's efficiency going forward.

Thanks, Gash. Maybe I can just squeeze in one more. On PV4, as you're working through it, Are you just contemplating a mine life extension or will there be a production expansion as well?

Thanks. Fire away, Keshil.

Yeah, we're always evaluating the expansion opportunity. There are expansion opportunities, and right now we have them sort of in what we would call an evaluation or a trade-off or value engineering process. The base case is a life expansion, obviously, with bringing in the reserves and coming up with suitable tailings. Options, but with that also, we're evaluating the opportunity to expand the operation. So there are several of those tradeoffs underway. I would say, again, the base case is additional reserve to mine life, but there is opportunity for some expansion there that is being evaluated. But, you know, the jury's out.

We don't have the scorecard in yet. Perfect. That's all from me, guys. Thank you. Thanks, Nelson.

Thank you. Next question comes from Orest Wakedel at Scotiabank. Please go ahead.

Hi, good morning. I'm just following up on Dalton's questions about the Chilean operations. I'm just wondering where the thinking is right now with respect to Santo Domingo, just given the uncertain market environment for projects and for the copper market itself, whether you still envision the construction of Santo Domingo starting in shortly thereafter the completion of Menoverti or can we anticipate more of a pause and kind of a rebuilding of the balance sheet before you'd start another big project?

Yeah, thanks for that question. And it is a very good question. I think, as you know, we have sort of stated previously that we have no intention of running two major projects in parallel. And so clearly, Our first objective is to complete and ramp up the Monteverde project. As you know, that project will be completed and sort of first all will be through sort of towards the end of next year. So to an extent, that gives us a little bit of time to actually assess the macro environment. And with that, that gives us sort of... I would say overall, we... we are rather conservative in terms of how we look at sort of our balance sheet management and how we look at our sort of future commitments. And so I think the timing of Santo Domingo will clearly sort of take into account the ramp up of Monteverde, the buildup of cash within the business and the current macro environments. And that's on both the side of sort of copper prices and the inflationary environments. So we're using this time to advance the studies and move the studies forward so that sort of we remain flexible, that we can pull the trigger on that at what we regard as the optimal time to do so. And obviously that question is sort of multiple parameters we need to take into account. Clearly, in an ideal world, one would want to pull the trigger on Santo Domingo sort of during a period when perhaps the market is somewhat weaker and capital inflation is somewhat lower rather than sort of wait until copper prices are sort of really booming. So I think we will take all those factors into account, but I think ultimately it will depend very much on sort of our confidence around sort of maintaining a strong balance sheet.

Okay, and thank you for that. And just as a follow-on then, so when I think about sort of your projected startup timeline and then a ramp up for Manoverde, you know, that would suggest to me that sort of the earliest timeline would be kind of call it second half of 24 for the sanctioning of that project. Is that the right way to think about it?

I think that's a fair comment, Orist. I think we, as I say, I think sort of once we have completed construction and put all through. I do think we're fairly hopeful that the Montevideo ramp-up will proceed fairly smoothly. It's a tried and tested design that we've got, tried and tested equipment, and the team from Osenko who we're working with has sort of over the past few years ramped up in a very impressive form several of these sort of almost identical concentrators before. So I think we're We're fairly optimistic about the ramp-up timeline, but clearly then we want to be in a position where we can sort of assess sort of cash build in the business and the macro environment, and then we'll take into account sort of what represents the optimal sort of point to pull the trigger on Santo Domingo.

Okay. And then just on Santo Domingo itself, before the merger, there were two infrastructure transactions that were being contemplated to reduce the upfront capital port rail. Are those still part of the new plan? Can you maybe give us an update on what's happening with those two proposals?

Yes, certainly.

And for that, I'll pass across to Cashel. but certainly those are sort of both under detailed investigation study.

Yeah, so with this combined entity now, we sort of rather than rushing forward with these, as you've sort of pointed out, and John just so eloquently put, we're sort of waiting for uh the right economic conditions to move santa domingo going while not trying to increase our complexity or workload by running two projects at the same time but we still have a full santa domingo uh office of uh engineers and and uh business people that are evaluating the different options in the integration you know it becomes more complex when we start talking about you know the possibility of cobalt not only from santa domingo but also from anta verde and the possibility of oxide from Santa Domingo over at Mantel Verde to fill some of the unused capacity at the SXMW. At the same time, we're focused on that other large revenue generator at Santa Domingo, of course, which is the iron ore. And really the iron ore is what is the catalyst to major port consideration, which is the port of Santa Domingo. Or the idea of trade offs still continuing on this idea of trade offs versus slurry and filtering at the port location versus transport by rail. And those trade-offs are still continuing simply because of the integration of the two assets, the return water, the quality of water, where the pumping stations are, what the electrical infrastructure are. So they seem very simple on the outset, but when you start getting into the detail, there is a right answer and we're working towards it. So we still keep those partners. and those partnerships engaged in what those trade-offs are. They keep continuing to evaluate with us what is the best scenario for the shareholders of Capstone. And we work with our joint venture partner at Mantel Verde and updating them and incorporating them. What is the best option for the Mantel Verde joint venture also? And invariably it always turns out to be what is best for Capstone Copper and Santa Domingo is also best for Mantel Verde and sharing and all those optimizations. So all those conversations, all those relationships and all those evaluations are still part of this value engineering exercise and trade-off process.

Will this become clear with the integrated study that's coming out next week, or is that something that we have to wait for the updated feasibility for?

I think I think what it does is the next. Couple weeks, what we'll be able to disclose is what we're working on specifically and what the merits of each are, but we won't have a final evaluation of that. That will come with more detailed engineering and trade offs of those as those mature. So, yeah, it's about laying out the pathway and the map more clearly. And then those evaluations in time will reveal themselves.

Okay. One more question, if I could squeeze it in. Just on the Manoverde sulfide project, how much contingency is built into the 825 million capex, and of that, how much has been consumed to date?

Yeah. I think what's important is just looking at that overall figure, what the sort of what it comprises of, and I think you heard in sort of casual's presentation a little bit earlier um it's it's really made up of several categories now the one is the um uh epc sort of lump sum turnkey project with osenko um a very large part of that is is um is all fixed price there's an element of it which is um which is on the sort of some of the the earth moving on the tailings facility However, that part of it now sort of is pretty close to being sort of cast in stone. And then the other major cost elements are the mining equipment. Now, all of that mining equipment is actually priced and the vast majority of it is already delivered. And then the kind of remaining portion of it is the pre-strip. And obviously, the previous increment we um, we reported was sort of primarily around that. And that was the result of sort of increased, uh, diesel and explosive prices, um, and the impact they had on the, on the pre strip. So we have, I would say sort of, um, a small contingency that remains in, um, in that $825 million number. Um, that's sort of a handful of million dollars, but, um, At this stage, we think there's sort of relatively limited scope for further cost slippage.

Thank you.

Thank you. Next question comes from Ralph Profiti at Eight Capital.

Please go ahead.

Thanks, operator. Good morning. Thanks for taking my questions. Maybe a couple for Raman if I can. Raman, on the QP program, is the goal to hedge out completely provisional pricing? You know, there's still disclosure in the MD&A about open pounds for Q4. And just wondering, how long would you expect the QP program to be in place? Could we see sort of it coming off when we get to higher copper prices?

Yeah, so the QP hedging program, it's going to continue to roll. We started it the first month of September, so that's why there's some open exposure on the MD&A there for a couple months of Q3. So you'll see that kind of flush out here in Q4 now, and then that should be our last quarter of really having provisional prices. Essentially, with the concentrate business, you've got a three-month kind of floating price out there. We're kind of swapping that for a one-month kind of near-term fixed price. So locking in a price closer to it versus having that exposure out there. And essentially when you move to this, Ralph, we just stay on it because what we noticed, I think we discussed with you a little bit is when the price falls, it falls hard and you lose a lot of money. And when it goes up, you don't, you know, it doesn't move up as fast. So, you know, this essentially allows us to achieve LME average each quarter, but you'll probably start seeing that in a full quarter in the first quarter Q1.

Yep. That's helpful. And, and a second question, just, How good is the liquidity in the sulfuric acid market to lock in those Q123 prices into later quarters? Do you have a goal in terms of the proportion of sulfuric acid exposure that you're aiming to be hedged on?

It's a fluid strategy that's actually discussed at the Exco on a weekly basis, I'd say. Typically, the fourth quarter is when you make a pivotal decision on how much do you want to fix versus float, let's call it. the next year. So as we talked about, we have started fixing into Q1 for Manto Verde. That's, you know, really good prices of 120. And based on our market intelligence, then we can decide if we want to fix a bit more here in the fourth quarter. Heading into next year, we'll leave a bit more open for spot. So we'll be working through that strategy here in the fourth quarter. And that'll be baked into our 2023 guidance then.

Thanks, Ron. Appreciate it.

Yep.

Thank you. Next question comes from Stefan Yolano at Cornbrook Securities. Please go ahead.

Yeah, thanks very much, guys. Just wondering on Pinto Valley with the throughput being down on that sort of 48,000 ton of level in the last quarter, you know, versus sort of PV3, I think it was trying to get up to around 58,000 tons a day. It sounds like you spent some money on some water retention and water infrastructure. Should we read into that that there's a seasonal issue here consideration going forward? And like with the new infrastructure, do you think we'll actually be able to keep it at 58,000 ton a year throughout the entire calendar year? Or is it going to be a summertime thing when throughput does go down just because of water?

Thanks, Stefan. I'll pass that question across to Castle.

Yes, Stefan. There is no doubt. There is. A seasonal nature, it's no mystery. It's quite hot in Arizona then. Much of our water or much of our makeup water is actually from ground sources. It gets affected by a recharge per year. So it's less affected on the immediate growth on the recharge and getting that additional makeup water. And so the infrastructure items we indicated with some of the thickener issues, the rake and some of the water infrastructure was actually individual breakdowns that limited our ability to gain some of that recharge water. So that's sort of on us in our infrastructure management and asset management going forward to limit that exposure. That being said, certainly one of the major sources of water also is reclaimed water. It's recycling and reuse of water, and that happens principally in the thickeners and our tailings dams. where we take water back and when it's dry, we suffer where in the sense that, you know, in that natural reclaim of water from wherever the spigoting is to where the reclaim pumps are, it is reduced in those seasonal areas. So what we do at a local level is what we do is, is we sort of plan out the extra production. If you recall, I, I recall it was before my time in Q4 of 2022. They had very good production in Pinto Valley, and that's because the reclaim was very high, and they were able to reutilize the installed capacity in the mill to achieve higher than 58,000 tons per day. So the idea probably going forward is to sort of format that. But I still think we're looking at and we're going through the detail exactly where we'll be with our late January guidance as we put out in each year what is expected out of Pinto Valley. But at an average, it will be in the high 50s. But, you know, seasonally, we'll have to profile that water dependence on that replaying while also having much more confidence in our ability for the freshwater makeup with a greater focus on asset integrity for 2023. Okay.

Okay. That's very helpful. Thanks very much.

Thank you.

Next question comes from Ben Nittingness at Clarkson Securities. Please go ahead.

Hi, guys. Thanks for taking my questions. I don't really have much left, but I'll ask one on the premiums we're reading about. I think in the last couple of weeks, there's been several news reports on premiums for European and Asian customers kicking in in 2022. That's quite above the levels we've seen today. Is this something you'll be able to leverage on?

Thanks. Thanks for that, Ben. I want to pass you across to Gerald, who has also recently taken over marketing responsibilities. So Gerald, across to you.

Thanks. I think you're referring to the cathode premiums?

Yes, that's correct.

OK. We have a third-party marketing. Our cathode's up, I think, and it's under contract to the end of 2025. And right now, we don't have exposure to the higher premiums, but post-2025, we will. So we're looking forward to that day that we can realize the upside to the premiums.

Okay, thanks. Over to you. Thank you.

Thank you. Next question comes from Craig Hutchison at TD Securities.

Please go ahead.

Hey, good morning, guys. Just one question for me. Just with respect to the Mantos Blanco space to take it from 7 million tons to 10 million there's a note that you guys are you applied for the dia application in august uh 2022 here for the environmental i guess permitting can you just talk about you know what's involved with permitting phase two how onerous that process is thanks yeah so certainly i'll have i'll have a first crack at that and then i'll pass it across to to to casual but you know in chile there are

three different levels of permitting. You get what's called a pertinentia, which is just a minor adjustment to something generally within a plant. There's a DIA, which means there's some additional throughput or scale or more material is going to go into a tailings dam. And then there's the EIA, which is the fully-fledged environmental permit. Our belief is that, and which the authorities have accepted, is that this expansion of Monteverde is the one in the middle, the DIA, and hence is basically a relatively straightforward process. It really just means some additional processing infrastructure within sort of an existing brownfields plant. And obviously the main reason why it sort of triggers a DIA and not just a pertinentia is because we'll be actually growing the amount of reserves that will be processed and will go into the tailings facility. But what we are doing is doing that within tailings facilities that are already permitted and which we believe should be fairly straightforward. So I think our expectation is that this is a relatively straightforward permitting process But obviously, we do need to make sure we sort of, you know, dot all the I's and cross all the T's with it. Kessel, do you have anything further to add to that?

No, no, I think that explains it well, John. Okay, thank you.

Thank you.

Next question comes from John Tomasos at John Tomasos Very Independent Research. Please go ahead.

Thank you for taking my question. Congratulations on the large derivative profit. Do you have the flexibility to collapse derivative positions and just take the profit? And if you do, do you want to?

John, thanks for the question. I'm going to pass you across to Raman for that to respond.

Hey, John. Good question. When you look at our mark-to-market on our hedge book, it's kind of broken out into two parts. So some of it is corporate hedging that we do up here. So yes, we're in a profitable position that we could potentially close out if we wanted to. And then part of the hedge book is tied to the project financing. So it was a requirement of the Manto Verde Development Project Facility. So those hedges are in place in relation to that debt infrastructure that we have put in place. So that would require a bit more discussions with lender consent if we ever want to do that or unwind that.

Do you have a general philosophy about hedging? Sometimes prices recover and it turns against you.

Go ahead, John. Maybe if I can just give a sort of, before passing back to Raman, just sort of a high level view is our philosophy with regard to hedging is really sort of a defensive strategy. Obviously, At this point, we have significant capital expenditure on our projects. We have some high-cost capo production. And in our view, it remains sensible and prudent to whether we're locking in on the cost or the revenue side to be doing so to ensure our balance sheet strength through the construction process. I think as we transition to lower cost operations, I think we'll be sort of revisiting at that stage our sort of hedging philosophy. But obviously there are things like sort of on capital projects where we have a fairly standard view, which when we move across to Santo Domingo, for example, if we raise the financing in US dollars, we will look to, for example, hedge out any peso exposure within that capital and ensure that sort of at the end of the day we're able to sort of manage the capital expenditure. But I do think sort of whilst we're in this particular phase, we are very much sort of focused on sort of a strategy to sort of protect margins during our major construction. Sorry, Robin, would you like to add to that?

I think that was well said. I mean, essentially, our hedging strategy, we look to hedge away input costs, which are FX and interest rates, and lock those in from a guidance cost perspective. And then copper is only viewed in a risk management perspective, as John said during the build of MBDP. Typically, we have been actually unhedged on copper historically. And the QP hedging that we mentioned that we've introduced, which will be small, but it's very, you know, short-term kind of looking out.

Do you reject other risk management strategies like selling equity or taking a partner?

I don't think sort of we certainly don't reject those strategies, but I think what we do is we look at sort of what are our financing options. We look at our balance sheets. And then we typically sort of prioritize what are our sort of preferred sort of modes of finance. And I think at this stage, we remain comfortable that those steps are not sort of either desirable or necessary. But that said, you know, as we move forward, when we – when we look at the sort of Santo Domingo project, we'll be obviously looking at it in the context of both the sort of base case project, but also potentially the oxides and the cobalts. And I think at that stage, we will look to see whether, for example, a sort of equity part in the project makes sense.

I just interject that one of my concerns is that we're in a highly inflationary period. And when you fix your selling price and you don't fix your cost, you're vulnerable to the unanticipated inflations. That's all. It's a different form of risk.

John, you're absolutely right. And, you know, we try and take a sort of very thoughtful approach to that. And, you know, on one side, we do try and, for example, where we have our high-cost capo business, We do try and make sure that we are sort of locking in our sort of biggest cost component, for example, the asset price around the time we're sort of locking in our copper price. But that said as well, you're absolutely right. When, you know, if copper goes up to $5 a pound, you will see cost inflation in a number of other areas. And so what we do look to do is make sure that we're not over hedged on the copper and we can be sure that sort of the the net benefit from that higher copper price will outweigh any sort of other inflationary increase on any unhedged parts of our sort of cost inputs.

Thank you for taking my questions.

Thank you.

Thank you. There are no further questions. I will now turn the call back over to John McKenzie for closing remarks.

All right. So as we discussed earlier, we're working hard to deliver the Monteverde Santo Domingo district integration plan and to host our Chile tour in two weeks. We look forward very much to seeing those of you who are joining us and to showcasing the exciting growth opportunities that we have underway and in front of us. In January, we'll announce the date for the release of our year-end results. So until then, stay safe and feel free to reach out to Gerald or Katina if you have any further questions. Thank you for your continued support and have a good day.

Thank you. Ladies and gentlemen, this concludes your call for today. We thank you for participating and we ask that you please disconnect your lines.