Lundin Mining Corporation

Good morning, ladies and gentlemen, and welcome to London Mining Q2 2024 financial results and webcast conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, July 31st, 2024. I would now like to turn the conference over to Jack London. Please go ahead.

Welcome, everyone, and thank you for joining Lundin Mining's second quarter conference call. For those that were on our corporate update call on Tuesday, where we announced the joint acquisition of Philo with BHP, thank you for joining today as well. Yesterday, after market close, we reported our operating and financial results for Q2. The press release and presentation are available on our website under our investor section. All figures presented today are in U.S. dollars, unless otherwise noted. Before we start the presentation, I would like to remind our listeners that the call may contain forward-looking information, and this information by its nature is subject to risks and uncertainties. As such, actual results may differ materially from the views expressed today. I would encourage you to read the cautionary note that accompanies our second quarter MD&A, along with the relevant filings on CDAR. These documents are also available on our website. Today with me on the call are three other members of our senior executive team. Cider Polson, our Executive Vice President and CFO, Juan Andres Morel, our Executive Vice President and COO, and Nathan Monash, our Vice President of Sustainability. Briefly, before we get into the Q2 results, I wanted to highlight the transaction we announced yesterday. We look forward to working with BHP and embarking on this multi-decade partnership to develop the Vicuña district in Argentina. This transaction transforms our growth profile and solidifies our belief that the district has the potential to be world-class in both scale and quality. For anyone that missed yesterday's conference call, there is a replay available on our website, and I encourage you to listen to it and get the full overview of the highlights of the acquisition and partnership. now into Q2 2024. Quarterly copper production for the company was 80,000 tons. As we have previously discussed, our copper production profile is weighted to the second half of the year, and we expect to see higher grades and throughput in Q3 and Q4 at Candelaria that will drive the production. We're still on track to meet our annual copper guidance, which is between 366,000 to 400,000 tons. 47,000 tons of zinc and 32,000 ounces of gold were produced in the quarter. Operationally, the quarter was affected by unscheduled maintenance and lower mining rates that impacted production at several of our sites. Nickel production at Eagle was impacted by additional ramp rehabilitation work that limited ore production from Eagle East. We have had to revise guidance at Eagle for the remainder of the year. After the quarter, we exercised our option to increase our ownership in Casaronas to 70%, further enhancing our presence in the region and strengthening our overall copper-dominant portfolio of high-quality base metal mines. We had a very strong financial performance this quarter with the increase in commodity prices and generated $461 million in adjusted EBITDA and $338 million in free cash flow from operations. This quarter, we announced our regular quarterly dividend of $0.09 Canadian per share, which makes up part of the annualized dividend of $0.36 Canadian per share. In addition, we released our annual 2023 sustainability report that highlights the company's material, environmental, health and safety, governance and social performance during the year. We are committed to the responsible production of critical minerals and believe that mining can be a platform for sustainable development. I will now hand the call over to Nathan Monash, our VP of Sustainability, to talk about the highlights from the report before going into the results of the quarter.

Thank you, Jack. Earlier this month, we published our 2023 Annual Sustainability Report, which reports on our efforts over the last year to address material sustainability topics and further integrate our sustainability strategy into Lundi mining's plans for growth. Sustainability is key to who we are as a company, and this report highlights our commitment to creating shared value. As many of our long-term shareholders are aware, Mooney Mining has been reporting on our sustainability performance in a standalone document since 2010, demonstrating our commitment to transparency and responsible mining. We are proud to highlight that we achieved the copper mark certification at Candelaria and Casarones, which are the leading global assurance framework for sustainability performance in the copper industry. I would also like to note that we have continued to reduce our greenhouse gas emissions through new power purchase agreements from renewable resources. We continue to make progress on our decarbonization plans and to achieve our goal of a 35% reduction by 2030 versus our 2019 baseline. We also continue to work with host communities 2023 to address common objectives in education, health, culture, and economic development. Our investments in 2023 totaled approximately $6.1 million. For a complete list of highlights, I would encourage everyone to go through the report. It can be found on our website under the sustainability section. I will now pass the call over to Juan Andres, our Chief Operating Officer, to talk about our production results.

Thank you, Nathan, and good morning, everyone. The company is tracking to budget and production guidance on a consolidated basis for copper, gold, and zinc. As mentioned earlier, copper production will be second half of the year weighted, primarily driven by grade profiles at Candelaria, Chapada, and Neves Corvo. Copper production for the company was 80,000 tons for the quarter and 168,000 tons for the first half of the year. Gold production for the quarter totaled approximately 32,000 ounces. As mentioned earlier, great profiles at Candelaria and Chapada will contribute to a stronger second half of the year for gold production. At Candelaria, production was 31,000 tons of copper and 17,000 ounces of gold. Production during the quarter was impacted by mining rates, which limited access to higher-grade ore from Phase 11 in the open pit. Mining rates were slower than anticipated due to interference with historic underground mining stoves in Phase 11. This delay pushed higher-grade ore into the third quarter. We expect production at Candelaria to be approximately 60% weighted to the back half of the year, where grades will improve to 0.7% to 0.9% copper. We have started to see some of these grades come through the mill in July already. Production at Candelaria is tracking to budget and still on target to meet guidance for the year. Cacerones produced 30,000 tons of copper this quarter. Higher than anticipated grades were partially offset by lower throughput and recoveries in the mill. Cacerones has experienced a challenging winter this year. Prolonged snowstorms limited tailings deposition for several days, which restricted mill throughput, while unscheduled maintenance events impacted mill availability. Cacerones copper guidance has been increased to 124,000 to 135,000 tons of copper for the year, reflecting production results from the first half of the year. As mentioned earlier, guidance at Eagle has been reduced, which upsets the increase at Cacerones, and overall consolidated copper guidance remains unchanged. During the quarter, Chapada produced 9,000 tons of copper and 15,000 ounces of gold. Lower recoveries from additional stockpile feed and unplanned downtime to repair a conveyor belt impacted production during the quarter. We plan grades and throughput to pick up in the second half of the year. Included in other copper production is Neves Corvo, which produced 7,000 tons, Zink Ruben, which produced 700 tons, and Eagle, that generated 1,600 tons of copper for the quarter. Neves Corvo copper production is expected to be on the lower end of the guidance range for the year. Zink production improved over the last quarter to 47,000 tons, and we expect it to improve further in Q3 and Q4. Neves-Corvo sink production was 26,000 tons. At Neves-Corvo, lower grades were realized due to change in mining sequencing. Higher grades from Lombardo South were replaced with lower grades from Neves South. Mining rates in Lombardo South were impacted from additional backfill and development work. We expect these to improve in the next quarter. During the quarter, zinc grubin produced 22,000 tons of zinc, which was in line with the budget, an improvement over the first quarter. We expect zinc rates to improve slightly over the remainder of the year. Nickel production was 1,700 tons. During the quarter, a fall of ground in the lower ramp limited production from Eagle East. Additional ramp rehabilitation work was required, which impacted access to the Eagle East and reduced mining rates. It is expected that the mine will now produce 7,000 to 9,000 tons of nickel for the year and 5,000 to 7,000 tons of copper. Operationally, our assets are tracking to guidance with the exception of Eagle. We anticipate higher grades in the second half of the year, along with reduced maintenance and weather interruptions. all of which will allow us to meet our annual guidance goals. I will now turn the call over to Tyler to provide a summary on our financial results.

Thank you, Juan Andreas, and good morning, everybody. Higher commodity prices in the second quarter led to improved margins, and we had a record revenue in the second quarter of $1.1 billion. Our revenue remains highly leveraged to copper, with the metal generating 74% of the revenue mix. Zinc and gold contributed 9% and 5%, respectively, and nickel contributed 3%. Our South American assets contributed approximately 76% of revenue and represent a key area of growth for the company. Candelaria and Casarone contributed 34% and 31%, respectively, for a combined 65%. Now looking at volume sold and realized pricing. During the period, we sold 79,000 tons of copper at a realized price of $4.79 per pound of copper and 39,000 tons of zinc at a realized price of $1.49 per pound. As we discussed last quarter, we hedged a portion of the copper production in May to lock in a pricing floor. During the quarter, the company settled hedges on 21,500 tons of copper with a pricing floor of $4.10 per pound and a pricing ceiling of $4.52 per pound. And given the average copper price during May, the hedge resulted in a marginal loss of $3.5 million. Revenue increased quarter over quarter, largely driven by commodity pricing and provisional pricing impacts. with provisional pricing adjustments from prior periods leading to a positive impact of $95 million during the quarter. Approximately 78,800 tons of copper were provisionally priced at $4.34 per pound at the end of Q2 and remain open for final pricing adjustments, as did 17,900 tons of zinc at $1.31 and 255 tons of nickel at $7.75 per pound. Production costs have been stable across our asset base this year. In Q2, total costs were 606 million, which is in line with previous quarters. Production costs increases from the previous quarter of around 40 million are mainly due to higher mining costs at Candelaria and maintenance costs at Casarone and Zapata. As shown on the charts to the right, our unit costs are trending in line with our absolute production costs. With our annual production profile being second-half weighted, we are on track to meeting our unit cash cost guidance at all sites, with the exception of Eagle, which has been revised upward to $3.20 to $3.40 per pound nickel. Total capital expenditure in concluding sustaining and expansionary CapEx was $255 million for the quarter and $524 million for the first half of the year. with our guidance for the full year now revised downward to 1 billion and 20 million, reflecting a 45 million reduction in guidance. The revised guidance mainly relates to reduced capex spending on Casarona, Neves, and St. Gruben. At Jose Maria, we spent 87 million during the second quarter and have spent 143 million for the first half of the year, versus a full year guidance of 225 million. The capital expenditure in the second quarter primarily related to field activities for the water program, geotechnical studies, and road maintenance works and payment of long lead items. Our key financial metrics for the second quarter are presented on slide 17. We generated adjusted EBITDA of 461 million and adjusted operating cash flow was 370 million. Our earnings per share attributable to London Mining shareholders amounted to $0.16. Our operating cash flow amounted to $492 million and benefited from a release of working capital of $122 million during the quarter, which was expected due to the change in payment terms on some of the sales contracts, as we mentioned last quarter. Our adjusted operating cash flow, which excludes movement in working capital, amounted to $370 million, as previously mentioned. Free cash flow from operations was $338 million during the second quarter, demonstrating improved margins and lower sustaining capital investments. For the first six months of the year, our producing assets have generated in excess of $400 million of free cash flow. Our adjusted earnings attributable to shareholders amounted to $122 million during the second quarter and represent a 170% increase on the same metric for the first quarter of the year. Our balance sheet remains strong with net debt position at the end of the quarter of just below 900 million, excluding capital leases, resulting in a leverage ratio of 0.5 times based on the last 12 months adjusted EBITDA. Subsequent to the quarter, we drew down an additional 350 million to pay for the Casarona 19% call option consideration. Our liquidity position remains strong with our revolving credit facility having availability of close to 1.5 billion as of the end of the second quarter. So all in all, the company remains in good financial health with cost levels and sustaining capital investment levels both trending favorably and coupled with robust commodity prices has resulted in a strong financial performance for the quarter. I'll now turn the call back to Jack to talk about our near-term growth opportunities and exploration.

Thank you. At the end of the quarter, we exercise our option to increase our ownership at by an additional 19%. Which will add approximately 25,000 tons of attributable copper to the company's production profile, securing additional copper production at an attractive acquisition price of approximately 14,000 dollars per time. The call option exercise. was paid for in cash and consisted of a payment of $350 million that was initially funded from Lundin Mining's revolving credit facility with the intention to refinance this amount by increasing the current $800 million term loan to $1.15 billion. Exercising our option early provides significant benefits to both parties. We secure additional copper production at an attractive acquisition price while our partners receive an upfront payment and retain a meaningful 30% equity position in Casaronas. This strategic move underscores our commitment to disciplined and scalable copper growth. Now touching on exploration. At Candelaria, exploration efforts continue with over 8,300 meters of drilling now completed, and that's 8,300 meters of an overall 18,000 meter program. Much of this work is focusing on growing and upgrading the Candelaria underground resources where we have demonstrated success in the past. In addition, some efforts are directed at extending the La Española deposit. Drilling activity at Casaronas continues and is on track to complete 13,000-meter drill program, the most significant that that asset has had in years. At the moment, drilling is paused for the winter season. At Chapada, drilling is primarily focused on near-mine opportunities and at the Sauva discovery. Further drilling at Sauva kicked off in the second quarter. The plan includes drilling 16,000 meters this year. Initial results show Sauva mineralization continuing at depth with grades that would permit underground mining. The system is still open at depth and we will continue to explore in this area. Exploration efforts continue at Zinkruven with over 23,600 meters of drilling now completed as part of the overall 55,000 meter drilling program. Primary focus remains on increasing mineral resources at the Borte Barcombe and Dalby ore bodies to the west, and the Birkeland and Neegrooven ore bodies to the east. Financially, we had a strong quarter, driven by higher commodity prices that led to record quarterly revenue for the company and operating free cash flow of $338 million. Our team continues to focus on business improvements and optimizing our assets to deliver results. As mentioned earlier, our production is back half of the year weighted. On a consolidated basis, we are tracking to full year guidance on copper, zinc, and gold. There are a number of catalysts on the horizon that will help drive shareholder value, including the optimization work where we are conducting at Candelaria and Casaronas. This includes looking at the underground expansion project at Candelaria, where we hope to give a market update on these initiatives by the end of the year. It is a very exciting time for the company, as announced on Monday, the joint acquisition of Filo with BHP and the subsequent formation of a joint venture that will hold the Filo del Sol project and the Jose Maria project, which represents a compelling opportunity for Lundin mining shareholders. This will be a transformational transaction for Lundin Mining. The creation of a long-term partnership between both Lundin Mining and BHP to jointly develop the Vicuña District in Argentina will unlock significant value and is consistent with our strategy of becoming a top-tier copper producer. To close out our call, the team at Lundin Mining has worked hard in the first half of the year, putting us in a position to have a strong third and fourth quarter, and we will maintain our focus as we enter the second half of this year. I would now like to open the call for questions. Thank you.

Thank you. Ladies and gentlemen, we will now begin with 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 prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment for your first question. Our first question comes from Ioannis Masvolas from Morgan Stanley. Please go ahead.

Ioannis Masvolas Yes, good morning, Jack and team. Thank you very much for the presentation. First question is on Candelaria and the QGIP expansion option. Can you give us an update on the timing of a decision and possible complex implications? And how does it actually fit into your growth aspirations in light of the JV with BHP? Thank you.

Hi, Jonas. Thanks for the question. The Candelaria underground expansion project is currently undergoing design and capital optimization efforts by the team there. And, you know, this is something that we're definitely keen to pursue, as mentioned in previous quarters and on the presentation today, you know, we're assessing kind of an optimized plan. and anticipate we'll be in a position to update the market towards the end of this year. But I would say that it, you know, it continues to be, you know, in terms of capital allocation, something that we would like to prioritize and showing, you know, promising early stage results from where we're at in the study.

Our next question comes from Martin Pradiere from Veritas Investment Research. Please go ahead. Thank you.

I just have a question on the Jose Maria. You booked $50 million in earnings, you know, reduced taxes out of the $122 million reported. Could you provide more color on Jose Maria income?

Hi, Martin. Good morning. It's Tiger here. Yeah, this relates to a reverse of a tax expense that we incurred in the fourth quarter when the Argentinian currency was devalued significantly. Our tax balances in Argentina are booked in local currencies. So when the currency devalued, obviously the recovery of that in dollar terms is reduced significantly. But there is inflation adjustments on the tax balances we have in Argentina. And this is essentially reversing the charge we had in Q4 with now inflation adjusting to tax, the local currency tax balances we have in Argentina, which essentially has reversed that $50 million tax charge we had in Q4. And now we're reversing that tax. back to zero effectively in the second quarter this year. So reflecting a tax receipt of, a non-cash tax receipt of $50 million in the second quarter.

Our next question comes from Stefan Ayanu from Cormark Securities in the Philippines.

Please go ahead. Thanks very much, guys. Just a quick maybe housekeeping question. Just looking to Casaronis and the reiterated cash cost. Can you just remind us, because I remember there was there was talk of some labor negotiations through the summer with various parties. Can you just remind us where we're at with that and how that maybe is reflected in your class guidance?

Yeah, sure. And I'll hand it over to Juan Andres to give an update on that, the status.

Yes. Good morning, Stefan. This is Juan Andres. We have three unions in Cacerones. We have already closed the first negotiation in Q1. And as we speak, we're in the final stage of the second negotiation with the second union. We expect to close that in the next couple of weeks.

And I can maybe add, in our guidance, we have made an allowance and an assumption on what these outcomes are going to yield. So it should already be embedded in the guidance we have given.

Our next question comes from Edward Goldsmith from Dutch Bank. Please go ahead.

Hi, Jack and team. Thank you for the presentation. Two questions from our side. Firstly, on the optimization plan and the synergies between your Chilean assets, can you give us an idea of what has been achieved to date and the future synergy potential?

Yeah, sure. Juan and Andres, maybe you can comment on the full potential work that we've got ongoing at Candelaria and Casaronas.

Yes, as Jack mentioned during the presentation, we have started what we call the Full Potential Initiative in actually three of our sites. We started with Chapada in 2023, and later in the year, we started the same exercise in Cacerones and Candelaria. We have seen very good results, and some of the reductions in the C1 that you're seeing are somehow attributed to that work that is being done. We plan to update the market on a more broader view by the end of the year, but so far we're moving forward with the implementation of several initiatives. And regarding your question on synergies between Candelaria and Cacedonesc, We have already established what we call the regional support function unit, basically a shared services unit, and that unit is already working on joint bidding processes, and we have seen very good results from those processes already.

Next question comes from Daniel Major from UBS. Please go ahead.

Hi there. Can you hear me okay? Yes. Great. Thanks. A couple of questions and apologies if anything's already been answered. I was a bit late joining. The first question is on the CapEx outlook, specifically with respect to Argentina, your guidance, 225 million for this year. Can you give us any steer on how you would expect that number on an attributable basis to trend for Lundin in 2025 post the formation of the JV on the basis 2025's essentially going to be sort of formulating studies etc but um yeah can you give us any steer on where that number would likely land next year

At the moment, we're working on completing the program that we set out in twenty twenty four. So the Jose Maria project team still has a number of initiatives that they need to work through as we look to close the deal and form the joint venture. And as mentioned on the call yesterday, we're going to be focusing on kind of releasing an updated budget for the year. towards the end of this year. But the first half of 2025, we'll be able to provide a lot more clarity on work plan studies and kind of the path forward once both assets are held together in the joint venture. But there's still a lot of work to be done on Jose Maria. We continue to work through various items, de-risking, looking at trade-off studies at the asset as a standalone, and then also looking at hydrogeology models and water field programs as well. So we'll continue on that and we'll update the market closer towards the end of this year.

Our next question comes from Iannis Mazvolos from Morgan Stanley. Please go ahead.

Yes, hi. So just to follow up on the JV structure announced yesterday. In the past, you had indicated that a partnership at Jose Maria level could involve a mining company and potentially another partner such as Melting Group. Is there a possibility for this to now materialize at the new JV that you have set up with BHP, or is that not really something you're contemplating?

Hey, Iona. Thanks for the question. You know, at the moment right now, we're really focused on forming this JV and having a 50-50 JV structure. In the future, at a later date, should the partners decide that we'd like to bring in a third partner, we, you know, we can do so at that time. I think at the moment right now, we're contemplating, you know, working just BHP and Lundin Mining on driving these projects forward. But we do keep the optionality open for the future. But right now, A lot of work needs to be done to, you know, formulate the JV as described in the transaction announcement on Monday.

Next question comes from Orist Walcadal from Scotiabank. Please go ahead.

Hi, good morning. Another question about the announcement from Monday evening with respect to the JV with BHP. I'm just wondering, obviously we have not seen any kind of updated technical report on Jose Maria. So I'm trying to understand what the value, the 690 million that BHP is paying for the 50% stake effectively in Jose Maria. Does that reflect, like, can we read into that in terms of an implied NAV value for what Jose Maria is actually worth from an NPV perspective? And I'm just wondering also, like, at what copper price does that assume?

Yeah, hi, Orist. You know, the 690 million consideration for Jose Maria is BHP's valuation on what they anticipate, you know, and what they think bringing both assets together will cost. And us vending in Jose Maria to, you know, to really form this joint venture that contains both the Jose Maria project and Filo del Sol, you know, that was the valuation that we were able to negotiate. So, You know, they have their internal models. We have our internal models on what we believe the value is of Jose Maria, but now we get to look at both assets coming together and really scaling up this development plan. So, you know, that's all I can comment on their valuation for now.

Next question comes from Edward Goldsmith from Deutsche Bank. Please go ahead.

Hi, just getting back to the Jose Maria transaction. Can you talk us through the potential adjustments to the 690 million payment from BHP?

Well, we have agreed with BHP that we are funding the work program on Jose Maria for the remainder of this year. And, you know, depending on what actual expenditure is incurred to the end of the year, there might be an upward or downward adjustment on the $690 million payment. And from 2025 onward, we are paying 50-50 on capital expenditure. And again, if the deal hasn't closed by year end, then there will be a further adjustment on 2025 expenditure as and when the deal closes in 2025 to reflect the 50-50 funding structure on 1st of January.

Next question comes from Ioannis Masvoulas from Morgan Stanley. Please go ahead.

Ioannis Masvoulas Hi there. So just one last question from my side. Just on EGLE, so you flagged the challenges in the second quarter. And you have already revised guidance lower for the rest of this year. Assuming the ramp rehabilitation completes by the end of 24, do you see the 2025-26 production guidance at Eagle as achievable? Or are there downside risks given where you are with this asset today?

Yeah, I'll let Juan Andres answer that. But I think, you know, we're trending towards being able to recoup those lost tonnages through the, you know, through the fall of ground. So we anticipate we'll be able to get back ramped up. But Juan Andres, you can comment better than I can as you were just at site.

Sure. Thank you, Jack. Ionisa, we plan to finish the rehab work soon. by the end of Q3, beginning of Q4. So we expect to get back to full-scale production by the end of the year. So at this point, we have only adjusted the guidance for 2024, and we don't see an impact on 2025 yet.

Next question comes from Oris Waukadao from Scotiabank. Please go ahead.

Hi, Jack. Just to clarify your last comments about my first question, does the 690 paid by BHP, does that assume a value solely for Jose Maria, or does that also include, call it some value of putting Filo de Sol together with the asset? I'm just trying to understand what the valuation of Jose Maria could be.

Yeah, Orest, that's their consideration for 50% of Jose Maria. So their consideration for us, you know, for them taking over 50% of Jose Maria as we've ended into the joint venture.

Next question comes from Martin Pradier from Veritas Investment Research. Please go ahead.

Yes, thank you. I just want to understand the Jose Maria meal key parts have been ordered. So I'm assuming that the size of the mill is set. If that is correct, how fast would the mill be in production?

Hi, thank you for your question. So yeah, that is correct. We do have some long lead items and some large scale fixed equipment like the ball and sag mills and the mill motors for Jose Maria that has already been purchased and is now in storage in San Juan. You know, these are large-scale mills, and so therefore we do anticipate that when the time is right to go into development, we'll be able to utilize this equipment. But again, we still have a lot of development avenues and opportunities to look through. And so once we've done our studies and done our integration of both assets, then we'll be able to better define the execution strategy for phase one of this district development project.

Okay, thanks. There are no further questions at this time. I'd now like to turn the call back over to Jack for final closing comments. Please go ahead.

Thank you, everyone, for joining the call. We appreciate that it's been a busy week for Lundin Mining, but a very exciting one nonetheless. And we remain on track to meet our guidance and we'll be focusing on continuing our operational performance throughout the end of this year and in parallel looking at closing this exciting transaction that we've announced. So appreciate the support and thank you for all the questions.

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