Ladies and gentlemen, thank you for standing by, and welcome to the Lundin Mining 2022 Operational Outlook and Update Conference Call. At this time, all participants are in listen only mode. After the speaker 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 that today's conference is being recorded. If you require any further assistance, please press star zero. I will now turn the conference over to your speaker today, Peter Rockandel, President and CEO. Thank you. Please go ahead.
Thank you, operator, and thank you to everyone for joining us on our operational outlook and update call. I will draw your attention to the cautionary statements on slide two, as we will be making several forward-looking statements during the prepared remarks and most likely during the Q&A as well. On the call today to assist with the presentation and answer any questions are Jinhee Magie, our Senior Vice President and Chief Financial Officer, Peter Richardson, Senior Vice President and Chief Operating Officer. As I mentioned previously on our Q3 call, during my transition and now as I have assumed the executive leadership position, I've continued to spend valuable time at Chapada, Neves-Corvo, and Zinkgruvan, meeting with our site MDs, senior management, union leads, and government officials where possible.
We are on the road again, and in the coming days, I will be spending time in Santiago and with our Candelaria and Eagle teams, as well as meeting with a number of our shareholders in Europe. Before turning the call over to Peter Richardson to speak to our annual guidance outlook, I'd like to reiterate our strategy at Lundin Mining. As detailed in our guidance release, we will continue to focus on creating value by investing in our own assets, and we remain disciplined in our approach for external opportunities to be added to our portfolio of high-quality assets. This strategy of investing in our own assets is now bearing fruit, as during the current metal price environment, we are setting quarterly records with over $760 million of free cash flow during the first nine months of this year.
Of this cash flow, we have declared over $240 million of dividends from our shareholders, while also repurchasing $36 million of our shares in the open market. We believe this sets us apart from our peers. I will now turn the call over to Peter Richardson to discuss the production, cash costs, and capital investment guidance for our operations issued yesterday.
Thanks, Peter. I'll spend the most time on slide five discussing the key aspects of our guidance for Candelaria. Copper production for the next two years is to increase over that of this year. The main drivers to this are improved copper head grades feed to the mill, as more ore is sourced directly from the open pit as we achieve planned processing rates. Consistent with prior mine plans, we will continue to source ore primarily from Phase X of the open pit next year. As the year progresses, we will be beginning sourcing from Phase XI, pushed back on the north side, the opposite side of the pit. In 2023 and 2024, Phase 11 is to be the primary ore source from the pit.
Open pit ore is to contribute roughly 60 million tons to the mill feed next year and in 2023, before increasing to approximately 80 million tons in 2024. In aggregate, the underground mines are to contribute roughly eight million tons each year, and we will keep the Candelaria mill full with stockpile ore making up the balance. As previously outlined on our third quarter call, initiatives to debottleneck the Candelaria plant's pebble crushing circuit are to be completed by late 2022 and will increase mill capacity starting in early 2023. That considered, we expect annual throughput for the complex to range between 27-28 million tons per year between 2022 and 2024 based on the planned mill feed blend and ore hardness model. Mill throughput is expected to first exceed 28 million tons per year in 2025.
We are continuing with basic engineering of the pebble crushing debottlenecking initiative and anticipate procurement and construction to be completed next year. Consistent with our prior messaging, production guidance considers a mine-to-mill grade discrepancy of 8% in 2022, reducing to 5% in 2023 and 2024. With focus on operational practices the last several months, we saw a noticeable improvement in grade discrepancy during the third quarter. The positive trend has improved further so far in the fourth quarter, as we continue with our methodical approach to identify and address sources of unplanned dilution and discrepancy across the mine-to-mill process, which we outlined on the third quarter conference call.
Copper production guidance for Candelaria in 2022 is 155,000-165,000 tons and is expected to be modestly weighted to the H2 of the year, owing mainly to the copper grade profile. Gold production guidance for 2022 is 83,000-88,000 ounces, and similarly to copper, modestly weighted to the H2 of the year. Cash costs are expected to be similar to this year, an average $1.55 per pound of copper next year after byproduct credits, which have been adjusted for the terms of the streaming agreement. Details of the byproduct metal price and foreign exchange rate assumptions for cash cost guidance for all our assets can be found in the press release and on slide 10 of this presentation.
Operational capital expenditures at Candelaria are forecast to total $270 million in 2022. Other than the addition of the pebble crushing debottlenecking initiative, the scope of the 2022 investments are consistent with prior plans, including waste stripping, underground development, and continued build of Luquillas tailings dam. While the scope is consistent, the guidance reflects some inflationary pressures on key inputs such as fuel, freight, and logistics. Lastly, on Candelaria, we plan to invest $50 million in exploration in 2022, including drilling of over 54,000 m. Focus of the program is on extending the near mine mineral resources of the underground mine, as well as testing some district targets. Moving to Chapada on slide six. Copper production guidance for the next three years is consistent with prior outlook.
Gold production guidance has been increased for 2022 on the refinement of the near-term operating plan. While we continue with our expansion studies to optimize the life of mine of the asset, the current guidance is based on the existing 24 million tons per annum throughput capacity. Chapada copper production is forecast to increase to 53,000-58,000 tons next year and be modestly greater in the H2 of the year given forecast grade profile and seasonal operating conditions. Gold production guidance is 70,000-75,000 ounces and similarly modestly weighted to the H2 of the year on the grade profile and seasonal operating considerations. Cash costs are expected to approximately $1.60 per pound of copper in 2022 after reduction of gold byproduct credits.
The forecast increase compared to this year's guidance of $1.10 reflects higher consumable costs and lower stockpile values. Operational capital expenditures are forecast to a total of $65 million next year. The scope of the 2022 investments includes primarily waste stripping and TSF and water management works. Chapada is the operation where we have seen the greatest general inflation pressure, such as consumables, freight, logistics, and electricity to name a few. However, much of this has been offset in U.S. dollar terms given the currency movement. We will continue with our aggressive exploration programs at Chapada next year, investing $10 million including 60,000 meters of drilling. The 2022 program is to focus on defining near mine mineral resources as well as following up on recent drilling success in the Formiga area to inform our ongoing expansion studies.
We're aiming to issue an exploration update early in the new year. On slide seven, nickel production guidance for Eagle is modestly lower for 2022 and consistent with prior outlook for 2023. Copper production guidance is directly in line with last year's outlook. The mine plan continues to prioritize high-grade ores from the Eagle East and Eagle ore body. 2022 production guidance is for 15,000-18,000 tons of nickel and the same amount for copper. Production of both metals is expected to be modestly weighted to the H2 of the year given the forecast grade profile. Cash costs are expected to remain in the first quartile of the global cost curve in 2022 at -$0.25 per pound of nickel, considering the significant byproduct copper credits. The forecast year-on-year increase is primarily a reflection of the lower volumes.
Capital investment is to be minimal again in 2022, estimated at $10 million, composed mainly of underground mine development, mobile equipment and mill water treatment plant sustaining initiatives. We have reinstated an exploration budget for Eagle in 2022. Though smaller than at our other sites, we plan to complete over 6,000 m of highly efficient drilling from underground as a part of a $2 million program. Drilling is to focus on extending the life of mine, delineating extensions of known mineralization at Eagle East and following up on previously identified targets. Moving to Neves-Corvo on slide eight. We have increased the copper production guidance for 2022 and 2023 compared to last year's outlook on refinement of the near term mine plan, positively impacting the forecast copper head grade.
Production is to increase to 33,000-38,000 tons in 2022, modestly weighted to the H1 of the year. For zinc, construction of the ZEP is progressing on schedule and on budget to be substantially completed by the end of this year. Production guidance has been tweaked for 2022 and 2023 compared to last year's outlook on refinement of the ZEP ramp-up schedule and recovery assumptions for these years. Zinc production is to increase over 65% next year as production ramps up from ZEP is to be completed in the H1 of the year, and with ZEP contributing to a full year of production at design throughput, 2023 zinc production is forecast to be over double this year's.
On the increased zinc production volume, 2022 cash costs are to improve to approximately $1.80 per pound of copper after the zinc and lead byproduct credits. Capital expenditures are in a total of $125 million next year, of which $30 million is expansionary capital to complete the pre-production works on the ZEP, and $95 million is forecast sustaining capital. Scope of the sustaining capital investments include underground mine development, TSF works and water initiatives, and mine and mobile equipment. We are increasing our exploration investment at our Neves-Corvo for 2022 to $8 million, which is to include over 32,000 m of drilling. Primary focus is to be on replacing mineral resource depletion with emphasis on further delineating known mineralized zones and ore bodies. Lastly, Zinkgruvan on slide nine.
Zinkgruvan has had a strong performance this year, and we expect that to continue. We have increased zinc production guidance 14% for 2022 and 11% for 2023 compared to last year's outlook at the midpoint of the ranges. This comes on minor refinement of the mine plan from which we are forecasting higher head grade and improved metal recoveries. Next year, zinc production is forecast to increase to 78,000-83,000 tons. Copper production guidance for 2022 and 2023 is generally consistent with the prior outlook. Cash costs next year are expected to improve to $0.55 per pound of zinc after copper and lead byproduct credits.
Sustaining capital expenditures are to total $60 million, including $35 million for underground development, including the Dalby ore body and the remainder primarily for mine and mobile equipment, TSF work, and other improvement initiatives.
Lastly, we plan to invest $5 million in exploration in 2022, including drilling over 20,000 m. Drilling will primarily target near mine mineral resources expansion around the Dalby and Burkland mineral bodies. On surface, we also plan to test some high-risk, high-return targets previously identified. With that, I'll turn the call back over to Peter to sum up.
Thanks, Peter. Slide 10 provides a detailed summary of our 2022 guidance, which Peter has spoken to. I believe it is clear looking at this slide that prior investments have created a highly desirable portfolio of high quality, free cash flow generating base metal mines, which sets us apart from our closest peers. Lastly, as outlined by Peter, we will be investing $45 million next year through our exploration programs, including over 170,000 m of drilling, primarily on near mine targets at our own assets. We intend to provide an update on some of these efforts in Q1. As I assume the executive leadership, continuing to add strength to our existing technical team while creating value by investing in our own assets and remaining disciplined in our approach for external opportunities will remain core to our strategy.
With that operator, I would like to open the line for any questions.
As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound or hash key. Please limit to one question and one follow-up. Your first question comes from Greg Barnes with TD Securities.
Yeah, thank you. A question for Peter Richardson. It says in the press release that you don't expect milling throughput at Candelaria to get above 28 million tons a year until 2025. Do you think you can get the mill, in total, up to 30 million tons a year, as was in the 2019 mine plan once you've got the pebble crusher fixed and the optimization work done?
No, the forecast that we have now considers the increases that we're planning after the upgrade of the pebble crushing circuit. We're also taking into account the ore hardness model. I think what you're referring to, the 30 million tons, is the combination of both mills.
Right.
So-
Is that achievable?
Well, you know, that. Sorry?
Is that achievable, with the combination of the SAG mill and the main mill, you can get to the 30 million tons?
Yep.
-eventually?
Yeah. Should be.
Yes, you can do that.
Yep.
Okay. The cash cost of Chapada, $1.60, is that the higher consumables cost primarily, or is it a combination of that and a slightly lower gold production coming through? It does seem like a big jump year-over-year.
Yeah. It's a, Greg, it's a combination of both. It's a combination of the higher costs that we are seeing, and the global overall inflation, as well as the slightly lower gold, as you've indicated. It's a combination of both.
Okay. I'll pass it on. Thank you.
I would, I might add, Greg, before we move forward, if anyone hears any loud noises, we apologize. We're in a conference room, and they've decided to start a construction project about three minutes ago.
Your next question comes from the line of Ioannis Masvouras with Morgan Stanley.
Thanks very much for the presentation. The first question from me is on Candelaria and grade dilution. You guided on improvement from 8%- 5% over the next couple of years. Shall we extrapolate this 5% through the mine life, or are you still comfortable with the assumptions on the original technical report? Thank you.
As I said earlier on, we've included 8% for next year and then 5% for 2023 and 2024. We have included a depreciation factor going forward at a lower rate than 5%-8% going forward. We're not guiding more than two years.
Okay, understood. The second or follow-up question, just on going back to Eagle. There is a meaningful step down in production in 2024, and my understanding was that you were expecting to continue operating at least until the end of 2025. Can you talk about the step down in 2024, and shall we expect another step down in 2025, assuming the East Keel Zone doesn't go ahead just in terms of the current mine plan?
The current life of mine at Eagle sees it ending at the end of 2025. You know, we're mining the grades that are there, so we're gonna see declining grades, and that's what you see in the grade profile and production profile. It's declining grades.
I might add that we do have a $2 million exploration project for 2022, so that is focused on extending along 6,500 m. We'll target the Keel Zone that was spoke to previously, and then there's three new underground targets that we'll be going after as well.
Understood. Thank you very much.
Your next question comes from Jack O'Brien of Goldman Sachs.
Hi. Good morning. Thanks for taking the question. First I just want to focus on your copper production. If we take a step back, production is forecast in 2024 to be roughly flat versus the 2022 levels at the midpoint. This comes from-
As a reference point 12 months ago where we expected Lundin to be offering more significant production growth. Perhaps you can just share with us some of the optionality you have there to increase that 2024/2025 copper production. Because as it stands there isn't really any growth coming through.
Okay. Well, we've guided 2024. We don't guide more than three years, right? Could you repeat the question because it was a long question? Sorry.
What the question, I suppose, is at the moment there's nothing from the growth side to get excited about when we think about copper production. Perhaps you could just help us understand some of the moving parts in terms of, should we say, the optionality you have at various mines, and how that could look beyond 2024.
Yeah, maybe I'll tackle that one first. There's a couple different items that we're reviewing right now. One at Candelaria would be QIP. We continue to advance the QIP internal studies at the feasibility level. The study work's substantially complete right now, and I would say the project economics look very robust under the current taxation and royalty regime. The study has it going from 14,000 tons per day underground to 26,000 tons per day. That being said, we were looking to you know, some stability with respect to the discussions on the mining royalty bill. Arguably the results that came out of the election yesterday were quite positive, so we're hoping that's gonna trend in the right direction and that would provide us an ability to have more growth, if you will, at Candelaria.
I'd also add that we are looking at some regional opportunities in Candelaria and the region. I'm going to be in Santiago on Monday, and at that time, meeting with various people about potential future opportunities as well.
Just to follow- up, if I may. Your balance sheet's obviously in exceptionally strong position. It feels like you could be much more aggressive in terms of distributions of that excess capacity. Given that that's not the case today, should we deduce that really either CapEx and/or M&A is gonna sort of bridge that gap and that your balance sheet will become more levered in the next year or two?
Well, I think I'd answer that by saying, you know, we have provided guidance on our CapEx, so that's definitely, you know, what you've been provided with is not gonna change. You know, to date in 2021, albeit small, but we did purchase 3.8 million shares, so we'll re-keep the NCIB in place and we'll kind of look at the capital allocation between that and the dividend policy. With the dividend policy, we have it at $0.09 per quarter. I believe this is probably one of the strongest dividends in our immediate peer group. Then we have the performance dividend that's designed to top that up in higher parts of the price cycle.
We'll have a combination of those returning capital to our shareholders, which we're quite excited about because I think there's a lot of companies out there right now that aren't doing that. M&A is just always ongoing. You know, we've never really changed our M&A strategy. We've been looking solid for a couple of years and we'll continue to do so on a going forward basis.
Got it. Thank you.
Your next question comes from Abhinandan Agarwal with Deutsche Bank.
Thanks, guys. Can I ask a question around the Chapada cost inflation, please? Are there any one-offs in this cost number, or is this the new base, in your view?
Sorry, could you... Any one-
Any one-off-
One-offs.
In the C1.
Yeah.
One-offs, yes, in the C1 cash cost number, or is this a new base we should be thinking about when we think about costs post 2022? Thank you.
No, there aren't any one-off in the cash cost guidance of Chapada. What I will add in addition to kind of the general inflationary cost that we are seeing is that the FX assumption that we have assumed in our guidance is more conservative than our current spot in the 2021 actual. That'll also have an impact to bring that cash cost a little bit higher. If you work that in addition to the cost inflation, those are the two main factors and it's not a one-off specific item.
Got it. Thank you very much.
Your next question comes from Daniel Major with UBS.
Hi. Thanks for the call. First comment or question is around CapEx. I guess you've explained the delta in 2022. I guess across the industry, there tends to be a trend of stating a sustaining CapEx number, and there's always a tailings dam rebuild that needs to be done or some other form of sustaining CapEx, which means that the sustaining CapEx actually never falls to the stated level. What is the long run, medium term sustaining CapEx number for Lundin based on the current portfolio?
Can you-
Yeah. We, you know, we only provide a one-year guidance on our CapEx. But if you look at historically, I guess 2021 was about just over $500 million as our forecast. We're up to guiding about $600 million for 2022. One of, you know, part of the increase there is we are taking the opportunity with our healthy balance sheet and our significant cash flow to reinvest in our assets. Where we are seeing some projects with opportunities for efficiencies and a good rate of return on our investment, we are taking the opportunity to go ahead with those. I would say that, you know, some of it does depend a little bit on the metal price environment.
With higher metal prices, we will add on some additional projects. I guess generally overall, 2022 is probably higher, and then going forward, I would say we're trending lower. If you refer to our technical report, I think, you know, that is still our best reference point.
I would add that we also did roll over some of our 2021 CapEx into 2022.
Okay. Yeah. If we take down the $40 million you rolled over and take a little bit off that, something in the kind of $500 million-$550 million would be a reasonable number. Is that fair?
I think that's fair.
Okay, great. Just a very quick follow-up, I hope that's permitted. You talk about the 8% and the 5% grade reconciliation. Can you just remind us where you've been running in recent quarters? Sorry, this Candelaria grade discrepancy or reconciliation.
Yeah. We spoke about that during the quarter three call. The copper feed grade in the quarter was in line with our plan. We have been achieving discrepancy numbers below our forecasted number. Q4, that trend continued. We've been doing better than we forecasted on our grade, on the grade discrepancy.
Where were you earlier in the year? Was it as high? Was it above the 8%? That's what I'm trying to get at. Can you remind us? I'm pretty sure you said before.
Yeah. In occasional months it was.
Okay. All right. Thank you.
Your next question comes from Lawson Winder with Bank of America.
Hi guys. Good morning. Thank you for taking the call. Thank you for doing this call. Just on the dilution at Candelaria. I think you know, the work's obviously continuing to determine what exactly is causing the mine to mill dilution. You were investigating obviously, whether it was the open pit underground or mill. Have you got a hunch yet as to where most of that dilution is coming from? Thanks.
We haven't been able to pinpoint exactly, but we've been making a lot of improvement on operational practices across the site, you know, the underground mines, both the planning, the execution and the open pit, and also, you know, how we treat the stockpiles and also how we sample and then do our assaying at the mill. So overall, you know, things are improving, but we still haven't been able to pinpoint one exact source for it. But the numbers are improving. They did during Q3, and they keep improving during Q4.
Okay. Okay, so you haven't pinpointed the issues yet. Yet you're confident guiding to a 5% dilution factor for 2023 and 2024 versus 12% in 2022. Or sorry, 8% in 2022. I apologize. What is giving you that confidence that it will get down to 5% in 2023 and beyond? Is it that you're already hitting that 5% in Q4 of 2021?
Yes. We're seeing months that we're below those numbers at the moment. What we're working now is to be able to get consistency month after month at those lower numbers.
As Peter alluded to.
Okay.
It's, you know, it's a lot of small things that are contributing to it. We haven't found one larger item, but the operational practices are all assisting in different ways, in addition to the fact that we are taking less material from the stockpiles.
Okay, got you. That's super helpful. Maybe if you wouldn't mind just one final question. Is HPGR off the table now to start as a way to address the pebbles? Do you think you know you'll just stick with optimizing the cone crushers and leave it at that? Thanks.
We're both optimizing. At the moment it's off the table. Our main focus is on optimizing the cone crushers, but also on our ball mill, rod mill conversion. Those are our main focus areas.
Thank you so much.
Your next question comes from Jackie Przybylowska with BMO Capital Markets.
Hey, good afternoon, everyone. Thanks for doing this call. I just wanted to follow up with something, Peter, that you said at the beginning, that there's an exploration update you're planning for Q1. Is that the Chapada exploration or is there gonna be more drill results released for other operations as well?
Yeah, I think the focus, Jackie, will be on Chapada. We are gonna be doing a 60,000 m $10 million project in 2022, but we'll probably provide a bit of color on some of the work we've been doing up in the Formiga area. We currently have five rigs up in that area, and we thought it would be helpful to give a bit of color on those results to the market. Just didn't wanna put 'em out, you know, 1 hole at a time, and the assays have been a bit slow. I think we'll have enough volume to be able to put out the results in hopefully January. We're looking to 1 or 2 other sites where we may be able to provide a bit of an update.
It's just something we're trying to also do on a more regular basis in with our exploration efforts.
That sounds great. If I could ask one other question, I know your existing NCIB expires sometime in early December, I believe. Can you maybe give us an update on what your thoughts are on renewing that or bringing in another NCIB for 2022? Thank you.
Yeah. Going into 2022, we will look to get the NCIB approved by the board. You know, much like we did in the past, we will probably be in there buying stock. It's always a balance between that and the dividend for capital allocation back to the shareholders. I think we'll just have to see how the markets are come January.
Thanks very much. That's all my questions.
Yeah.
Your next question comes from the line of Stefan Ioannou with Cormark.
Very much, guys. Just on Chapada, you mentioned again the exploration update early next year. Is there any sort of line of sight to how that may feed into an updated mine plan for that project going forward? Or is that still sort of a milestone that's a bit further out?
Well, what we're looking at with respect to the Chapada expansion is the possibility of expanding our existing facilities. We're currently doing work on that, and we're hoping to be able to provide some direction of that in the early part of Q1, not anything like a full study. The exploration results that are going on may feed into some different opportunities. That's why we're holding off just now to continue with the exploration work, and we'll see how that continues. We're trying to figure out where the center of the ore body is trending, 'cause that will dictate locations for any future expansions.
Okay. Got it. Thanks very much.
At this time, there are no further questions. I'll turn it back to the speakers for any closing remarks.
Thank you, operator, and thank you to everyone who are participating in today's call. A lot going on at Lundin Mining right now, and we're very excited to be going into 2022. We'll be providing some updates at the beginning part of the year, but we'll do a general call to everyone during February with our Q4 results. Thank you for everyone's input today and any questions, feel free to reach out to the team. Thank you.