Good morning, ladies and gentlemen, and welcome to the Lundin Mining second quarter 2022 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 assistance, please press star zero for the operator. This call is being recorded on Thursday, July 28th, 2022. I would now like to turn the conference over to President and CEO Peter Rockandel. Please go ahead.
Thank you, operator, and thank you everyone for joining Lundin Mining second quarter 2022 results call. Before we get into the formalities of the call, it is with profound sadness that I'm announcing the passing of our former chairman, founder, and friend, Lukas H. Lundin. Lukas passed away after a courageous two-year battle with brain cancer. Lukas founded Lundin Mining with his father in the mid-1990s and was a member of the board and chairman of the company for more than 25 years until he stepped down this past May. In his role as chairman, Lukas oversaw Lundin Mining's development from an exploration stage company into a global mid-tier producer with a strong copper focus and a portfolio of world-class assets. The many successes of Lundin Mining and the Lundin Group owe directly to Lukas's extraordinary strategic foresight, matched by his relentless drive.
His guidance and support for his colleagues will be deeply missed, however, his pursuit and vision of creating a world-class base metals company lives on. Lukas would say, "Get the right people, empower the people, and have good assets." Those of us that work closest with Lukas share in his approach, and we'll continue to build upon his legacy. Thank you everyone. Now I will continue with our quarterly call. I will draw your attention to the cautionary statements on slide two, as we will be making several forward-looking comments throughout the prepared remarks, and likely during the Q&A as well. On the call to assist with the presentation and answer questions are Jinhee Magie, our Senior Vice President and Chief Financial Officer, and Peter Richardson, our Senior Vice President and Chief Operating Officer.
As you would have seen from our news release last night, this will be the last earnings call for Jinhee and Peter with Lundin Mining. Jinhee will be retiring at the end of September, and Peter will soon be moving over to the gold space with Barrick Gold in Nevada. I want to thank both Jinhee and Peter for their dedication and contributions to Lundin Mining. I'm also excited to also announce the appointment of a new member to Lundin Mining's board of directors and four strong leaders to our executive team. Natasha Vaz will be joining our board on August first. Natasha is currently the Executive Vice President and Chief Operating Officer leading Agnico Eagle Mines' operations and project development teams. We look forward to the operational leadership, insights, and perspectives Natasha will bring to our board.
Juan Andres Morel will be joining the management team as our new SVP and Chief Operating Officer next week. Juan Andres Morel is a well-known mining executive with an exceptional track record over 30 years, including more recently as the general manager of mining operations for BHP's Escondida. Prior to that, Juan Andres Morel spent 14 years with Antofagasta at various senior operational leadership positions, including head of operations at Los Pelambres. Juan Andres Morel also worked at Codelco as head of strategy and director of technical services. Juan Andres Morel's vast open pit and South American experience will be a strong and natural fit. Teitur Poulsen will be joining as SVP and CFO on September 1st.
Teitur Poulsen is coming from Lundin Energy following its acquisition by Aker BP for approximately $14 billion, where he had been CFO since 2017, and also has many years of experience in finance and strategy.
David Dicaire is joining as SVP of Josemaria and will have overall responsibility for the project. He has over 40 years of mining and EPCM experience gained on a variety of global projects. Most recently, David was with Lundin Gold, where he oversaw the successful construction of the Fruta del Norte project in Ecuador. Before that, he was with Freeport-McMoRan as Project Director for the highly successful multi-billion-dollar Cerro Verde expansion project in Peru. David was also General Manager of Project Development for South America for Xstrata Copper. Lastly, I'm happy to announce the promotion of Kristen Mariuzza to SVP Sustainability, Health, and Safety. Kristen successfully led our Eagle Mine as Managing Director for several years prior to being appointed VP Environment and Social Performance.
She joined Lundin Mining in 2013 with the acquisition of the Eagle Mine from Rio Tinto and has held senior positions in operations, environment, permitting, and health and safety. I'm very pleased to welcome these exceptional colleagues to Lundin Mining. I believe their depth of experience will prove to be invaluable additions to our team as we continue to develop Lundin Mining into a world-class base metal producer. Continuing with sustainability and responsible mining on slide four, earlier this month, we published our 2021 sustainability report. As many of our long-term shareholders are aware, Lundin Mining has been reporting on our sustainability performance in a standalone document since 2010. Within this year's report, we are proud to have announced our new Focused on the Future long-term sustainability and strategy.
Focused on the Future is comprised of a promise, a purpose, and five pillars, as described in the image on this slide. The foundational work incorporates initiatives already underway at Lundin Mining, as well as new ones. It will guide us as we continue to develop meaningful performance indicators to track and measure our sustainability efforts. Under this framework, we are pleased to have announced an interim Scope 1 and Scope 2 GHG absolute emissions reduction target of 35% by 2030 compared to our 2019 baseline year. Though we are already a leader with an industry-low GHG emission intensity for the base metals we produce, we acknowledge our role in the call for action to reduce emissions, commit to low carbon alternatives, and develop climate resilience.
The bullet points on the right side of the slide outline just a few of our 2021 safety, environment, and social performance highlights discussed in this year's report.
I encourage those interested in additional detail and more information on our approach and performance to read this report. As always, please reach out with any questions. I will now turn the call over to Jinhee.
Thank you, Peter. On slide five, second quarter copper and zinc production exceeded that of the prior year quarter, while nickel production was in line. We produced over 120,000 tons of base metals and approximately 39,000 ounces of gold. We also sold over 110,000 tons of base metals and approximately 32,000 ounces of gold on a payable basis, generating revenue of $590 million. Unfortunately, second quarter revenue was affected by significant provisional pricing adjustments, given the late quarter decline in base metal prices. We remain predominantly leveraged to copper, with the metal generating nearly 60% of the second quarter's revenue after pricing adjustments. Zinc contributed 15%, an increase over recent quarters, in part given increasing zinc production with the ramp up of Neves-Corvo Zinc Expansion Project, and nickel contributed 12%.
Slide 6 presents a summary of our second quarter financial results compared to the same quarter last year. With the late quarter decline in base metal prices, our second quarter revenue and financial results were significantly impacted by provisional price adjustments. Prior period adjustments and the mark-to-market of current period sales that remained to be settled at the end of the quarter were approximately -$220 million. Details of the pricing adjustments are in our MD&A and financial statements. Ultimately, we realized a copper price of $2.82 per pound, including a -$0.96 per pound prior period adjustment. The nickel price of $7.64 per pound, including a -$3.40 per pound prior period adjustment.
Second quarter revenue of $590 million was 32% below that of the same quarter last year due to lower realized metal prices net of price adjustments. On a year-to-date basis, revenue was comparable to the first half of 2021. We reported an attributable loss of $0.07 per share and adjusted loss of $0.05 per share. Details of these adjustments are broken down in our MD&A as well. Despite the earnings loss, we generated adjusted EBITDA of nearly $150 million and cash flow from operations of over $365 million. Adjusted operating cash flow before changes in non-cash working capital was $50 million or $0.06 per share.
On a cash basis, capital expenditures were roughly $215 million in the second quarter for a first half year total of approximately $360 million. Capital expenditures at Eagle, Neves-Corvo and Zinkgruvan are all tracking well to guidance. As will be discussed in the operations section, capital expenditure guidance for Candelaria and Chapada have been revised given inflationary cost impacts on capitalized stripping, including diesel and other mining consumables. We generated over $215 million of free cash flow in the quarter, paid over $170 million in dividends to shareholders, and purchased $8 million of shares under our normal course issuer bid in late June. The balance sheet remains in a very strong position with cash equivalents of approximately $500 million and total liquidity of approximately $2.3 billion at quarter end.
Lastly, our board of directors declared a regular quarterly dividend yesterday of CAD 0.09 per share. I will now turn the call over to Peter Richardson to speak to our operations.
Thank you, Jinhee. Starting with Candelaria on slide seven. The operation had a strong second quarter. This is now three quarters in a row of on plan or better performance on Candelaria. The operation produced nearly 41,000 tons of copper and approximately 23,000 ounces of gold on a cash cost of $1.86 per pound. Tons milled, ore grades and recovery rates were all in line with plan, and production is tracking well to annual targets. While the open pit ore mining is continuing primarily from phase X pushback, with ore production from phase XI pushback to start later in the year. Consistent with many other miners have indicated so far this reporting season, Candelaria saw increased costs for energy and mining consumables during the second quarter.
Copper cash costs of $1.86 per pound was greater than planned and the prior year quarter, due mainly to high costs for energy and consumables, partially offset by favorable foreign exchange effects. Full year cash cost guidance has been increased to $1.75 per pound of copper from $1.55 to reflect the first half actuals and the expected impact of inflationary increases, primarily electricity, fuel, maintenance, and contractor costs. Candelaria's second quarter capital expenditures were approximately $85 million, bringing the first half total to roughly $170 million. As noted on the first quarter call, capitalized waste stripping was trending above the annual guidance. Given the inflationary increase in diesel, explosives, and other consumables, Candelaria's full year capital guidance has been revised to $400 million from $350 million, primarily reflecting the increased cost of mining input.
On the growth and exploration front, the initiatives to develop the Candelaria plant pebble crushing circuit are advancing as planned and are expected to increase mill capacity starting in 2023. As we have previously discussed, technical study work evaluating the expansion of the north and south sector underground mine from the current 14,000 tons per day to 26,000 tons has been finalized. The study indicates a technically and financially robust project, and we will be looking to update the royalty and taxation assumptions ahead of a decision to advance the project once there is greater clarity. Ultimately, a construction decision will require the receipt of the 2040 EIA. Lastly, we have completed over 14,400 meters of drilling as part of this year's $50 million exploration program.
Much of this work is focusing on growing and upgrading underground resources where we have demonstrated success in the past. Of note, second quarter drilling has extended mineralization of the Alcaparrosa mine, including two holes that have intersected 2% copper, nearly 150 meters, and 3.5% copper over 65 meters. Moving to Chapada on slide eight. The difficult operating conditions Chapada experienced in the first quarter, particularly the significant rainfall, had knock-on impacts into the first part of the second quarter. Chapada produced 10,345 tons of copper and 16,000 ounces of gold at a cash cost of $2.98 per ton of copper. Production was lower than the same quarter last year due to the ore blend sent to the plant, which had an impact on the mill throughput, grades, and metal recoveries.
However, several daily mill throughput records were achieved in June. While we are exploring options to increase ore release to catch up on what was delayed from the first quarter, it proved difficult to secure the necessary additional contract mining equipment and personnel to achieve the increase in rates required. As a result, we have revised Chapada's full-year production guidance to 45,000-50,000 tons of copper and 62,000-67,000 ounces of gold as access to originally planned ore sources has been pushed back in season. We continue to expect production to be weighted to the second half of the year, owing to the grade profile of seasonal operational conditions. Second quarter cash cost was greater than the comparable quarter of 2021, attributable to inflation rate increase in energy, mine consumables, and contract costs, as well as the lower production and therefore sale volumes.
Cash cost guidance has been increased to $2.25 per ton of copper from $1.60 to reflect the first half actual revised production forecast and expected impact of inflationary increases in energy, primarily fuel. Chapada's second quarter capital expenditures were approximately $30 million, bringing the first half total to approximately $31 million. Like Candelaria, capitalized waste stripping was noted on first quarter call to be trending above the annual guidance. Given the continuing inflationary cost increase in diesel, explosives, and other consumables, Chapada's full-year capital guidance has been revised to $80 million from $65 million, mainly reflecting increased capitalized waste stripping mining input costs. Despite the slower start with the rain, Chapada's exploration drilling is ahead of plan with over 34,700 meters completed in the first half of the year.
The Saúva mineralized area footprint has now increased approximately 1,200 meters by 950 meters from 1,000 meters by 750 meters discussed last quarter with assay results received during Q2. The system continues to remain open in all directions. With the sizable and growing potential of Saúva, we will focus our efforts on drilling and how to best incorporate it in the future expansion scenarios. We aim to issue a maiden mineral resource estimate for Saúva early in 2023 as part of our company-wide mineral R&R update. On slide nine, the Saúva assay results presented have been received during the second quarter. To the end of June, approximately 36,000 meters have been completed in 99 holes, with assays received for 67 of the holes.
five rigs continue to test extensions mainly to north towards Fumiga and to the west of the discovery area. This slide shows the location of completed holes where assay results are pending, as well as planned holes. We continue to be very excited about this discovery and believe it supports our view that many opportunities exist to increase the size and the quality of our mineral resource base at Chapada. Potential implications this high-grade system may have for ongoing expansion studies are being evaluated at Saúva as this area continues to evolve with drilling. Moving to the Eagle on slide 10. The operation had a strong quarter, producing over 4,700 tons of nickel and 4,400 tons of copper at cash cost of $0.90 per pound of nickel.
The mill set records for nickel recovery, including an all-time monthly record of 88.5% in June. Production of copper and nickel are trending at the high end of guidance, with production of both to be mostly weighted to the second half of the year on grade profile. Cash cost was higher than prior year quarter due to inflationary increases in operating costs and lower realized copper price impacting the by-product of this. However, costs are on track to meet annual guidance, which remains unchanged at -$0.25 per pound of nickel. Eagle's second quarter capital expenditure was approximately $3 million, bringing the first half to roughly $7 million. Full-year CapEx guidance of $10 million also remains unchanged.
We are continuing to work to include the upper Keel zone into our 2023 life of mine plan and subsequent mineral R&R estimate updates for release in the first quarter of 2023. We are aiming to be in development in the upper Keel zone in 2023, with initial production in the first half of 2024, further extending the life of mine and improving the production profile of the later years. We're also continuing internal study work on the lower Keel zone, which, though lower grade than the upper Keel zone, is even closer to existing ramp and infrastructure. Second quarter drilling has extended Eagle East semi-massive sulfide mineralization further to the east. Currently, there are three underground rigs testing the exploration area roughly indicated around the post-mineral gabbro shown, and the fourth rig is to begin drilling later this month.
Moving to Neves-Corvo on slide 11. The operation produced over 7,300 tons of copper, 20,300 tons of zinc, and 900 tons of lead on a cash cost of $2.39 per pound of copper in the second quarter. Zinc production increased 40% over the first quarter as the Zinc Expansion Project began its ramp up in earnest. We have reduced zinc production for this year to 90,000-100,000 tonnes from 110,000-120,000 tonnes to reflect ramp up progress achieved to date and the reforecasting of when we expect to achieve full underground mining rates from newly developed pit areas. The surface facilities continue to ramp up all original works to be completed early in third quarter.
We had targeted full production rates in August, although now expected later in the fourth quarter as we continue to increase underground mining rates. With this, zinc production is expected to continue to be second half-weighted as that is ramped up over the remainder of the year. Copper production guidance remains unchanged. The second quarter cash cost of $2.39 per pound of copper was greater than that of the corresponding quarter last year due to high cost of consumables, particularly electricity, somewhat offset by favorable foreign exchange rate. Despite the elevated second quarter, cash costs remain on track to meet full year guidance of $1.80 per pound of copper. Neves-Corvo's second quarter ZEP and sustaining capital expenditures were approximately $25 million, bringing the first half total to roughly $60 million. Both remaining ZEP and sustaining capital expenditures remain unchanged.
On Slide 12, zincgruvan continues to perform very well. In the second quarter, the operations produced over 21,200 tonnes of zinc, 500 tonnes of copper, and 9,100 tonnes of lead at a cash cost of $0.44 per tonne of zinc. Operations is on track to deliver on full year zinc and copper production guidance. Forecast cash cost remains in line with the annual guidance, with expected inflationary impacts on consumables being largely offset by production volumes and by-product credits. Zinc pre-launch second quarter capital expenditures were approximately $50 million, bringing the first half total to roughly $25 million, while year sustaining capital guidance of $60 million remains unchanged. Engineering for the sequential flotation project to further improve concentrate grades and better recovery rates is underway.
It is a relatively minimal capital expenditure project on the order of $50 million with a high IRR and quick payback period. Exploration efforts continue with over 8,200 meters of drilling now completed this year as part of the 20,000-meter 2022 program. Primary focus remains on increasing mineral resources at Hobby and between Kirkland and New Inuan camps. I will now turn the call back to Peter to discuss the Josemaria project.
Thank you, Peter. As I mentioned earlier, we're excited to have David Dicaire join as SVP Josemaria with overall responsibility for the project. He has significant global experience gained over 40 years. His experience covers all aspects of project management for many types of mining projects, ranging from managing pre-feasibility studies to large EPCM projects. We're looking forward to have David join the team. As David joins, we are continuing to progress the project through the next stages, including working with authorities and discussions on commercial agreements and securing additional environmental and sectoral permits. With Fluor, engineering work has been progressing. Engineering is estimated to be 20% complete. We continue working towards an updated technical report in the fourth quarter of this year.
This is to include an update of cost estimates to be reflective of current conditions and evaluation of potential scope changes compared to the plans of the 2020 feasibility study, as well as new mineral reserve and resource estimates. Over 31,000 meters of drilling have been completed since the last 2020 estimate. As previously mentioned, we intend to spend approximately $300 million as milestones are met, advancing the project, including engineering, commitments for long lead time items, early works, and drilling. Of this, approximately $55 million has been recorded as CapEx. We are continuing to advance all aspects of the project in a deliberate and disciplined manner to minimize the risks and towards a construction decision at the appropriate time. This includes multiple discussions and avenues for project financing, including traditional debt sources, joint ventures, and offtake partnerships.
Moving to a summary of our current guidance on slide 14. We have procurement strategies in place which are mitigating the impacts associated with global inflation and supply chain delivery, though, as with many of our peers in other industries, we are experiencing continuing risks with these. We have not seen a significant impact on our operations relating to direct supply chain availability. However, in our forecast, we expect inflationary impacts on diesel, electricity, and contractor costs to continue to increase operating costs for the remainder of the year. As discussed in the operational section, Chapada and Neves-Corvo zinc production guidance has been revised. While we remain on track to achieve the midpoint or greater of production at our other assets, we also continue to be on track to meet our original annual copper and nickel guidance.
Cash cost guidance for Candelaria and Chapada have been updated to reflect first half actual and the expected inflationary impacts on mining consumables. Similarly, capital expenditure guidance has been updated for Candelaria and Chapada, reflecting higher expected open pit capitalization of waste stripping costs due to inflationary impacts on energy and other mining consumables. The approximately $300 million we expect to spend advancing the Josemaria project remains unchanged, as does exploration expenditure guidance of $45 million. I'll conclude with slide 15. While second quarter financial results were impacted by cost inflation and the late quarter decline of prices for many base metals, we remain favorably positioned both financially and operationally to address potential macroeconomic challenges and to continue to execute our strategy. Noticeable progress has been achieved at Candelaria to improve operational predictability.
The operation has delivered its third quarter in a row of on plan or better production results. Unfortunately, we have not been able to accelerate ore release at Chapada to the extent necessary to make up for the impacts of the significant rainfall earlier in the year. Our operation got back up to planned rates as it exited the rainy season in the second quarter and is positioned to deliver a strong second half performance. The Saúva discovery continued to grow. The Zinc Expansion Project is making progress in its ramp up, as demonstrated by the 40% quarter-over-quarter increase in zinc production. The surface facilities continue ramp up as well. We had originally targeted full production rates in August, though we now expect this to occur later as we continue to ramp up underground mining rates in the newly developed ZEP areas.
The operation remains on track to deliver its originally provided copper production and cash cost guidance. Eagle and Zinkgruvan both continue to perform very well, on track to achieve annual production, cash costs and capital expenditure guidance. We continue to make progress advancing the Josemaria project in a deliberate and disciplined manner. Lastly, I'm very excited to welcome four experienced leaders to our executive leadership team. Thank you, operator. I would like to open the lines for questions.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press star followed by one on your touch-tone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pooled in the order they are received. Should you wish to decline from the pooling process, please press star followed by two. If you're using a speakerphone, please lift your handset before pressing any keys. One moment for your first question. Your first question comes from Orest Wowkodaw with Scotiabank. Please go ahead.
Hi. Good morning. I wanted to talk about the Josemaria project. Obviously, you know, market conditions have changed quite significantly since last quarter. Wondering how you're thinking about that project now in the context of the market. I realize you're committing to spending the $300 million this year, but are you still thinking that assuming you get the approvals you need, the stability agreement, et cetera, that you hope to sanction this project, call it, early next year? Or given the current environment, is there a chance that you could wait until things improve and maybe complete more of the detailed engineering before you start?
I'll take that. Thanks, Orest. It's Peter Rockandel. Yeah, we're obviously highly cognizant of the current market, and that certainly factors into our decision-making, if you will. Right now we are proceeding with, in particular, a lot more detailed engineering. Fluor has been doing a very good job on that front. As alluded to in the call earlier, you know, we are working with the government and, you know, trying to finalize a number of the different commercial agreements and sectoral permits, et cetera. You know, we are looking at the timeline with the project and what the, call it, near-term spend would be in light of the current capital markets.
You know, our intention is to keep moving forward at the pace that we've kind of originally indicated, but we're certainly highly cognizant of this market and, you know, we'll take that into consideration as we move forward. The other thing too is in parallel, we'll continue with the discussions that began last quarter with a number of the different counterparties that may be involved with the project on a going forward basis to assist with some of the financing requirements.
Okay. Thank you. As a follow-up, if I may, just at the Neves-Corvo ZEP project, obviously you cut the guidance for this year, I guess based on the first half of the year. At this point, do you see any knock-on impact into the guidance for 2023 at the ZEP project, or is this strictly a 2022 issue?
That's a very fair question, Orest, and I suspect you know a lot of people that are lined up on the call with questions were gonna ask the same one, and maybe they're gonna ask it on more than one asset. If I can kind of take a step back and speak to the entire portfolio, if you'll bear with me. We obviously worked hard. We do work hard, quite frankly, on all our assets. We've put an extra focus on the last nine months or so at Candelaria, just given some of the historical challenges and the fact that it is our biggest asset.
As Peter alluded to, you know, we've been very fortunate to have three consecutive quarters as per plan, and it's tracking extremely well towards the year-end guidance. That's definitely a positive. Zinkgruvan and Eagle were continuing to track well versus our guidance also. Not trying to cover up for the other areas where we have challenges. At Neves, you know, it's positive to see the year-over-year growth, but we have a lot more work to do, quite frankly, to achieve that run rate capacity.
I think as we move in towards Q3 and Q4 and we get a feeling to where those production levels are, there is certainly the possibility if they don't ramp up as per plan or as quickly as the plan, that could slip a little bit into 2023. You know, we've had a number of teething issues as we've started up Zep, not uncommon when you start up a new operation. We had some pipes that weren't built to spec, a few belts that ripped, et cetera, but we've actually been able to overcome all those issues. The other thing is with Zep starting a fair bit later than planned, we are mining in different areas than the original plan, excuse me. That in itself also presents new challenges.
That being said, you know, we'll get a better idea as we move into Q3, Q4, with Neves and whether or not that slips into 2023. I can assure you that we remain very focused on the successful wrap up of ZEP, and we've got our entire team focused in on it. You know, it's a world-class ore body. The zinc price is very, very strong, so we need to ensure that we maximize it. Maybe I'll just mention Chapada, because I'm sure it's gonna come up as well. You know, with respect to the challenges that began about two years ago, when we had our first season of a normally high rainfall, it did impact production, but it seemed like it was a one-off.
Of course, that was followed up by even a bigger year. If we go back to arguably three years ago and earlier, they were going through droughts. You know, it's very hard to predict what the weather patterns will be, but we have to make assumptions that this could be, this weather, if you will, could be for an extended period of time, and we have to do a lot better job with our planning, making an assumption that there could be heavy rainfall. Our new hires and technical services have been down at Chapada just recently and are reviewing a few different scenarios to adjust on the, you know, likelihood that there is further strange weather patterns. I'll be down there in a few weeks with our new COO, and we'll be looking over those plans as well.
Yeah, it's a fair question that you ask. As I say, three of the assets I think we're pretty bulletproof on, and the other two, we're working hard to make sure that we can give you guys guidance that's reliable.
Thanks, Peter.
Sorry for the long-winded answer.
Thank you.
Your next question comes from Jackie Przybylowski with BMO. Please go ahead.
Thank you. Maybe I'll just start with a quick housekeeping question. It sounds like from the prepared remarks that your annual reserves and resources update's gonna be in Q1, which is a bit later than you guys normally do it in September. How does that affect the guidance that you're going to give us for 2023? Or are you still planning to put that out in, like, November, December, like you normally do, or is that gonna be later this year as well?
Sorry, this is Peter Richardson. The R&R is gonna be presented in January, February of next year, and the guidance for the coming years will be presented as per normal, of course, in the end of November.
Got it.
As we've done previous years.
Thanks, Peter. That's helpful. I mean, maybe a question on provisional pricing. Certainly this was a rotten quarter for your exposure to copper prices, and it certainly hit your revenues pretty hard. I know some companies, some of your peers, hedge that provisional pricing exposure, so we don't have to forecast it. Is that something that you've given some thought to? Because it certainly would help to smooth out these kind of peaks and valleys on your revenue side.
Yeah, maybe Jackie, I'll answer that one. You know, it's not something historically we've done, but we have had a fairly thorough discussion over the last couple days during a lot of the internal board meetings and et cetera. It's something that we're gonna look a little or quite a bit harder at on a going-forward basis. You know, the probably the biggest advantage to doing it is giving the analysts, et cetera, the ability to, you know, better predictability, if you will, on the assumed assumed prices. It is something that we will certainly take a closer look on a going-forward basis.
Thanks, Peter. Maybe if I could sneak in one other question. I know you gave a pretty thorough answer already to the question about what's happening at Chapada on the operating side. Can you maybe talk a little bit about what's happening on the project side as well? It looks like you're still getting some good drill results from the Saúva area, but how does that feed into a ultimate expansion plan, and when might we expect to see some detail on that?
Yeah, I mean, I think it's gonna be prudent for us to continue going pretty hard at Saúva. The percentage of successful drilling is incredibly high. I think, you know, with respect to the market, we're gonna have to be patient here as we continue to drill. It seems like it's open in every direction, and given the grades that we're experiencing, it would have a material impact in any expansion scenarios. We are feeding that information as we speak into some of the studies. In the end, you know, again, when I go down in a couple of weeks with a number of our senior leadership team, we're gonna review that information. I think that's probably all I can say at this. You know, we're very excited, quite frankly, as you can see in the presentation.
It continues to grow. As I said, I think it'd be prudent to really understand what the ultimate size of this is, and then we can determine how best to move forward.
Thank you. Maybe I'll just pass on my congratulations to Peter on his new appointment and Jenny on her retirement and also obviously my condolences on the passing of Lukas.
I appreciate that. It hasn't been the easiest of weeks.
Yeah.
Your next question comes from Dalton Baretto with Canaccord. Please go ahead.
Thank you. I wanna start with asking about Lukas's favorite jurisdiction, Argentina. Peter, I'm wondering what the status of the commercial agreements is and whether the recent resignation of the finance minister and all these talks with the IMF are gonna have anything to do with it. Thanks.
Thanks, Dalton. No, I mean, right now our communications with the various parties where we have always been aligned continues to be quite positive. You know, in fact, if anything, they're wanting to see the project move forward even quicker than we are. I mean, I shouldn't say that we don't want it to move quicker, but you know, we need to make the prudent decision on timing when we have all the necessary inputs. There's still very strong support in Argentina. Again, as part of my South American trip coming up in a couple of weeks, I will be down there, and I will be meeting with a number of the different officials. Just ensuring that we continue to have that level of support.
Okay. You said to Orest earlier that you'll be cognizant of market conditions when you green light Josemaria. Any thoughts on maybe accelerating your buyback instead?
I guess what I can say on the buyback is after close today, we'll be out of blackout. The buyback was in place quite recently, and there's still capacity from what we have been approved to continue with our buyback. I think that's something that we think makes sense, and I would expect that it's a high likelihood that you may see us active in that area.
Okay, great. Maybe one last one from me. You talked about some of the cost inflators, and you know, the large part of that's out of your control. Given the tailwinds you're seeing in some of your local currencies, any thoughts on hedging out some of those to protect your costs?
Yeah, ironically, again, historically, we don't do hedging. Ironically, this is something that we've just had a very, very thorough conversation on, and I anticipate on select situations you may see that occur as well.
Great. Thank you. That's all for me.
Your next question comes from Ioannis Masvoulas with Morgan Stanley. Please go ahead.
Hi, yes. Hi there, good morning. A couple of questions left from my side. The first, on Josemaria again. And around the scope changes that you are considering, could you potentially discuss the order of magnitude that we're talking about in terms of spending? Is it more in the order of $100-$200 million, or are we looking something closer to $500 million or higher? And the second question is on Eagle. You already touched on the upper Keel zone, but could you perhaps elaborate a bit on the opportunity in terms of mine life extension, production rates and unit costs, just to get a better sense on what it means for the asset? Thank you.
All right. Peter, first shot at Eagle.
Yeah. Hi, this is Peter Richardson. I'll answer Eagle. We're as we said during the conference call, we are incorporating the upper keel zone in our life of mine, which will be updated at the end of this year. We won't see any throughput increase like at the asset 'cause we're maxed out on what we can produce, mine tons and mill tons. We'll see an extension of life of mine as there's more ore that will be feeding the plant.
Just going into your question on Josemaria. You know, we did provide a bit of an update last quarter, so nothing has really changed on that. You know, the scope changes were designed around increasing the power on site, crushing capacities and changing some tailings, camp size. It was the similar things that were mentioned last quarter, and there's no changes or updates to any of the numbers that we would have mentioned in that last quarter.
Okay. Thanks very much. Thank you both.
No problem.
Your next question comes from Greg Barnes with TD Securities. Please go ahead.
Yes, thanks. Peter, the cost guidance for 2022 at Chapada and Candelaria has gone up a lot. Obviously, I recognize the inflationary impacts, but how sticky are these costs gonna be into 2023?
Hi, Greg, it's Jinhee. I would say we're expecting kind of similar levels into 2023. You know, as we said before that, you know, currently the foreign exchange has really been helping and offsetting on the inflationary impacts in those two specific countries. As Peter had mentioned, you know, kind of protecting on the foreign exchanges is something that we're also looking at. I guess overall, I'd say into 2023, we're probably expecting or we're forecasting kind of similar pricing.
Should I be thinking $1.75 cash costs on $2.25 at Chapada in 2023 as well?
I would say on the cost side, you know, when you look at the C1, that takes into account our by-product credit as well, right? The by-product also will impact the C1, but I think if you look at on a gross cost basis, and that's outlined in our MD&A, I think that is kind of what we're expecting to be continuing into the trend into 2023.
Okay. Okay, thank you. That's it from me.
Your next question comes from Matthew Murphy with Barclays. Please go ahead.
Hi. My condolences on Lukas as well, and sorry, you have to do earnings at around the same time. Just a quick one from me on Josemaria. Just on the front-end engineering, do you have a target level that you want to achieve before the go decision? What do you think that'll be? Does that influence some of your discussions as well on financing?
Well, I would say it influences our discussions on timing. I can say, without putting a line in the sand on this call, that the number is considerably higher than where we are today. You know, we'll make sure that we have the necessary engineering to ensure the accuracy of the project. There's a lot of historical data to show what that number is. You know, we're achieving great increases, if you will, on a weekly basis with Fluor. We're quite happy with this progress, but we certainly need more progress before we make that decision.
Okay. Thank you.
No problem.
Ladies and gentlemen, as a reminder, if you do have any questions, please press star one. Your next question comes from Lawson Winder with Bank of America. Please go ahead.
Hi. First, my sincere condolences for your loss. Also say just thank you for the update today. I wanted to ask about Neves-Corvo and the electricity cost in Europe, which, you know, I think we all know have risen to fairly eye-watering levels. Could you just remind us how the electricity contracts at Neves are structured in terms of when they might be reset or have to be renegotiated? What would be the exposure to spot prices when those contracts are renegotiated?
Right.
Hi, it's Jinhee. I'll take a first stab at that. At Neves-Corvo, you know, earlier this year, we were fully exposed to the energy markets, as we came off some contracts at the end of last year. As we saw the spike, we were unable to lock into a pricing that we were happy with. I will say that in the recent months, we have been fixing our prices and I believe about 50%, fixed for the remainder of the year. It is something that we are continuing to watch, and it's come off quite a bit from earlier in the year as well.
You know, I think going forward, you know, our expectation is that kind of the level that we're seeing right now and lower going forward. You know, we're also looking at an alternative energy source as well. You know, looking at the possibility of investing in solar.
I may add, Lawson, that with that possibility of looking at solar, even just moving forward, may have an impact on our current contracts with some of the energy providers that would like to be involved with that project if we should go that route. That's quite interesting, and it's something that we're working very, very hard on as we speak. Just a brief thank you again for the condolences.
Okay. No thanks for that. That's helpful. Just on your exposure, the power you're getting now, is it correct to assume that it would be natural gas generated?
It comes off the grid.
Uh.
It's hard to break down all the different sources that feed into that. We could get that answer for you.
I also wanted to just kinda stick with the electricity cost theme. I mean, if I recall correctly, in 2023, Candelaria's power will transition to a renewable energy contract. How is the pricing on those contracts now looking? 'Cause I think the original expectation was for a pretty material reset lower in electricity cost as a result of that.
Yeah, yeah. It's Jinhee. Yeah, absolutely. That still continues to be the case, and I should have mentioned that when Greg asked the question for 2023. We will be entering into the new contract in 2023. Compared to current prices, we are expecting it to be more than 60% lower in cost. That will have a significant impact on the production cost in 2023 and going forward. That still remains the case. The additional benefit on the new contract is that it's fixed and just adjustable for CPI.
Okay. What would be your percent of cost that's made up from electricity today versus where it will go once those contracts reset in 2023?
Yeah. Right now, our electricity accounts for about 20%, just over 20% of the cost. I would say historically it's probably been. It's still quite high. I'd say probably been maybe 15% of the cost.
Okay. That's super helpful. If I could, I just wanted to ask another question about the reserve update, but more in particular, Josemaria. I just wanted to kind of better understand the materiality of the update that we might expect at Josemaria. Would you expect it to materially change, like the shape, the depth, the size of the expected pit? Or will it add any additional pits?
Well, I think what I would say is a lot of the drilling that's been done to date is really just an extension of the previous drilling that ended in mineralization. It's a pretty homogeneous deposit. One can assume that the holes that are going deeper are having success. I think when we come out with a new R&R, you will see an increase there. We have not done a lot of drilling outside of that area. You know, with respect to other pits, not at this time.
Okay. That's super helpful. If you guys wouldn't mind, I'd like to try and sneak in one more question. I was just thinking about the ZEP project. You provided some detail, but maybe it would be helpful just to get a little bit of a better idea in terms of what's sort of causing the ore availability. For example, I mean, is it just developments falling short, or are there issues with ground conditions, or maybe are you just having issues getting like the necessary skilled labor and-
It's Peter here. We're having issues in the mine with productivity primarily in the Lombador area, which is the main zinc area that has been developed and is being developed for that. It's productivity issues there that we're working on and we're making changes. That's been the main issues in the mine. We've also had some issues, as Peter alluded to, with teething issues with the ramp-up of the crusher material handling system and some on the surface, where we have a number of initiatives to rectify those issues. We had a plant down two weeks ago or last week. A lot of changes and upgrades have been made to get over those issues.
Okay. Thanks very much for the update today.
Your next question comes from Daniel Major with UBS. Please go ahead.
Hi there. Yeah, thanks for the questions. The first one, just some clarity on the cash allocation to Josemaria this year. You've allocated $300 million, and you booked $54 million in CapEx. When we look at the exploration and corporate line, project development increased to $41 million, which includes Josemaria. How much of that spend was Josemaria? And what should we expect in the coming quarters? Is the $300 million split between CapEx and this project development line under the exploration, or is that incremental to the $300 million?
Yeah. On the Josemaria spend, we spent about $90 million in total up to June 30th from acquisition. $55 million being in CapEx and about $45 million going through OpEx or non-CapEx. I would say, you know, that includes again some project management, the overhead costs and such. I would say going forward, of the $300 million, I would say probably a similar allocation to what we're seeing or what we saw in Q2, I would expect for the balance of the $300 million.
Just sorry, to be clear on that. Is the expense costs on top of the $300 million or included in the $300 million ?
They are included in the $300 million .
Right. Okay. Similar run rate, $40 million a quarter in expense, and then the balance goes through CapEx.
Yes. Yeah. Maybe a little bit less on the OpEx and a little bit more on the CapEx as we, you know, do make payments and deposits on long lead items. I think it was, you know, about $40 million-$60 million this quarter. Maybe it'll be more like $30 million-$70 million or something going forward. I would say a slightly higher CapEx, slightly lower expense.
Very clear. Thank you. Next one is Candelaria. Two questions. Firstly, on the outlook for 2024, sort of beyond your explicit guidance period. I think the last technical report indicated an uplift to north of 190,000 tons of copper, 2024. There's obviously been a lot of changes at the mine since then. Should we be expecting the 2023 run rate is kind of medium-term expectation for Candelaria, or are you still expecting to get, you know, north towards the 300 mark in the middle of the 2020s? That's the first kind of part of the question.
The second part to the question, with respect to more CapEx being allocated to Chile, certainly we heard Anglo American today, I think, making a pretty explicit reference that the shape of the tax changes would mean it's unlikely that they allocate much more capital towards Chile. What's the threshold, you know, in the tax outcome that's obviously still under debate that would mean that additional investments in Chile are off the table? If the current proposal that I think implies something close to a high 50s% effective tax rate, would that be enough to stop you pushing forward with the underground?
I can comment on the production. At the moment we are working on our draft life of mine going forward, and we will be finalizing them at the end of this year, and that's when we'll be disclosing our guidances going forward. We're also looking at updating the technical reports. That's a project that's ongoing with our technical services team. Those will also be coming out later this year, early next year.
Daniel, I may answer the question on Chile. I had the opportunity to meet directly with President Boric last month and a number of his deputy ministers as well. I don't think we were surprised by the new proposal, if you will. Call it 45% effective tax rate below 200,000 tons. That part to us wasn't a surprise, but I think we were a little surprised, as are a lot of other mining companies, in the call it ad valorem tax that he put on after the fact. You know, I'm gonna be down meeting with a number of the ministers as part of my trip in a few weeks, and I think we'll be expressing our views on that one, which are very much aligned with everyone else's views.
You know, I think this is gonna be, quite frankly, viewed as a first proposal by the government, and it's gonna require a fair bit more discussion because they're starting to see the pushback by a lot of mining companies. You know, whether or not this goes through in the fall will be questionable. There's a few other things we still need to be doing, quite frankly, like the 2040 EIA in order to proceed with the project. You know, we'll see what the tax system comes out as we're lined up with all the other moving parts. Also, Dan, if I may add one thing also that we're, and we've communicated this before, the Pebble increase, the Pebble debottlenecking project is progressing as planned.
The plan is to have that up and running during next year. With that, we'll see greater throughput in the mill. That's gonna be a cash-positive change going forward.
Okay, thanks. One more, if I may, just perhaps slightly a higher level question. I mean, we've seen some mining executives this reporting season seeming shocked that the copper price, you know, fell from $4.50 a pound. I mean, I'm assuming most, you know, most companies, including yourselves, were not planning on, you know, that kind of price environment to move the business forward. You know, $3.50 is not a bad price. You know, is there a threshold level that either you cut the dividend or, you know, don't move forward with Josemaria?
No, I mean, I think at this current commodity price, you know, what our current strategy is still solid, and I don't see any changes to that. To the first part of your question, you know, I spent some time yesterday with our commercial team, and even they were quite surprised by the drop in the pricing, only because the demand that they're seeing for our end products is a bit of a disconnect to what the current prices are. You know, we feel that these, in the long run, are unsustainable prices. You know, you're seeing a lot of projects being challenged. You're seeing across the board everyone's costs going up, and I think that's gonna spill through eventually to also the end commodity prices.
I think most CEOs were surprised by the drop. You know, obviously, $3.50 is still a good price, but you have to take into consideration our costs have all gone up as well. I think the outlook for the commodity is still as strong as it ever has been, but it's difficult to predict it in the short term.
Okay, thanks so much for that.
There are no further questions at this time. Please proceed.
Okay, thank you, operator, and you know, thank you to everyone on the call. I mean, obviously, the current climate has presented a few new challenges, but I'd like to reinforce that Lundin Mining is in a very strong position. We've got a great balance sheet right now. We've got five solid operating assets, and we've got some new people joining our senior leadership team that we're quite excited about. I think the outlook is strong, and some of the current teething issues that we're dealing with we will certainly address and look forward to updating everyone in due course. Thank you for the support.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.