Good day, and thank you for standing by. Welcome to the Lundin Mining acquisition of Josemaria Resources conference 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. Please be advised today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to speaker today, Peter Rockandel, President and CEO. Please go ahead.
Thank you, operator, and thank you everyone for joining us today. We're excited to be announcing the acquisition of Josemaria Resources and its world-class copper-gold project. Before we begin, I will draw your attention to the cautionary statements on slide two, as we will be making forward-looking comments during the prepared remarks and likely during the Q&A. Please also refer to our news release dated December 20, 2021, and our most recently filed AIF, all of which are available on our website. With me on the call today from Josemaria Resources are Adam Lundin, President, CEO, Ian Gibbs, CFO, and our friend Arndt Brettschneider, VP Corporate Development and Technical Services. From Lundin Mining, we also have Jinhee Magie, Senior Vice President and CFO, and Quinn Yong, VP Corporate Development and Strategy.
We're excited this morning to be discussing our agreement to acquire Josemaria Resources for its wholly-owned Josemaria project in the San Juan province of Argentina. In our view, this project is a unique and scarce opportunity, a meaningful copper-gold deposit in an advanced stage with a clear path to production and enormous upside potential. Since our last acquisition, we have continued to pursue further growth opportunities. We have engaged in numerous discussions ranging from large-scale corporate M&A, single asset opportunities, and other early-stage exploration projects. The more work we concluded, the more it became apparent that in order to bring a world-class asset into our portfolio, we would need to focus on earlier stage projects. Through that process, we determined that Josemaria was clearly the best opportunity and a great fit for Lundin Mining.
With Josemaria, Lundin Mining was positioned as a major copper producer with a well-diversified portfolio of high-quality, long-life base metal assets. This morning, we will walk through the strategic rationale, highlight the terms of the agreement, and outline some of the key attributes of this world-class project. Lundin Mining has demonstrated a strong track record of growth through discipline and successful M&A. Executing on a strategy while continuing with value-add organic opportunities has set us apart from our peers. We believe now is the optimal time to bring an earlier stage large-scale project into our portfolio, and in doing so, elevate us to the next level. The acquisition of Josemaria delivers large-scale copper growth directly aligned with our stated strategy.
Once in production, Josemaria is expected to produce on average 130,000 tons of copper, nearly 225,000 ounces of gold, and 1 million ounces of silver annually over a 19-year mine life. This growth would increase our copper production by nearly 50% and gold production by 140% compared to our 2022 guidance. This project does have a clear path to development. Josemaria has been advancing the feasibility stage project through environmental approvals and commercial and fiscal terms with regulatory authorities, which they anticipate to finalize next year. Josemaria adds meaningful copper-gold production growth to Lundin Mining's current portfolio while adding appropriate asset and geographic diversification. Within Lundin Mining, we believe capital financing risks to the project timeline and to Josemaria shareholders are significantly reduced.
The project capital and development timeline offer many funding options under our own stewardship, even as we pursue our own current organic opportunities. We expect to fund the cash component of the transaction with our existing liquidity, which as of September 30 was $430 million and approximately $700 million available for drawdown on our credit facility. In addition to the current Josemaria project, we believe there is further potential increased value with the extensions of the known ore body, as well as some of the more recently added exploration prospects. At this time, I'll pass it over to Quinn Yong to go through the transaction summary.
Thanks, Peter. Moving to slide seven, summarizing the transaction. Lundin Mining is to acquire Josemaria Resources for approximately CAD 625 million or approximately $485 million. Josemaria shareholders are to receive consideration of CAD 1.60 per share, representing a 29% premium to Josemaria's ten-day VWAP on the TSX. The total consideration will comprise of 30% cash and 70% Lundin Mining shares at an exchange ratio of 0.1487 newly issued Lundin Mining shares per share of Josemaria Resources. The two largest shareholders of Josemaria, Lorito and Zebra Holdings, and Josemaria officers and directors have entered into voting and support agreements such that approximately 42% of the total issued and outstanding shares have agreed to vote in favor of the transaction.
Based on our extensive due diligence completed to date and supportive work from our advisors, we believe our purchase of Josemaria and the terms provided are appropriate for both sets of shareholders. I would now like to pass the call over to Adam Lundin, President and CEO, Josemaria Resources.
Thank you, Quinn. The acquisition of Josemaria Resources by Lundin Mining is an excellent opportunity for all shareholders. We believe Josemaria shareholders will benefit from a compelling premium and the opportunity to continue to participate in the future potential of the project under Lundin Mining stewardship, while at the same time gaining exposure to Lundin's diverse portfolio.
A high quality producing operation by way of the shares to be received. We have established very strong relationships in Argentina, and we look forward to working with Lundin Mining to continue building upon these moving forward. Josemaria Resources has also established a very strong construction team, and adding additional depth from Lundin Mining, including some of the more recent announced hires, will only further assist in the successful development of the project. The Josemaria board of directors unanimously supports the transaction, and we have voting support arrangements from all directors and officers at the entities of the Lundin family. Slide eight, Josemaria overview. I'll give a brief overview of the project for those not familiar. Josemaria is located in an emerging world-class copper district in Argentina.
Under our stewardship, Josemaria has grown into a top ten open pit copper project in the Americas with a mine life of 19 years, defined only by the reserves. A process feasibility study highlighting robust economics was completed in late 2020, which is available on the josemariaresources.com website and SEDAR filings. The feasibility study outlined the conventional open pit operation with a low strip ratio, long mine life, and low cost. Processing is to consist of a conventional crush, grind, and flotation flow sheet, producing a quality copper concentrate with a significant gold by-product credit. Over the first eight years, the operation is expected to produce on average nearly 160,000 tons of copper, over 300,000 ounces of gold, and 1.3 million ounces of silver.
The Josemaria Resources team has been advancing the project through environmental approvals and commercial and fiscal terms with the regulatory bodies. The environmental and social impact assessment was submitted in the first quarter of 2021. The expectation of Josemaria Resources management is that the ESIA and commercial and fiscal terms are to be finalized in 2022, outlining project timeline of approximately five years to commercial production. I will now turn the call back to Peter.
Thanks, Adam. Lundin Mining has been following the advancement of the Josemaria deposit into a world-class ore body for a considerable period of time. As Adam mentioned, it is now within the top 10 open pit copper assets in the Americas by mineral reserves, with 6.7 billion pounds of copper, 7 million ounces of gold, and just over 30 million ounces of silver. With the recent progress towards obtaining environmental approval in commercial and fiscal terms, we believe now is the optimal time to acquire Josemaria Resources. On slide 10, we can see how Josemaria adds large scale copper growth that complements our existing portfolio of base metal assets and adds a strong third pillar to our South American business.
As mentioned previously, once in production, Josemaria is expected to produce on average over 130,000 tons of copper, nearly 225,000 ounces of gold, and one million ounces of silver annually over a 19-year mine life. Again, as mentioned before, this will add 50% to our copper production and 140% to our gold production. Josemaria will be an excellent fit, and we are excited about its potential to become a cornerstone asset. In addition to the Josemaria project itself, we believe there's significant potential to increase value over the longer term by leveraging our copper-focused exploration expertise, much like we have at our other assets. The Lundin family has a successful working relationship with Argentina for more than 30 years.
Some of the more notable projects being Alumbrera and Veladero. We look forward to continuing to build on the strong relationships. As we do across all Lundin Mining, we will work together to ensure the Josemaria project delivers sustainable benefits to all stakeholders. Finally, as previously outlined, we believe there's significant potential to increase value beyond the current Josemaria project through mine life extensions and exploration on newly acquired properties in the district. Josemaria will become the center of gravity for any future developments in what has the makings of a world-class district. In conclusion, the acquisition of Josemaria reflects our commitment to value creation through growth of high-quality, long-life base metal assets. We are excited to add a large-scale, world-class copper-gold project to our portfolio.
We remain fully committed to our strategy of operating, upgrading, and growing a base metal portfolio that provides leading returns for our shareholders. Our existing assets are operating as planned. We recently announced a series of new hires, adding further strength to our technical expertise. Now with Josemaria, we will have a world-class growth project in our portfolio. Lundin Mining is well-positioned for the future. With that offered, I'd like to open up the lines for any questions.
Thank you. As a reminder, to ask a question, you need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the queuing roster. Our first question comes from the line of Ioannis Masvoulas from Morgan Stanley. The line is open.
Hi. Yes. Good morning and good afternoon, and thanks for the presentation. Two questions from me. I'll take them one at a time, if that's okay. In your press release, you talk about plans to review the project timeline, CapEx, and economic estimates. Are there any specific aspects of the feasibility study where you envisage possible changes? How differently could you approach a project development as compared to a general developer? Thank you.
Yeah. Hi, it's Quinn Yong here. We did extensive DD and, following transaction close, we're gonna further review and, determine if any updates are needed to the timeline and CapEx.
On first review with respect to, say, production profile and number of other metrics, I think we'll be tracking well with what Josemaria already produced.
Great. Thank you very much for that. The second question is around the project pipeline. How does things change for Chapada and the potential expansion there, given the acquisition today? Can you talk about how you see the two projects fit into your growth story over the next three to five years, please?
Sure. This will have no impact on the Chapada timeline. We believe that it can be done in tandem, so our exploration efforts will continue to be going at Chapada, and they've been very, very positive. We'll have more of that out in Q1. As I mentioned at the start, these can be done in tandem.
Great. Thank you. I'll join back to queue. Thank you.
Our next question comes from the line of Lawson Winder from BofA Securities. Your line is open.
Hi. Thank you for taking the question and for doing the call. One question from me. Was there other bidders involved in the process?
I would put that question over to the Josemaria side. Adam?
Yeah. No, we felt that this was what's best for Josemaria shareholders, given the mix of cash and stock and having the ability to take Lundin Mining shares and continue to partake in the project moving forward.
Okay. Sorry, you're saying that there were no other bidders? Is that correct?
I'm saying that I thought this was the best thing for Josemaria shareholders.
Okay. Okay, great. Also on Argentina, I know this is far off, but just in terms of capital expatriation, what is the current situation in terms of getting money out? I mean, my understanding is that, I mean, right now, the most effective way is to get it out through interest and debt repayments. Is that currently the case? How do you see that situation evolving? Thanks very much.
Yeah, no problem. Thank you. I think maybe, I'll hand this over to Ian Gibbs, the CFO of Josemaria.
Good morning. Yeah, you're absolutely right to point out that there have been foreign exchange regulations in Argentina. I think I've stated in our materials, Josemaria has been negotiating with the federal and provincial authorities the fiscal terms that we would sanction the project under. The Mining Investment Law provides for stability for 30 years of your projects. Foreign exchange and foreign exchange repatriation is one of the items at the top of the list. Concrete discussions are ongoing, and we are getting traction so that we can find an effective way to make sure that any financing for the project or capital investment can be repatriated. That is something that we'll be developing prior to project sanction for fiscal stability.
Okay, great. Just one final sort of follow-up on the versus the feasibility study. Peter, you mentioned that everything was sort of tracking well. Prior to sanctioning, should we be expecting some sort of update to that feasibility study? Thanks.
Yeah, I would expect that, you know, as we were doing our due diligence, we made our own assumptions. After we have ownership of the project, we'll continue doing review in those different areas. In the passage of time, we will come up with our own numbers.
Great. Okay, thanks so much, guys.
Our next question comes from the line of Orest Wowkodaw from Scotiabank. Your line is open.
Hi, good morning. Peter, this is a pretty significant deviation in the company's strategy. You know, the company from my perspective, Lundin's been really successful buying non-core producing assets from others. Now you're shifting gears to start up a very large greenfield project. Can you maybe speak to why you think the company is ready to move in that direction? You know, how investors get comfortable with this transaction given the risk of such a large capital build?
Yeah, I mean, I think there's a lot of different ways to answer this question. I don't think we've deviated from our strategy. We may have deviated from what we've done in the past, but our strategy's actually always been to look at early-stage projects, single asset companies, and also have discussions with larger entities where we felt there was strategic opportunities. We've always had that broad range. We've just never been able to execute on an earlier stage project. You are correct, we've had a good success in the past of buying single asset companies at opportune times.
That group of acquisitions is becoming more and more challenging, and we've seen that some of the deals that have been announced quite recently that we may have looked at but didn't feel, quite frankly, added a lot of value. While it may appear that the strategy has changed, it really hasn't. I think I've been very vocal in every single meeting to say that we do actually look at the full range. As far as changes that need to occur as a result of this, yes, we will obviously need to be aware of the skills required to move a project like this forward. We recently did announce the addition of Patrick Boitumelo as our Senior Vice President of Technical Services. We also announced Arman Baha, VP, Technical Services, and we're gonna be announcing a new VP of Project shortly.
That being said, Josemaria has actually assembled a world-class construction team. If you look at it closely, Read Futral, Phil Bremmer were both key members of the Freeport construction team, did quite successful construction jobs at Tenke, at Tasiast, at a number of other operations, so, you know, we aren’t deviating. We just thought that after reviewing a number of projects, quite frankly, I think we’ve signed eight CAs in the last two to three years, looking at numerous projects, and in order to get something that’s world-class into our portfolio, we felt that we had to flex one of our parameters, which we’ve alluded to on a number of calls. And this fits well, and as I said, Josemaria does already have an excellent construction team in place. So that was a bit of a long-winded answer, but I’m not sure I answered all your questions.
Well, thanks. Maybe as a follow-up, does Lundin Mining plan to develop this on its own, or will you look to partner it?
I think that in the brief time that this announcement's come out, it's been made apparent to us that we'll have a lot of different opportunities how to look at bringing this forward.
I see. From a cash flow perspective, you know, Lundin's got a really strong dividend payout here. How should we think about this transaction now in terms of the development? Is sort of a 2023 or 2024 the time period where we start to see kind of material CapEx spend that would obviously impact your dividend payout?
Well, I'll touch on the front end of that. I mean, part of that will be getting the final permitting and in place, and that will dictate how we spend money in Argentina. I don't know, Jinhee, if you wanna mention anything else on the dividend front or.
Yeah, I'd say that we don't really envision any significant impact to a return of capital program. You know, our quarterly dividend, basically, when we put it in place, it was at a level that we were comfortable at, that it could support us or us being able to pay it through varying metal price cycles and business cycles, so we're comfortable with that. The performance dividend that we've put in place is based on excess cash. So yes, obviously, you know, if we you know, moving forward with this project, the commitments to that will impact the excess cash, which will impact our performance dividend. But again, the strategy and the fundamentals underlying you know, what we're looking to return remains unchanged.
Okay. Thank you very much.
Our next question comes from the line of Dalton Baretto from Canaccord. Your line is open.
Yeah, thanks. Good morning, everybody. Pete, I wanna start off by asking about timing. Why now, given that the stability agreement is not in place and the permit isn't in place?
Well, I think there actually has been a lot of progress in country, and I can also get Adam to speak to that. I was recently down in Argentina, and I met with the governor. I was quite comfortable about some of the things that they are doing to try moving mining forward. I think this is actually the perfect time to be getting in there. Once it opens up some more, I think it's gonna become a very competitive landscape, quite frankly. Adam, is there anything in particular you'd like to add?
Yeah. Hi, Dalton. Thanks, Peter. Yeah, I think with Argentina, you know, starting to open up, you saw the recent news out of Chubut. Obviously, San Juan's always been a very pro-mining province, but the reception and continued reception we have at the federal government and, you know, amendments to Decree 234 and the discussions we've had, I think it's an excellent time for Lundin Mining to be getting involved in the country, in Josemaria.
Dalton, I'd add, you know, it's interesting, I was reading an article the other day from FM Global, which has been around for over a hundred years, I think, doing country risk, and they've been moving Argentina up their list quite a bit lately, and I was surprised to see it ranked ahead of places like Peru, Mexico and Panama. I think there are other people that do feel Argentina is trending in the right direction. You know, if you're trying to find a world-class ore body, you're gonna have to kind of step out in some areas less explored. BHP themselves actually after saying they'd never go to the DRC are back looking in the DRC. I think Argentina is a place that's gonna start to see a lot more mining investment as we move forward.
On that note then, Adam, you know, when you and I have talked, you've been expecting a stability agreement or some sort of a decree sometime this year. But where does that whole process stand?
Yeah, I think, you know, we've seen, you know, again, with the amendments to Decree 234, which allows us to retain more of our cash flow offshore. And so it's starting to happen. It's not gonna happen in one big fiscal agreement like we've seen in other countries with other Lundin Group companies. As we start seeing it come in piecemeal, we're confident it's already begun, or it has already begun.
Okay, great. Just maybe switching gears a little bit. You know, this project has always been presented to me as kind of one part of the district, right? You know, we've talked numerous times about the synergies with Filo del Sol, particularly the infrastructure side. Peter, can you talk a little bit about how you look at that piece of the project as you go forward and whether there's any interest from Lundin Mining in Filo or Los Helados as well?
Yeah. I mean, I'd say that we are taking on a large project, so all our energy and resources are gonna be focused on the successful development of Josemaria. That's unequivocally where we'll be devoting our time. I mean, it has a 19-year mine life, not including any success we may have to increase the mine life. They've also more recently acquired some lands that look extremely promising. You know, I do think controlling Josemaria puts us in an enviable position, the first mover advantage, if you will, and arguably to control any developments that will occur in the region. All our energy and resources are gonna be focused on the successful development of Josemaria.
Okay, great. Just maybe one last note from me. Can you speak to the premium paid and how you got comfortable with it?
We certainly can.
Yeah, we did extensive DD, and we had numerous internal groups and external third-party experts help us with our NAV and our asset build up to the NAV. We feel we've run various scenarios. We feel really comfortable with the price offered-
Yeah.
The consideration mix.
I would add, you know, we specifically hired Morgan Stanley as we thought that They're one of the top global advisors to work with us on that valuation. There was a separate, independent committee established which TD Securities worked with. There was a very rigorous process that took place in negotiating that price, and I believe it is the one that is the appropriate price for both sides.
That's great. That's all for me, guys. Thank you.
Our next question comes from the line of Stefan Ioannou from Cormark Securities. Your line is open.
Great. Thanks very much, guys. Most of my question's been answered, but just curious, you know, you mentioned, Peter, just, you know, looking at Josemaria, but also looking to maybe potentially make it, you know, bigger through even exploration both at Josemaria proper and the surrounding area. I was just wondering, I know there's a lot of moving parts on the table here by just closing the transaction, but how soon do you think you may be getting in to sort of drill some of the prospects in Josemaria? I'm thinking in particular the Las Pilas which they recently tied up within Josemaria. When do you think you might be able to get a drill on that?
Well, I would say that maybe Adam has to answer that, 'cause for the next three-four months, we're not the owner of the asset. Adam, I don't know if you or Arndt have any comments on that.
Yeah, no. Recently securing the Las Pilas property was exciting for us. We, you know, plan on doing some exploration drilling and work there in the first half of 2022. Also we've kicked off our field season where we'll be drilling some deeper holes within the current ore body which we believe can convert a large portion of our inferred material which we believe will lead to extended mine life beyond the 19 years stated in the feasibility study.
Okay. Okay, great. Then just one other quick question. Just in the press release this morning, it just mentioned there would be like a, there's a $100 million loan tied to the deal as well that would just sort of fund interim expenses through when the deal actually closes. Is that in part to fund exploration and just project advancement? And can you just maybe give some mechanics on how that actually works in the background?
Sure. I can speak to it. There's very strict controls on it that any of the spend has to be approved by Lundin Mining. There are certain things that we think that can be done in conjunction as we're closing the deal that will help advance the project. There are limitations on what it can be spent on and the dollar value. We've already seen their various budgets, and it would be treated very similar to we do with our own projects.
Okay. Okay, great. Thanks very much, guys.
We have a question from Daniel Major from UBS. Your line is open.
Hi there. Yeah, thanks. Two questions. The first is perhaps related to the last question on the loan. Can you give us any sense of what the impact of the deal will have on 2022 CapEx guidance for Lundin, obviously subject to closing broadly in line with your timeline?
Sorry, on the Lundin Mining 2022 CapEx?
Correct.
Yeah. I think, you know, if you look at what Josemaria has put out as what they're looking to spend in their technical report and their analysis, I think if you kind of look at that will give you a good guidance. Right now, I think, you know, we're not looking to change anything significantly or materially. Once we've had a chance to close this deal and look at that in more detail, we'll be, you know, providing that guidance as soon as we can.
Okay, thanks. Just to clarify, is it? I'm just looking at the technical report here, $67 million year -5 on the cash flow profile. Is that the number that we should be thinking of on a 100% basis?
Yes, I think that's fair to use that.
I just wanna add the permitting may affect the timeline as well.
Sure. Okay. The base case is around that kind of number to spend on the project in 2022. Okay, great. Yeah, second question, just on the backdrop in Argentina, clearly fairly aggressive inflationary backdrops, substantial devaluation consistently of the currency. What proportion of your exposure, if you have any, to domestic cost, domestic inflation, how worried are you about that in terms of the numbers that are in the technical report?
Yeah. First thing I'd highlight is, about 37% of the CapEx is in local peso, and the rest is in hard currency. We performed an analysis on Argentinian inflation, and we found that it correlates strongly with devaluation of the peso, so they largely offset and the economics are still robust.
Okay, you're factoring in matched devaluation with domestic inflation effectively in those numbers.
Yeah. We look back, and our analysis proves that it correlates very well.
Okay, great. Yeah, thanks for that. That's the rest of my questions are answered.
Again, if you would like to ask a question, press star one on your telephone. Our next question comes from the line of Pierre Vaillancourt from Haywood. Your line is open.
Hi there. Could you just clarify what the key milestones are, you know, from here on to, you know, permitting and construction and production? Just give me a rough sense of what that could look like.
Adam, can I put that one over to you?
Yeah, no problem. Yeah, well, for us, you know, we submitted our EIA in February 2021. We anticipate to receive approval for that. That'd be a key milestone in 2022. And then also, you know, on the fiscal stability side, negotiations are going on about export tax. So a couple. You know, I just mentioned those two items that we'd like to see come through before making a construction decision and then also getting through our Class 2 estimate.
Okay, assuming things come in when you think they will, can you just give a rough estimate or maybe guesstimate on construction and production, just you know, as a guideline?
Yeah. I think we'll be working closely together, obviously, with Lundin Mining, and it's gonna be their project come April. For us, you know, we look to make a construction decision in the middle of 2022, and we believe we can bring the project online in 2026.
Did you say 2026?
Yep.
Okay. Thanks very much.
There are no further questions at this time. Now I turn the call back over to Peter Rockandel.
Thank you, operator. As I said previously, we remain fully committed to our strategy of operating, upgrading, and growing a base metal portfolio, and Josemaria Resources will be key to this. Our existing assets are operating as planned. I've had the opportunity to visit all our assets and have been very pleased with how we're heading into the end of the year. We've also recently announced a series of new hires, and those will add good bench strength or good strength, excuse me, to our technical expertise. I believe Lundin Mining is in excellent position as we close out the year and then going into 2022. With that, operator, I thank everyone for joining the call, and we look forward to catching up in the new year.