Lundin Mining Corporation

Good day and thank you for standing by. Welcome to the London Mining second quarter 2021 results call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone keypad. Please be advised that today's conference is being recorded. If you require further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Marie Inkster, President and CEO. Thank you. Please go ahead.

Thank you, Operator. Before we begin.

Thank you, Operator, and thank you, everyone, for joining Lundin Mining's second quarter 2021 results call. I would like to draw your attention to the cautionary statements on slide two, as we will be making several forward-looking statements throughout the course of this presentation. On the call to assist with the presentation and answering questions are Jinhee McGee, our Senior Vice President and Chief Financial Officer, and Peter Richardson, our Senior Vice President and Chief Operating Officer. The photo on this slide is our EGLE planning engineer, Matthew Younger, inspecting an impressive high-grade phase on one of the cut-and-fill levels of the Eagle East. On slide four, we published our 2020 sustainability report earlier this month. As many of our long-term shareholders know, Lundy Mining has been reporting on our sustainability performance and standalone documents since 2010. In this year's report, we outline many of our sustainable improvements in safety, environment, and social performance. In particular, we highlight our proactive efforts in monitoring the evolving COVID-19 pandemic, putting appropriate and protective measures in place while working closely with communities to identify their needs and provide support. Our best ever total recordable injury frequency rate of 0.55, our formal adoption of the global industry standard on tailings management, and we had no level three or above environmental incidents and a 13% decrease in level two incidents. In 2020, we initiated a cross-functional and collaborative process to further advance our sustainability strategy and performance. This includes a multidisciplinary sustainability working group, an executive steering committee, and a formal governance structure. Through these, we will continue to define, integrate, and embed sustainability pillars, key themes, performance indicators, and long-term targets. I encourage those interested in the additional detail and more information on our approach and performance to read the report. And as always, please reach out to us with any questions. I'll now turn the call over to Jinhee to run through the summary results of the quarter.

Thank you, Marie. During the second quarter, our operations produced nearly 110,000 tons of base metals and approximately 41,000 ounces of gold. This is a quarter-over-quarter improvement driven by better performance for many of our mines. We sold over 103,000 tons of payable base metals and approximately 39,000 ounces of payable gold, generating revenue of over $870 million. As the market price for the metals we produced increased in the second quarter, there was a positive pricing adjustment again this quarter. The positive price impact on revenue was from the settlement of prior period sales was nearly $50 million. A large portion of these settlements was attributable to copper. Copper generated 72% of the quarter's revenue, slightly greater than the 70% of the first quarter and on a percentage basis in line with the same quarter of last year. Nickel contributed 9% in line with the 10% of the first quarter and up from the 6% in the same period last year on increasing production and prices. We remain predominantly leveraged to copper and well diversified geographically. Slide 6 presents a summary of the second quarter results compared to the same period last year. We benefited from significantly higher base metal prices this quarter compared to the second quarter of last year. We realized a copper price of $4.58 per pound above the average market price in large reflecting $0.32 per pound of prior period adjustments. To a lesser extent, we benefited from positive prior period adjustments for gold and zinc. Details can be found in our MD&A. Second quarter revenue of over $870 million was nearly 65% above that of the same quarter last year, and a nearly 30% increase from the first quarter of this year. In the first half of this year, our consolidated revenue was over $1.5 billion. It is important to point out that at quarter end, nearly 86,400 tons of payable copper remain provisionally priced at $4.25 per pound. This is a larger than typical amount remaining provisionally priced and is a result of the timing of shipments at the end of last quarter. Approximately 30,000 tons were settled in July. Attributable net earnings from operations were 33 cents per share and adjusted earnings were 31 cents per share for the quarter. Both are substantially higher than the same quarter from last year. In the first half of this year, we generated over $370 million of adjusted earnings. Details and adjustments are broken down in our MD&A. With better operational performance and improved base level prices quarter over quarter, we generated adjusted EBITDA of over $480 million, a nearly 110% increase over the same quarter last year. We generated over $835 million of adjusted EBITDA in the first half of 2021. Cash flow from operations was nearly $420 million, modestly impacted by a built-in working capital. Adjusted operating cash flow before changing the non-cash working capital items was over $430 million or 58 cents per share. We've introduced a non-GAAP free cash flow metric this quarter and details are presented in our MD&A. In the second quarter, we generated nearly $300 million of free cash flow, a record for the company. In the first half of this year, The company generated nearly $355 million of free cash flow. Lundin Mining is in a very strong financial position with cash and equivalents approaching $300 million at quarter end and a net cash position of over $150 million. The company's revolving credit facility was fully repaid by quarter end. The company's financial position has further improved since the end of the quarter. Net cash is now roughly $190 million, with cash on equivalents of $250 million following repayment of approximately $80 million of Candelaria term loans. I will now turn the call back to Marie. Thank you, Junhee.

Moving to slide seven, we have adopted a dividend framework to guide the direct returns to our shareholders while enabling the company to maintain a strong financial position for future growth. The total dividend is supported by this framework aimed at returning a minimum target of 40% of available cash flow through the combination of the sustainable and core quarterly based dividend supplemented by a variable performance dividend declared and paid semi-annually. Available cash flow is determined as operating cash flow after capital investments, contingent payments, and distributions to our partners. The table on the slide outlines the calculation. Our board of directors has declared a regular quarterly dividend of $0.09 Canadian per share, or $0.36 per share on an annualized basis, and this represents an increase of 50% compared to the most recent regular dividend paid in June of this year, and 125% increase over the dividend paid at the end of last year. The board has also declared an inaugural semi-annual performance dividend of nine Canadian cents per share for the first half of 2021. In total, 18 Canadian cents per share of dividends were for the quarter, which annualizes to Canadian 54 cents per share and a total dividend yield of approximately 5%. I'll now turn the call to Peter to discuss our operations.

Thank you, Marie. Starting with Candelaria on slide 8. Candelaria performed in line with plan during the second quarter. It produced over 36,000 tons of copper and 24,000 ounces of gold at a cash cost of $1.52 per pound copper, all improved quarter over quarter. Operating costs were above plan, impacted by extra mine and mill maintenance. though on a cash cost basis were offset by higher than forecast magnetite and precious metal byproduct credits. Following the 2021 production guidance revisions announced on June 21st, we have reintroduced full year cash cost guidance at $1.55 per pound of copper. The increase over the prior guidance primarily reflects the lowering of copper and byproduct gold production. Full year capital expenditure guidance has been reiterated at 345 million US dollars, with over 150 million of this having been incurred in the first half. Moving to slide nine, as announced in our June 21st release, we have adjusted the near-term mining sequence in an area of phase 10 of the open pit for the second half of this year to manage production challenges in a localized area. As can be seen from this photo, while nominal in volume, small movements have the potential to impact activities on lower levels, levels 144, 128, and 112. The photo shows several of the measures and actions we have taken to manage risk in this localized area. The photo is of current mining on July 18th. To reduce the risk, we have implemented new blasting procedures including smaller blasts to manage the energy impact, have pinned the 192 and 224 levels in the localized area, and made design changes to increase bench width and step-outs, as can be seen on the 224, 192, and 160 levels, have increased equipment in the area to improve productivity as we work through the area, further enhanced monitoring process, including time delay response, prisms, and INSAR satellite imagery, adding further technical capabilities, including senior technical mining personnel, and enhancing external review and auditing process. With these additional measures, we are confident in the management of the production challenges while mining through this localized area of phase 10 in the open pit. I'll be happy to take any questions during the Q&A. I'll turn the call back to Marie to discuss Candelaria's 2022-2023 production outlook.

Thanks, Peter. Moving now to slide 10. We are currently preparing and optimizing our life and mine plans for all of our operations as part of our annual planning process. In reviewing the plant and mine performance for the first six months of this year, the preliminary plans for Candelaria are considering a forecast annual processing rate of approximately 28 million tons for the complex, utilizing the existing infrastructure and allowing for a mine-to-mill copper grade dilution of 5% to 8% for 2022 and 2023. This compares to the most recent 43-101 Technical Report, which assumes annual throughput of approximately 30 million tons in each year and does not incorporate an allowance for normal dilution. While further work is required to complete and confirm the plans, on preliminary review, production forecast for 2022 and 2023 is expected to be approximately 10% to 15% lower than our prior guidance for both of these years. Alternative plans, trade-off studies, and further revisions are being evaluated to improve future year's production. These include adding and de-bottlenecking our pebble crushing and grinding capacities, improved grade control, increased contribution to mill feed from our underground mines, and an earlier and increased contribution of Phase XI ore. We aim to finalize our life of mine plans over the next few months, and it is approved by the company's board in November. As per our normal course, a three-year production outlook along with one-year cash cost and capital expenditure guidance for all mines will be provided at that time. Peter and I will be happy to take any questions and elaborate during Q&A. I'll turn the call back to Peter to continue the discussion of the operations.

Thank you, Marie. Moving to Chapada on slide 11. Second quarter production totaled over 11,200 tons of copper. This represents improvement of nearly 15% and 30% respectively compared to the first quarter. The operation performed well and set a new monthly mill throughput record in May, processing 2.3 million tons. Metal recoveries improved quarter over quarter and were on plan for copper and better for gold, though remained below those of recent quarters primarily due to a to the as-planned lower mill feed grades. Operation costs and the second quarter cash costs of about $1.33 per pound copper were both in line with the plan. Full-year copper guidance has been tightened to 48,000 to 50,000 tons from 48,000 to 53,000 tons previously. The gold production guidance range has been tightened and lowered to 73,000 to 76,000 ounces from 75,000 to 80,000 ounces previously on re-sequencing of ore sources for the second half. Full year cash cost guidance of $1.10 per pound of copper has been reiterated. Our gold price assumption for the second half of the year has increased $100 per ounce to $1,700, while our Brazilian real estate assumption remains at $5.10 US dollar. Full year of capital expenditure guidance remains at $65 million, though we have now anticipated lower capitalized tripping expenditures to be offset by near-mine land acquisitions. On the exploration front, we continued the excellent progress achieved in the first quarter. We completed nearly 18,500 meters of drilling in Q2, bringing the first half total to over 29,000 meters, and on track to complete the budget 60,000 meters for the year. Nine million dollars has been expended in the first half of the 16 million full-year expedition budget. Slide 12 is an aerial of Chapala with several exploration drilling highlights from assays received back during the second quarter. On the slide, you can see the surface expression of last year's measured and indicated mineral resource, which includes the proven and probable mineral reserves at a subset. As you also can see, the inferred mineral resource and other areas we have determined to be highly prospective priority for near mine exploration. We are in the late stages of preparation of our annual mineral resource and reserve statement across our portfolio, which we aim to announce early September. As in prior years, the R&R statements will have an effective date of June 30th, 2021. It is important to mention that to prepare the geological models for this year's update, Chapada's assays cutoff date was in the first quarter. With this cutoff and the assays delays we have experienced in the first half, unfortunately, much of the recent drilling success from earlier this year will not be incorporated in this year's update that we'll be announcing in roughly a month's time. At Chapada, our primary focus remains on near mine exploration to better understand and define the mineral resource potential and inform our ongoing expansion studies. Moving to Nevis Corvo on slide 13. First quarter production totaled over 10,300 tons of copper, 16,600 tons of zinc, and 1,300 tons of lead at a cash cost of $1.65 per pound copper. Copper production increased nearly 40% over the first quarter, in line with plan, on improved feed grades and increased mill throughput. Zinc production increased over 10% quarter over quarter, however, was below plan, impacted by a lower than plan average zinc feed grade. Mining was resequenced to lower grade areas to make volume, with less from higher grade Lombardo ore bodies to complete rehabilitation work. The full year copper production range has been tightened to 36,000 to 38,000 tons from 35,000 to 40,000 tons, while zinc production guidance has been lowered to 67,000 to 70,000 tons from 70,000 to 75,000 tons. Operation costs in aggregate and on per ton mill unit basis were better than planned in the quarter, both on a Euro and a US dollar basis. 2021 full-year cash cost guidance has been improved modestly to $2.10 per pound of copper from $2.20 on a first-half performance. This also considers a revised zinc by product price assumption of $1.25 per pound for the second half of the year from $1.50 previously and a second half euro to US dollar exchange rate of 1.25. Four years sustaining capital guidance of $65 million has been reiterated with $20 million having been capitalized in the first half. Moving to the zinc expansion project. Consistent with our previous guidance and timeout, construction is to be substantially completed by the year end. Pre-production capital of $430 million remains unchanged as of their 2021 capital expenditure guidance of $70 million, with approximately $30 million remaining to be spent in early 2022, primarily reflecting timing of payments. Slide 14 shows recent progress on the underground aspects of the project. In the second quarter, we commenced construction on the reticulation system, defining the shaft shutdown with prefabrication and pre-assembly works now underway We started some gallery and pumping station final supports and initiated construction on the dumping base. Over the coming months, underground work is to focus on the completion of the electrical rooms with handover to the commissioning team, completion of the shaft upgrade, finishing mechanical installation of the material handling system on the hoisting level and installation of electrical on the crushing level, and installation of the service water piping system. Moving to slide 15. These pictures show some of the second quarter progress on surface. During the quarter, construction began on the expansion of the Pace fill infrastructure, remaining cyclone construction work was initiated, and all remaining flotation and filtration works were awarded and commenced. Over the coming months, surface work is to focus on completion, ventilation, and electrical works in substation, finishing commissioning of the third tailings Pace thickener, and new cyclones infrastructure construction and commissioning. Construction as well pushes positions to be substantially completed by year-end and ramped up over the course of 2022. On slide 16, zinc treatment continued to perform very well. In the second quarter, production totaled nearly 18,200 tons of zinc, 650 tons of copper, and 5,100 tons of lead at a cash cost of 42 cents per pound zinc. Zinc and lead metal production exceeded plans primarily on better-than-cassin mill feed grades. Full-year zinc production guidance has been tightened, with the bottom of the range revised upwards to 73,000 to 76,000 tons from 71,000 to 76,000 tons previously. Operating costs on a per-ton mill unit basis were modestly above plan, both on a SEC and a U.S. dollar basis. However, the second quarter cash costs were better than planned on higher byproduct copper prices and volumes. Full-year cash cost guidance of 65 cents per ton zinc has been reiterated, as has the sustaining capital guidance of $50 million. Exploration efforts continue with a focus on the extension of Dalby and the areas between Burkland and Negru and Orpati. Over 5,600 meters of exploration drilling was completed in the second quarter, bringing the first half total to approximately 12,000 meters. In 2021, we plan to complete 27,000 meters of drilling planned as a part of a $6 million program. The chart on this slide presents the evolution of the zinc and copper mineral resources and reserves over the last 10 years. The primary message being that we are confident we will be able to continue to extend the mine life of Zincruen beyond what is presently defined by the approximate 9 to 10 years of mineral reserves. Talbot can be seen begin to contribute to the zinc mineral resource initially in 2018. We aim to have it reflected in the mineral reserves and fully expect it to continue the tradition of continuous production since 1857 beyond the next 10 years. Lastly, on the operation front, on slide 17, Eagle had a strong quarter yet again. Mill performance was as planned while the mine delivered greater nickel and copper grades than forecast. As a result, second quarter production was nearly 4,800 tons of nickel and over 5,200 tons of copper at a cash cost of negative $2.01 per pound nickel. With minimum capital expenditure of $5 million US dollars, Eagle generated over $90 million of cash in the quarter. On a strong first half performance, Eagle's nickel and copper production guidance have been both narrowed with the midpoint raise to 18,000 to 20,000 tons from 17,000 to 20,000 tons previously. 2021 cash cost guidance has been improved for a second time this year to a negative $1 per pound of nickel from negative 25 cents previously. as a result of the exceptional first half and revision of our byproduct copper price forecast. We are now forecasting $4.30 per pound of copper for the remaining of the year from $3.75 previously. With the remaining life of mine production profile, current metal prices levels, and low annual capex, Eagle is well positioned to generate significant free cash flow in the coming quarters and years. Beyond what is presently in the mine plan, we are now undertaking technical and economic studies to evaluate the potential of mining mineralization in what is referred to as the keel zone. This zone of disseminated mineralization that is lower than that of Eagle and Eagle East ore bodies, however, given the proximity to the existing ramp infrastructure, has the potential to be economically mined at current spot nickel and copper prices. This area will not be included in the upcoming 2021 mineral reserve and resource estimate, though provide significant opportunity to extend the mine life if current nickel and copper prices prevail. With that, I'll turn back the call to Marie to sum up.

Thanks, Peter. On slide 18, we have a summary of our current guidance. As discussed in the operational sections, the annual production guidance ranges have been tightened for the operations. Candelaria guidance was updated in late June. Chapada Gold and Nevis Corvo's ink production saw modest reductions based largely on forecast mill feed grades, while other metals were tightened within their previous ranges. Full-year cash cost guidance for Eagle and Nevis Corvo have been improved given year-to-date performance and forecasts for continued favorable by-product metal prices. Candelaria cash cost guidance has been reintroduced after the previously disclosed near-term mine sequence changes in Phase 10 of the open pit for the second half of the year. Cash cost guidance for Chapada and Zinc Reuben is unchanged. Full year exploration expenditure guidance remains at $40 million. We are well positioned to achieve the targeted 140,000 meters of planned exploration drilling this year. Lastly, on slide 19, the investments we have made over the past several years and are completing now at Nevis Corvo have positioned money mining well to benefit from the current commodity price environment. with multiple years of strong production, leading cash costs, and free cash flow generation. Our operations performed well in the second quarter, particularly as our South American mines continued to address evolving challenges of COVID-19. We were able to take advantage of the current price environment and generate a quarterly record of nearly $300 million of free cash flow for our shareholders. We generated nearly $355 million of free cash flow in the first six months of this year. We have adopted a dividend framework to guide direct returns to shareholders while enabling the company to maintain its best-in-class balance sheet and strong financial position for future growth. Our total dividend is supported by this framework aimed at returning a minimum target of 40% of available cash flow through the combination of our regular base dividend, which is sustainable throughout the cycle and can be progressively increased as our asset base improves and grows, and our new variable performance dividend. We will continue with our objective to create value by investing in low-risk, high-return opportunities in our own assets as we remain disciplined in our approach to unlocking creative external opportunities. And with that, operator, I would like to open the lines for questions.

Thank you, speakers. Participants, we will now begin the question and answer session. to ask a question over the phone, please press the star key followed by the number one. To withdraw your request, you may press the pound key. Again, that's star one to ask the question or the pound key to withdraw your request. First question is from the line of Orest Waukadao of Scotiabank. Your line is now open.

Hi, good morning. Given the magnitude of the guidance cuts in Candelaria in 22-23, can you please provide more color on what's driving this? I'm just really confused because my understanding was that you were mining slower through the fault zone in H2-21, which would have pushed some of that into first half of 22. But I really don't understand the magnitude of the cuts, especially for 23. Any colour here I think would be very appreciated.

Good morning, Art. Yeah, I think we're pretty clear in our release about what's driving it. you know, the 28 million tons per annum versus the 30 million tons per annum, there's an impact to that, and really it's, you know, six months now that we've been running the CMOP at full rate, and we are still having a lot of pebbles in the circuit, and we're not achieving the sole throughputs that we felt that we would achieve and building that into our plan. So, you know, we need to do some work to address that on additional crushing and grinding. In addition, we are seeing some grade dilution in the short-term plan and so we're accounting for that. So those are the two things really that are driving it. Peter, I don't know, can you expand on that a little more?

No, it's correct what you said, Marie. The lower efficiency on the team-up project, we expected 4,000 tons extra per day for six months. We're not seeing that. So that's the reason that we've cut back from 30 million tons annually to 28 million tons annually. We have a a number of investigations ongoing to recover some of that. So we will be making decisions later on this year to be able to increase throughput as we plan. And then also the discrepancy between the short-term model and what we're seeing in the mill. And that's something that we're constantly working on and we have a lot of initiatives to improve that.

Now, are these issues limited to 2022 or 23, or should we be also taking a hatchet to what's in the mine plan for 24 and 25? I mean, the technical report calls for copper production in the order of over 190,000 tons in those years. It sounds like what I'm hearing is that these are more structural issues that are going to impact life of mine, not just 22, 23. Is that correct in my thinking?

Well, I think you're being a bit dramatic or saying that you're taking a hatchet to the plan. It's still a good plan, and we are working on our opportunities to improve the throughput. There's also opportunities. Right now, we could improve from the underground to improve the grade. We're permit constrained. We actually could move more time to the underground. So there are a number of things that we're looking at. In November, we will give a three-year guidance and give some guidance some future trending then. So incorporating those plans in the future years. But, you know, I think saying you're going to take a hazard to the plan at this point is a little overdramatic. Okay. Thank you.

Next question is from the line of Jackie Perzybulowski of BMO Capital Markets. Your line is now open.

on the new dividend policy. It's great to see you guys adding returns to shareholders there. Can you maybe talk a little bit about why you chose to use a special dividend framework? And so what you're thinking on that versus the buyback that you already have in place is? And I guess as a follow-up question, how should we think about that buyback? Is Should we assume I guess at this point that you're not planning to make use of that this year? Thanks.

We are focusing on the dividend as the main source of the returns to shareholders at this time, and we do see that with our production, we have really good production, good cash costs, and we'll be generating very good free cash flows. And so with this policy, what it allows us to do is to still – retain some cash for growth opportunities, but depending on how we see those playing out, to be able to distribute a significant amount of the free cash flows. We set a minimum of 40%, but we'll look at that in the future and see whether we're building cash and whether it should be above that number. But it will be a minimum of 40%. So on the buyback, we'll probably continue to do that, but not with a focus. Probably where we see opportunistic opportunities to use it, but it won't be a focus for us. It still is in place, but I think most people would recognize that unless we're going to put hundreds of millions into a substantial buyback program, it's really not going to move the needle. So right now we're focusing on the dividends as the return mechanism.

Thanks very much. I'll leave it there for now. Thank you.

Next question is from the line of Ioannis Mazoulas of Morgan Stanley. Your line is now open.

Good morning and thanks for the presentation. A couple of questions from me again on Candelaria, and I'll take them one at a time if that's okay. So regarding the outer years beyond 2023, is it fair to say that you will need to make good progress on those initiatives around additional crushing and grinding capacity as well as great control initiatives to make sure you get close to the projected production numbers that were included in the technical report? Is that a fair assessment of the situation? And if that's the case, could you give us a sense of what sort of associated capex may be required here for those additional investments? Are we talking the low double-digit million dollar numbers or could to do something materially higher than that. Thank you.

Yeah, so, Yannis, on your first point, yes, I think it's fair to say that we will need to do some additional work on the crushing and grinding in order to see the full throughputs that we would need to do the previous guidance. And we are studying those. We have been studying those for a little while now. And it's both crushing and grinding that we've been looking at as alternatives. And so depending on which one of those is chosen, the CapEx can be quite different. Of course, the crushing would be much cheaper than the grinding alternatives. But I think your order of magnitude on the crushing is fairly reasonable. Peter, anything to add?

Yeah, just to clarify. So when we say crushing and grinding, it's the pebbles. So we're producing... pebbles that we need to crush before we're turning them into the sag grinding circuit. So we've been looking at different options, as Marie is saying, and how to improve both the capacity but also the reliability of those systems. So depending on what alternative we choose, we're talking mid-single digits or a little bit higher depending on chosen opportunities. And we see some of these initiatives we can do within our permits.

Understood. That's helpful. Thank you. And a second question, Candelaria. When you lowered your production for 2021, you took a cut both on copper and gold. but you didn't do so on the preliminary assessment for 2022 and 2023. So how should we think about gold production for those two years?

Yeah, that's because we haven't finished modeling all the gold. We're in the preliminary stages of our mine plan, and we have been seeing some good improvements in recovery on gold. So it may not be... of the order of magnitude, but we're still looking at that. We're still looking at the gold.

Okay, understood. And the last question from me on the new dividend policy. It's good to see that payout ratio gives a bit more visibility on what to expect from Landin, but could you also comment on whether that changes your mindset at all around M&A? is now the bar potentially higher in potential deals? Or are you looking at shareholder returns and M&A the way you looked at in the past and we shouldn't really assume any changes to your M&A strategy? Thank you.

Yeah, so the dividend doesn't change our views on M&A. We'll still continue to look for opportunities, still focusing on copper. you know, there aren't a lot of opportunities out there, you know, with the characteristics that we would typically look for in the quality that we would typically look for. So we're not seeing a lot right now, you know, and something that we'll have to discuss with our board is whether we turn our attention to things that may be a little bit longer dated in order to get some growth in the pipeline. because typically we haven't entered into those type of situations, but really with the lack of available work opportunities, if we want to continue to grow, we need to do that.

Understood. Thank you.

Next question is from the line of Greg Barnes of TD Securities. Your line is now open.

Yeah, thank you, Marie, Peter. I think I understand the crushing issues and the pedal generation issues I get that. What I don't really understand is the copper grade dilution, which is pretty significant, and I would have thought that would have been included in your block models already. I wonder where that's coming from.

Yeah, sure, Greg.

Peter, do you want to address that? Yeah, so the correlation between the block model and our long-term, or sorry, our short-term mine model is pretty good. What we're seeing, the discrepancy is between the short-term short-term mine model and what we're seeing in the mill. So that's where we're seeing the discrepancy. And we have a lot of initiatives ongoing to try to resolve it, understand it, and resolve it. So we've been doing a number of sampling campaigns to check our sampling systems, both in the mine, both open pit, underground, and in the mill, using tracers, and especially on the underground mines to track potential dilution, doing visual checks in the open pit for dilution risk and contact zones, and just working hard in the middle to make sure samplers are up and running and the assay system as well. And we continue to do balances twice a month now to really keep track on the discrepancy so we can catch it early. So that's the issue at the moment is that my short-term model and what we're seeing in the middle is not adding up.

I'm surprised that just suddenly appeared out of nowhere. There must be something that's changed to drive that kind of solution. You're not sure it's coming from the underground or the open pit?

No, we're investigating where it's coming from. We've seen dilution previously, and then it's gone up, and then it's gone a little bit down again. Now we're focused on minimizing this at the moment, right, because it's a little bit higher than normal for us.

Okay. So you do think this is a short-term issue rather than a longer-term issue?

Yes. We hope so it is, and that's what we're doing. We're investigating, identifying it, and then we're going to be putting measures in place to make sure that it's minimized.

Just on the Chapada expansion studies, you mentioned in the presentation that you weren't able to get all of the information you would have liked to get into the upcoming reserve and resource update. Will you be able to get more of that information available for the upcoming I'm not sure whether it's a technical study or a concept study about what you're planning to do at Chicago in terms of a potential expansion. Or is that being delayed by these acid delays?

The expansion study is not delayed. We're pushing forward with that. What we wanted to highlight is that we are, because we're behind in the assays by a significant amount here, it's not going to be incorporated into the R&R update, which, you know, we expect once we get those assays in to be able to have a quite, you know, substantial increase in our R&R based on all the drilling that we're doing and the good success that we're having. But unfortunately, we don't have the results to be able to include it in the R&R update. But we are incorporating into the study some of the concepts about where the future ore bodies and what grade profiles there might be. So it doesn't affect the timing of the study at all. Is there anything?

No, so much is said. They're all going in parallel.

So, Marie, the study that we are going to get at the end of the year or early next year, what level is it going to be? Is this going to be concept, pre-fees? How are you positioning it?

Well, we're hoping to have a scoping by the end of the year.

Okay. So what level of detail will that be at? What level of accuracy do you think? Is that more the concept level or pre-feasible?

Yeah. It's more scoping. So, you know, it's somewhere between the conceptual and pre-feasible.

Okay. Fair enough.

Thank you. Next question is from the line of Daniel Major of UBS. Your line is now open.

Hi there. Couple of questions. First one, operationally, Chapada recoveries, both copper and gold, have been comparatively low in the first half of the year. You've obviously reiterated the guidance, but can you give us a steer on the driver of that lower recovery rate relative to 2020 and what you're seeing or expecting in second half of 21 and into 2022?

So yeah, it's really related to real remining and it follows the grades as well. And Peter, I don't know if we had out there an expectation, but we do expect that in different areas it does improve. So the second half of the year was improved on both grade and recovery. Any additional comments?

It's grade and recovery, where we mine it, and how much stocks we put in. So when we add stocks, the grade, or sorry, the recoveries go down. So it's a combination of grade and where it's mined. We have a really good lithology model when it comes to the recovery. So we, and that's based on the different pits and stocks. So that's what it is.

I think it typically dips during the rainy season because there are days that we have to stop mining because of safety issues in the pit when it gets really wet. And so we do supplement from stocks quite a bit more in the wet months than we would in the dry months.

Okay, so recovery should be getting back to levels more comparable to 2020, second half of this year and into next year in the 80s for copper. Is that fair? Yes, that's correct. Okay, thanks. Most of my other questions have been answered, but have you got any update, any comments on your expectations around timelines for the Chilean mining tax debate and how your engagement has been so far? Have you been presenting to the Senate, for example, in terms of the implications of the proposed changes?

Yes, so we have been obviously following very closely and we were invited to present along with a number of other companies. So that should be relatively soon. We know that also Canadian Ambassador was invited to. present with Mackenzie's presented so we think you know once it got up to the Senate there was a certain level of sanity that came into the proceedings and they're really looking at the implications on the policy and how that would affect the industry and foreign investment so we think it's been positive you know positive over the last couple of months, positive movement. We also saw, of course, with the presidential primaries that the candidates have really moved from the extremes on either right or left and they're more centrist. So we see that as a positive for the country and the markets reacted very well in Chile as well. So we are following closely and we do expect it to still continue for probably a couple of months. We would be surprised to see any real action on that in the near term.

Okay, so just to push on that second point, do you think it's more likely that we'll see a resolution from the Senate following the election, or do you think we might see some update or clarity before the election?

If I was a betting person, I'd probably put it after the election, but I couldn't rule out the fact that they would do something in the fall. from Canada it's sometimes hard to have your finger on the pulse but we do have good contacts that keep us informed on a regular basis and I think it's something that will go on for some time and of course the revenue of Codelco and the taxation revenue that's coming into the country now also will be a big plus for the industry in showing the contribution in the existing sliding scale royalty so I guess stay tuned And it definitely won't be anything like that which was originally introduced.

Got it. Thanks a lot.

Next question is from the line of Abby Agarwal of Deutsche Bank. Your line is now open.

Thank you. Good morning, all. Thanks a lot for the call. So I just have a quick clarification on Candelaria, please. So just trying to understand the mechanics behind the production cut. So if I understand correctly, the lower throughput is an issue with the MEL, and the grade dilution, is that a function of phase 10, or is that something different which you are observing right now?

Yeah, so correct on the mill, it's really the, you know, when you make improvements, you remove a bottleneck, but you often find that you create a new one somewhere else. And we are, you know, seeing that we need more upfront crushing and grinding for those pebbles. So you're correct on that one. On the grain dilution, it does vary from time to time.

Peter, can you expand on that? you know you ask if it's phase 10 that's what we're trying to pinpoint where where it's coming from we're doing all these uh studies and sampling is it from the underground is it from phase 10 or is it from stocks so it's too early to say uh where is it coming from but it's the discrepancy between what we're delivering what we are modeling in the mind and what's being assayed in the middle

Okay, got it. So this is okay. So it's not possible to separate, separate if it's a phase 10 issue, because, you know, the reason why I asked this question, that question was because I know, like, given you move to phase 11, and you know, how, how sure can you be, you know, that these issues are not replicated with phase 11. But I guess it's, it's likely difficult to answer that question. Am I correct in thinking that? Yeah, that's correct. One last question from my side, please. Is it possible for, I appreciate it's early days, but is it possible for you to separate on what exactly is fixable with better operating practices and what you think is actually structural?

Are you referring to CMOP, to the pebbles?

Yes, so basically at Candelaria, the great deletion plus the So what you think is, you know, is fixable with better operating practices and what you think is potentially a structural issue here?

So on the crushing and the pebble crushing and grinding, it's both. So we're looking at some modifications to the grinding, sorry, to the pebble crushing circuit and also to potentially to the grinding circuit. But then there's also some operational changes upgrades that we need to practice to make sure that we utilize this circuit as much as possible. So we minimize the downtime. So it's a combination of both that we're working on.

And on the dilution, it is practices as far as we're aware. There's nothing structural in the block model. It's just a matter of controlling the dilution that comes into the mill.

Very clear, thank you very much.

Next question is from the line of Lawson Winder of Bank of America. Your line is now open.

Hello, good morning. Murray, you've recently expressed a five-year copper equivalent production target of 600,000 tons. And I'm curious, with the developments recently at Candelaria, does this impact your confidence in holding that target out there at all?

No, we'll continue to try to achieve that target. I think it's a reasonable target for us to set with some additional... activity and will continue to try to achieve that.

Now, in terms of the upgrade that Chile, in the past you've said that basically you weren't interested in investing in Chile as the draft constitutional rewrite process was unfolding. Now, given kind of the more urgent nature of probably trying to address some of these issues that have emerged. As you're thinking around that change, are you now willing to make some investments in Chile before that becomes clear?

We have instituted a policy that we would make investments depending on the payback period. So if we saw something that had a minimal payback period, we would be willing to do that. But until there's clarity on the fiscal regime, something that would have a long payback period, we need more clarity on what that will be before we would dive in.

Gotcha. Okay, that's great. Now, you've... highlighted some issues here at Candelaria that, to me, might impact the current reserve and resource estimate. And I'm just curious, will you have enough information, particularly on the costs and even the great control associated with this, to apply any updates to the reserve and resource update in September 30th? you know, should we possibly be watching for a Candelaria standalone reserve and resource update with the three-year guide in November, December?

No, the issues don't affect the resource and the reserve. There's no issue with the resource and the reserve. It is in the processing and mining practice.

Okay, great. Thanks for that. And then you also, Peter, you mentioned that there might be some aspects of the proposed optimization that might not be within the permits. You said some of them were within the existing permits. Which ones would not be within the existing permits?

Well, for example, if we were to install a brand new larger crusher, that's not described in the technical aspects of the permit. But modifications to the existing circuits, that is allowed. But if we were to build, say, a new crushing plant, that is something that would be outside the permit, as we understand it.

Yeah, and we do have some additional permitting that's in process right now with our EIA 2040. That does anticipate that we would do the underground expansion, so that would relieve some of the constraints on the underground, but there were probably another year in that process without EIA. It's been very slowed from COVID.

Okay, so crushing. Is there any throughput work that you can do under the existing permit? For example, like Oh, yeah.

Yeah, so anything that we can do with the existing infrastructure that we have, so optimizing the crushing circuits that we have, the public crushing circuits that we have, we're optimizing the pebble grinding circuit that we have. That is allowed within our permit. But constructing new facilities needs to be permitted.

Okay. Oh, that's great. That's very clear. And then there was... Some news in the last week or so just on the Environmental Authority and some issues related to Candelaria. Can you confirm that there is something going on there and just maybe elaborate on what that might be?

Yes, so we have received notice from the SMA that they're looking at six charges of violation of our permit. So three of those they would consider pretty serious. Three are purely more administrative in nature. So we're assessing those and determining whether or not we will dispute them or whether it's easier to go forward to agree and present a compliance plan. You don't see it as something that would affect the operation or be material to the operation. Okay.

Thanks, guys, for pointing that out.

Yeah, similar to the current process that we were working through since 2013. It's a pretty long process if you do decide to dispute the charge. So we're working on the 2013, you know, we recently had rulings in court that were in our favor on those, and there's some similar ones in this one. So we'll have to discuss how we proceed with those, but we don't see it as something that's material to the operation. And of course, we have a lot of steps to make sure that we're in compliance with our permits. We understand it's very important to have the processes to ensure compliance and we continue to have a good track record on compliance with all environmental permits at all operations.

Thank you.

Thanks. Operator, maybe if we take one more question, if there is one more.

At this time, there are no additional questions on queue.

Okay, great. Thank you. And thank you, everyone, for your attention. And we will provide our next update with our Q3 results.