Good morning, ladies and gentlemen, and welcome to the Lundin Mining third 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 you require immediate assistance, please press star zero for the operator. Also note that this call is being recorded on Wednesday, October 26th, 2022. I would like to turn the conference over to President and CEO, Peter Rockandel. Please go ahead, sir.
Thank you, operator, and thank you everyone for joining Lundin Mining's third quarter 2022 results call. Before we get into the formalities of the call, it is with great sadness that I address the passing of our board member, Ms. Karen Poniachik, on October 11 in Chile, as well as the tragic loss of a contractor colleague at Neves-Corvo in Portugal on September 30.
Karen was appointed to our board in February 2021 and brought with her a wealth of wisdom, local context, and insight gained through her distinguished career and many contributions to mining in Chile. We extend our heartfelt condolences to Karen's family and friends.
She will be greatly missed by many. Also, unfortunately, a fatal accident occurred underground at Neves-Corvo in late September. In this isolated incident, the employee of a materials handling contractor was fatally injured while driving a piece of mobile equipment.
We continue to support those impacted and have held safety stand-downs at every operation and at our head office to reflect on the loss and reconfirm our shared commitment to zero harm. Thank you. I will now 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.
On the call to assist with the presentation and answer questions are Teitur Poulsen, our Senior Vice President, Chief Financial Officer, and Juan Andrés Morel, our Senior Vice President and Chief Operating Officer. Juan Andrés joined us as SVP and COO on August first. Juan Andrés has an exceptional track record with over 30 years in the industry. More recently, he was the General Manager of mining operations at BHP's Escondida in Chile, currently one of the world's largest copper mines.
From 2005 to 2017, he held progressively senior roles with Antofagasta, including Head of Operations at Los Pelambres and Chief of Technical Services. Earlier in his career, he spent seven years with Codelco as Chief Strategy Officer of the El Teniente division, Director of Corporate Operational Excellence, and Chief of Open Pit Mine Planning, among other roles. Teitur joined us as SVP and CFO on September 1.
Teitur brings over 20 years of financial experience, most recently as CFO of Lundin Energy, which was acquired by Aker BP for approximately $14 billion earlier this year. Continuing with the key highlights from the third quarter on slide four, overall, we had a strong quarter. Candelaria, Eagle and Zinkgruvan operations all continued to deliver as per plan.
It had rebounded from the weather impact of the first half of the year, with mill throughput, feed grades and metal recovery rates all improving in the third quarter. Copper and gold production increased 35% and 50%, respectively, over Q2. Ramp-up of the Neves-Corvo zinc expansion program is progressing. Quarter-over-quarter improvements have been seen in ore processed, grades, and recoveries.
Overall, production of all metals is tracking to their annual guidance ranges. Despite the macroeconomic conditions, we generated adjusted EBITDA of over $200 million and adjusted operating cash flow of over $180 million, exceeding Q2 by 35% and 260%, respectively. Our balance sheet remains strong with $1.9 billion of liquidity at quarter-end.
As Teitur will speak to, we have initiated a foreign exchange hedging program to protect operating costs and business plans. We continued our balanced and disciplined approach to capital allocation. We remain growth-focused while at the same time delivering leading cash returns to our shareholders. We have paid nearly $225 million in dividends and purchased 10.8 million shares for approximately $50 million year to date.
The current regular dividend yield of 5.42% is the strongest within our direct peer group. With Josemaria, Lundin Mining is well positioned to deliver meaningful growth in the coming years. We are continuing to progress the project and are targeting to complete an updated technical report for publication to the market in the second half of 2023.
As I will speak to a bit later, the high-grade copper gold mineralization at Saúva continues to grow and remains open. The maiden mineral resource estimate by Saúva is targeted for release in early 2023. I will now turn the call over to Teitur Poulsen to speak to our summary results.
Thank you, Peter. Great to have joined the mining sector, and I'm looking forward to talking through some of the financial highlights on this, my inaugural, earnings call on Lundin Mining. On slide number five, we produced over 116,000 tons of base metals and approximately 45,000 ounces of gold in the third quarter.
In terms of sold volumes, we sold close to 107,000 tons of base metals and around 43,000 ounces of gold. Total copper production was essentially in line with the second quarter of this year, though below that of the third quarter last year. This is primarily due to lower production from Chapada year on year, while being in line to best in plan for this quarter. Total zinc production exceeded the third quarter last year, primarily due to ramp-up of the zinc expansion project.
Production was slightly lower quarter-over-quarter as Zinkgruvan batch processes a greater portion of copper ore in Q3 than it did in the second quarter, given the mining schedule. Similarly, nickel production was greater this quarter than prior-year quarter, though lower than the second quarter on lower feed grades at the Eagle.
Gold production increased over 15% in the third quarter compared to the second quarter on improved operations at Chapada and was flat compared to last year's quarter. Our metal mix remains predominantly leveraged to copper, with the copper generating 60% of quarter's revenue after pricing adjustments. Zinc and nickel contributed 13% and 11% respectively, while gold contributed 10%. Moving to slide six. Third quarter revenue increased 10% over the second quarter to nearly $650 million.
With the price decline for several of the metals produced over the course of the quarter, revenue was negatively impacted by $65 million due to prior period price adjustments. Slide 6 provides a summary of the realized metal prices for the quarter, breaking out the prior period adjustments, as well as the mark-to-market at the end of the quarter.
Ultimately, for the third quarter, we realized prices of just over $3 per pound of copper, $1.43 per pound of zinc, and just below $9 per pound of nickel, including pricing adjustments. At the end of the third quarter, approximately 90,000 tons of copper were provisionally priced at $3.46 per pound and remained open for final pricing adjustments.
As did over 31,000 tons of zinc at $1.36 per pound, and 5,500 tons of nickel at $9.56 per pound. Details of these pricing adjustments are outlined in the MD&A and financial statements. Turning to slide seven. Production costs totaled just over $1.2 billion for the first nine months this year and have been approximately 20% higher compared to the same period last year.
This increase has largely been a result of higher consumable costs, primarily Candelaria, Chapada, and Neves-Corvo, given inflationary pressures, particularly diesel and electricity, felt earlier in the year, and partially offset by the effects of favorable foreign exchange. The figure on this slide presents the relative impact of key drivers to total operating and capital costs by each operation, year to date.
Forecast cash costs remain consistent with guidance for Candelaria and Chapada, while Neves-Corvo forecast cost is trending above, considering mainly electricity prices and forecast by-product zinc volumes and pricing. Eagle's forecast nickel cash cost is also trending above guidance, considering mainly forecast by-product copper pricing, while Zinkgruvan's cash cost is trending favorably due to foreign exchange impacts.
Total capital expenditure are tracking well to guidance, with third quarter spend amounting to $200 million, while the spend for the first nine months is totaling $562 million. As Peter mentioned, we have initiated some foreign exchange hedges on our foreign currencies to protect operating costs and business plan. Turning to slide eight.
You can see here the company has entered into a series of foreign exchange hedges over recent weeks to provide better visibility on the US dollar funding requirements for our future operating costs and capital expenditure over the period from now to end of 2020.
The company has entered into forward swaps for euro and Swedish kronor, while it has entered into zero-cost collars for the Chilean pesos and the Brazilian real. The company has hedged over half a billion dollars worth of Chilean pesos and just below half a billion dollars worth of Brazilian real and euros respectively, and $234 million worth of Swedish krona.
These hedges cover a certain proportion of the estimated exposure in these respective currencies, and the company will consider to enter into further hedges for 2024 and potentially also for 2023 in due course, and assuming that the market conditions are favorable. Turning to slide nine. This is a summary of the third quarter key financial metrics.
Third quarter revenue of nearly $650 million was 10% greater than the second quarter, though below the same quarter last year, mainly due to lower realized metal prices, net of adjustments, offsetting higher sales volumes. We generated adjusted EBITDA of over $200 million, adjusted earnings of over $30 million, and adjusted operating cash flow of over $180 million. Details of the adjustments are broken down in our MD&A.
Beyond metal prices and broad inflationary pressures impacting these metrics compared to prior quarters are the Josemaria expense cost. Costs for engineering, drilling, and other related costs for Josemaria project were nearly $55 million for the third quarter of 2022.
We remain in a strong net cash position of nearly $180 million at quarter end, which includes our working capital build during the third quarter of $145 million. The company's liquidity headroom by the end of third quarter was approximately $1.9 billion. Slide 10 presents greater detail on the sources and uses of cash in the third quarter.
Before changes in working capital, the direction and timing of which is influenced by provisional pricing, our operations generated over $180 million of adjusted operating cash flow, net of nearly $55 million expense on the Josemaria project, as well as $58 million paid in cash taxes.
Ultimately, cash and cash equivalent at quarter end were approximately $230 million, a decrease of roughly $270 million, with cash flow from operations used to fund capital investments in our assets, the Chapada acquisition gold price contingent payment, share of the dividends of $50 million, and share buybacks of over $40 million. As of October twenty-fifth, the cash and net cash balances have improved to approximately $255 million and $205 million respectively. I'll now turn the call over to Juan Andrés to speak to our operations.
Thank you, Teitur. Great to be on my first quarterly conference call with Lundin Mining. Starting with Candelaria on slide 11, the operation had a strong third quarter, which is now four quarters in a row on plan or better performance for Candelaria. The operation produced over 37,000 tons of copper and approximately 21,000 ounces of gold at a cash cost of $1.97 per pound of copper.
Tons milled were slightly below target, while ore grades and recoveries were above plan. Better copper grades from phase 10 of open pit and Candelaria and Santos underground mines offset the relatively lower grade use of ore stockpile with Alcaparrosa mine suspended. I will speak more to the sinkhole at Alcaparrosa in a moment.
The cash cost of $1.97 per pound of copper reflects the year-on-year inflationary pressure on operating costs, mainly for energy and consumables, as well as the dominant impact of slightly lower quarter-over-quarter copper production. Capital expenditure of roughly $275 million for the first three quarters are trending toward the full year guidance of $400 million.
On the growth and exploration fronts, the prior initiatives of debottlenecking the Candelaria pebble crusher circuit are advancing with some delays due to some supply chain issues, and they are expected to increase mill capacity by Q4 2023. We have completed over 34,000 meters of drilling as part of our 2022 $15 million exploration program.
Much of this work continues to focus on growing and upgrading underground resources of the various mines where we have demonstrated success in the past. Lastly, as the company previously discussed, technical study work evaluating the expansion of the north and south sector underground mines from their current 14,000 tons per day to 26,000 tons have been finalized.
The study indicates a technically and financially robust project, though we're waiting clarity on potential taxation and royalty changes and require approval of the 2040 EIA ahead of a decision to advance the project. If we now move to slide 12, I will provide more details on the Ojos del Salado Alcaparrosa sinkhole. There has been no material changes to the size of the sinkhole since detection on July thirtieth, and mining operations at Alcaparrosa remain suspended.
Candelaria and corporate crisis management teams were formed immediately and have since shifted to their focus to technical and remediation work streams. We are continuing to communicate with all stakeholders as we continue to monitor, investigate causal factors, and cooperate fully with regulatory authorities.
We have been working collaboratively to collect and analyze geophysical, geotechnical, and hydrogeological data. One of the communications channels you can use to stay informed is the website set up at the link below, www.mineraojosdelsalado.cl.
Based on data collected on and analyzed to date, we believe there were multiple influencing factors, including our mining activities. In early October, we completed construction works to seal and isolate the Gaby sector to control ingress of water into the mine in the lower levels of Alcaparrosa.
Importantly, we're working with the authorities on solutions to minimize the impact on employment in the region and we are committed to the remediation regardless of the causal factors. I'm happy to answer any questions you may have during the Q&A, and will turn the call back to Peter to speak to Chapada on our drilling at Saúva.
Thank you, Juan Andrés Morel. Moving to Chapada on slide 13. Chapada achieved a significant step-up in production and improvement in cash costs as the operation rebounded from the weather impacted first half of the year.
The operation produced nearly 14,000 tons of copper and 24,000 ounces of gold at a cash cost of $1.92 per pound of copper in the third quarter. Production increased 35% for copper and 50% for gold over the second quarter as mill throughput, feed grades, and metal recoveries all improved. Year to date, production of 34,000 tons of copper and 52,000 ounces of gold is trending well to annual guidance.
The third quarter cash cost was greater than the comparable quarter of 2021, attributed to year-on-year inflationary increases in energy, mine consumables, and contractor costs, although benefited from the increased production volumes. Year to date, capital expenditures of approximately $6 million are on track to full year guidance.
Despite the slower start in the first half of the year, Chapada's exploration drilling is ahead of plan with over 52,000 meters completed to date. The high-grade mineralized area footprint of the Saúva system has further increased to approximately 1,200 meters by 1,000 meters, with assay results received during the third quarter.
The system continues to remain open in all directions. With the sizable and growing potential of Saúva, we will continue to focus our efforts on drilling and how to best incorporate it into future expansion scenarios. We aim to issue a maiden mineral resource estimate for our Saúva in early 2023 as part of our company-wide mineral reserve and resource update. Slide 14 presents highlight assays from Saúva drilling during the third quarter and shows where assays for completed holes are still pending.
As mentioned, the high-grade mineralized area footprint has increased to approximately 1,200 meters by 1,000 meters with the assay results received and continues to remain open. 6 rigs continue to test extensions mainly to the north towards Formiga and to the west of the discovery area.
We continue to be very excited about this discovery and believe it supports our view that many opportunities exist to increase the size and quality of our mineral resource base at Chapada. The potential implications this high-grade system may have for our ongoing expansion studies are being evaluated as Saúva and the area continues to evolve with drilling. I will now turn the call back to Juan Andrés to speak to Eagle, Neves-Corvo, and Zinkgruvan.
Thank you, Peter. Moving to Eagle on slide 15. The operation delivered a consistent performance again in the third quarter, producing nearly 4,400 tons of nickel and 4,000 tons of copper at a cash cost of $1.05 per pound of nickel. Year to date, production of approximately 13,000 tons of both nickel and copper is trending well to guidance.
Cash cost was higher than the prior year third quarter due to inflationary increases in operating costs and lower realized copper prices impacting the byproduct credits. Eagle's forecast nickel cash costs trending above guidance, considering mainly electricity and forecast byproduct copper pricing. We're continuing work to include the Upper Keel zone in our 2023 life of mine plan and the mineral resource and reserve estimate updates for release in first quarter 2023.
The aim is to be in development in the Upper Keel in 2023, with initial op production in the first half of 2024, further extending the mine life and improving the production profile of the later years. We are also continuing internal study work in the Lower Keel zone to possibly extend mine life further dependent on metal prices.
Year to date, 12,400 meters of drilling has been completed and three underground rigs continue to focus on further near-term life of mine extension opportunities. We now move to Neves-Corvo on slide 16. On Neves-Corvo, the operation produced over 7,000 tons of copper and over 22,500 tons of zinc at a cash cost of $2.69 per pound of copper in the third quarter.
Zinc Expansion Project ramp-up progressing with a quarter-over-quarter increase in zinc production on-grade throughput and metal recoveries. Current attention and focus are on achieving further operational improvements in new mining areas and material handling infrastructure needed to meet the annual guidance.
The 2023 production profile will be dependent on operating rates we can achieve on a sustainable basis by the end of this year. The third quarter cash cost of $2.69 per pound of copper was greater than that of the third quarter of last year due to higher cost of consumables, particularly electricity, and somewhat offset by a favorable foreign exchange rate. With cost pressures persisting in the third quarter and lower than originally forecasted by-product zinc volumes, annual cost is trending above guidance.
Year to date, total capital expenditures of nearly $80 million is trending toward the full year guidance of $125 million. Let's move now to Zinkgruvan on slide 17. The operation continues to deliver strong results. In the third quarter, the operation produced over 17,800 tons of zinc, more than 1,700 tons of copper and approximately 7,000 tons of lead at a cash cost of $0.18 per pound of zinc.
Both the mine and mill continue to perform well and in line with expectations. The operation is on track to deliver full year production guidance, while cash cost is trending favorably to guidance, primarily due to the foreign exchange impact and byproduct copper volumes. In October, we received the Dalby mining permit.
Exploration efforts continue with over 10,200 meters of drilling now completed this year as a part of the 20,000-meter 2022 program. Primary focus remains on increasing mineral resources at Dalby and between Burkland and Nygruvan ore bodies. Engineering for the sequential flotation project to further improve concentrate grades and metal recovery rates is progressing for construction in 2023. I will now turn the call back to Peter to discuss the Josemaria project.
Thank you, Juan Andrés. We are continuing to progress Josemaria through the next stages, including working with authorities in discussions on commercial agreements and securing additional environmental and sectoral permits. Engineering is estimated to be 33% complete at quarter end. We continue to work toward an updated technical report, which we now expect to be able to release to the market in the second half of 2023.
This is to include an update of cost estimates to be reflective of current conditions and the evaluation of potential scope changes compared to the plans of the 2020 feasibility study, as well as a new mineral reserve and resource estimate. Over 31,000 meters of drilling have been completed since the last 2020 estimates. We intend to spend approximately $300 million for engineering commitments for long lead items, pre-construction activities, and drilling.
Of this, nearly $200 million has been incurred with a little over $100 million expensed and the balance capitalized. 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.
I'll conclude with slide 19. Despite the challenging macroeconomic environment, we continue to have solid operational performance leading to strong cash flows and a strong balance sheet from which to grow. We remain well positioned both operationally and financially to deliver on our strategy of operating, upgrading, and growing a base metals portfolio that provides leading returns for our shareholders throughout the cycle. We look forward to updating you on our continuing efforts in the coming weeks and months. Thank you, operator. With that, I would like to open the lines for questions.
Thank you. Ladies and gentlemen, if you would like to ask a question at this time, please press star followed by one on your touch-tone phone. You will then hear a three-tone prompt acknowledging your request. If you would like to withdraw your questions from the queue, you will need to please press star followed by two. If using a speakerphone, we do ask that you please lift the handset before pressing any keys. Please go ahead and press star one now if you have any questions. Your first question will be from Greg Barnes at TD. Please go ahead.
Yes, thank you, operator. I'm wondering if Juan Andrés could talk a little bit more about the particular challenges you're facing at ZEP, the new ore zones that you're trying to develop and the challenges getting the ore to surface by the sound of it?
Good morning, Greg. Thanks for the question. It's been, of course, a challenge to bring the ZEP project into the nameplate capacity. We have faced some challenges in getting our material handling system to perform as planned. Right now we're working on several operational improvements regarding conveyors and hoppers, apron feeders, scrapers in the conveyor belts, ventilation, dewatering. A few items that we need to improve to ensure that we reach the nameplate capacity for the ZEP project.
It sounds like a lot of challenges, Juan Andrés, pretty much everything. Is there a particular bottleneck that's causing these issues?
It's the material handling system, so the conveyors underground, which building a conveyor underground is a challenging task. We're working hard on putting that system to work as planned, as the engineering specification set.
Okay. Peter, turning to you on Josemaria, obviously delaying the project feasibility study, I think is probably the right thing to do in this environment. Can you lay out the preconditions that you will need to have in place to make a sanction decision when the time is right for Josemaria?
Sure. You know, I don't know if I'd use the word delaying, but rather just continuing with all the work we're doing to get it to a level where we can make that decision. You know, I think I said earlier in the call, we're progressing through the basic engineering. We're currently at about 33%. Clearly, we need the number materially higher than that to make a decision.
David Dicaire, SVP of Josemaria, is working closely with Fluor. We anticipate the number will be, you know, arguably double that by the second half of next year, and we'll be putting out a new technical report at that time. That'll be a key milestone, if you will, and there's still some government items and permitting things that we need to get cleared up.
Just quite frankly, nothing, no big hurdles there, but just a few changes. Also we in parallel, you know, we have been maintaining conversations with a number of different parties, as I mentioned earlier in the call, just with respect to financing. I think if we could get that whole package together for the second half of next year, that would be the appropriate time to move forward.
What level of partner would you like to bring in, Peter?
I think we have to wait and see what the different proposals are. It's obviously two different ways you could look at it, right? You could pick a trading house, which is a common practice with projects like this. We've obviously maintained those conversations, but there's also a number of larger global mining companies that are struggling to find projects. I think they recognize not only this project, but the district is something that's pretty rare. It's gained a lot of interest with some of those people.
Okay. I'll leave it there and pass it on. Thanks a lot.
Thank you. Next question will be from Bryce Adams at CIBC Capital Markets. Please go ahead.
Good morning, Peter and team. Thanks for taking my questions. I've got two of them. Gregory asked on Josemaria and the update there. Might just follow on with that, and I guess maybe at a higher level, how much of this decision to push that feasibility work into the second half of next year, how much of that is engineering and technical versus strategic decision? You know, I think Gregory asked on it, but how much is it to line up with potential partners?
I think of it, you know, when we talk about engineering, as you said, we're at 33%. In order to make a decision moving forward, you need a higher number. That number keeps going up week by week. That's part of it. As you get that information, you'll have more material to present to those people that you may have been in discussions with. It is kind of, you know, they're interrelated, if you will.
Yeah. No, that makes sense. My second question on Chapada, so a much improved quarter over the, you know, the first half rainy period or weather impacted. Do you think that it's a strong set up here into Q4 and that Q4 can be a step higher compared to Q3? And then, can you remind me when the rain returns? Is that in December or it really gets heavier in January?
No, it seems like every year it starts earlier and goes later, so it does start in December. Given that we've had two years back-to-back of, call it one in a hundred year rains, it's quite frankly hard to predict, you know, Q4 until you really know the weather pattern. We've done a lot of things to prepare for the rain.
We've done a lot of dredging, put in some piping, drainage systems, things of that nature. We've also changed a little bit of the mine sequencing in case it does have a heavy rain. The last couple of years, there's a lot of different companies in this in Brazil that have been impacted quite heavily by the rainy season. We'll just have to wait and see. Hopefully, it's not quite as strong as the last two years.
Okay. Thanks very much. I'll jump back in the queue.
Thank you. Next question will be from Dalton Baretto at Canaccord. Please go ahead.
Thanks. Good morning, everybody. Peter or Juan Andrés, I'd like to start by asking your thoughts on the new proposal on taxes and royalties that the Chilean government presented yesterday. Thanks.
Maybe that we have a Chilean on the line. I'm calling in from LME, so I can't look across the table. Juan Andrés, would you like to address that one?
Sure, of course, Peter. Thank you. Well, after the referendum in early September, we have seen a significant shift in the priorities from the Chilean government, and one of them being the royalty and the tax reform. Recently, we saw that the government presented a bill to the Senate in order to get approved a new, much more moderate proposal on the royalty.
We're optimistic. We have seen some significant changes on the proposal, one of them being the ad valorem royalty, which is now being flat compared to a more of a scale and proportional ad valorem royalty. We remain optimistic that, eventually, by the end of the year, we will have more clarity on the royalty for Chile.
Great. Thank you. Maybe switching gears, and going back to Josemaria just very quickly. Peter, you talked about scope changes. Wondering if you can comment on what kind of scope changes we'll see in the updated tech report.
Yeah, we spoke earlier in the year that we were looking at a few different things. We made some changes to the tailings design. We've changed some of the crushing. We increased the power lines into the area. That's one of the things we're looking at. In addition to that, we're kind of doing some trade-off studies as we speak on grinding and flotation. Those are the main areas. You know, we wanna do whatever we can to optimize the operation, but you know, we are also taking into consideration today's inflationary environment. That would be the bulk of it.
Okay, great. Maybe I can squeeze one last one, and it's a similar question on Chapada. It looks like, the expansion is not gonna wait until Saúva is more fleshed out. I'm just wondering, is that gonna have any impact on kind of the scope of the project that was proposed?
We were looking at a number of different projects, so there wasn't one specifically that we said we were going ahead with. To your point, I think Saúva is probably turning out even better than we anticipated. As we speak, we've got 6 rigs on there, drilling right now through the whole trend. I think we mentioned earlier on the call that the mineralized area has increased to roughly 1,200 by 1,000 meters and still remains open. We'll have a maiden resource estimate out in the first quarter. You know, from there, we should be able to have a better understanding of how Saúva can play into Chapada.
One of the things we're looking at Chapada, in addition to the expansion studies, you know, we are looking at some opportunities for doing debottlenecking and optimization that could increase the production, but at a significantly lower CapEx. You know, we're weighing all those off against one another as we speak.
Great. Thanks, Peter. That's all for me.
Thank you. Next question will be from Orest Wowkodaw at Scotiabank. Please go ahead.
Hi, good morning. A couple of more questions on Josemaria. You're spending, I guess, $300 million this year. With the pushback in the technical report to the second half of next year, I assume that means you're gonna be spending sort of less than expected next year on advancing the project. Can you give us any idea on what that number could look like for 2023?
Oh, Orest, that's probably a tough one only because we're working through that as we speak. Actually, we do have our budget meetings in about three weeks. But to you know, to your point, it's highly likely the number will be lower because it'll still be going through the you know, the study phase. So most of the money that's being spent right now is on the camp, on the roads, you know, some earthworks. So it should bring that number down a little bit, but I'm happy to give you an update as soon as we have it later this year.
Okay. Just on the $300 million for this year, I think the disclosure talks about $180 million being capitalized. Does that imply then there's only $20 million gonna be expensed in Q4?
I don't know if we've given Teitur. Have you got the breakdown of how?
Yeah, maybe I can comment. Year to date is $200 million spent, but that includes the gains on the Blue Chip Swaps that we had so far this year, which is around about $68 million included in that number. Depending on what we do on Blue Chip Swaps in the fourth quarter, we are saying the total spend is $300 million, of which 180 is expected to be capitalized.
Does that imply there's $20 million left for Q4?
It implies.
Sure.
....$120 million for the full year is being expensed. In the third quarter alone, we expensed $55 million on the project and $40 million in Q2, so that leaves round about $25 million-$30 million, yes.
Okay. Okay, thank you very much.
Thank you. Next question will be from Lawson Winder at Bank of America. Please go ahead.
Thank you, operator. Good morning, and thank you for the update, Peter and team. I wanted to ask about the three-year guidance planning process. As you alluded to, you'll be having your budgeting meetings in three weeks, and shortly after that, we should be getting updated three-year guidance.
Just sort of thinking philosophically in terms of how you think about forecasting three years out, do you assume the current inflationary environment dissipates or do you assume that it continues to be a headwind over the next three-year period? Sort of any thoughts around how you factor that in would be really helpful. Thank you.
Not sure which one of us three should take that one. Well, one of the things I'll say is we're lining up our three-year planning. We're changing the cycle, so it's all lines up in Q1. Some of it was a bit off sequence. To your point, yes, we certainly take today's inflationary environment into consideration, I would say. I do think that we see the numbers longer term ratcheting down a little bit. That's also probably aligned with our commodity price assumptions as well, which are not that aggressive long term.
Okay. That's very helpful. Thank you. Then, if I could ask on Josemaria. When you think about strategic partners, and particularly in light of the fact that you mentioned, you know, big global mining companies as potential partners, is there a level of comfort with Lundin becoming a minority partner in Josemaria and sort of turning the operations over to maybe a much bigger, better capitalized mining company?
I mean, I think it's premature to make that call right now. You know, we're still working through the engineering. I think that's where our focus is right now. We have a pretty solid relationship with a lot of different counterparties, so it's natural for us to keep those conversations going. You know, when we get to that stage, we'll see what some of the suggestions are. I would imagine some bigger companies may wanna have a control position, but we'll have to address that as we move into 2023.
Okay. No, that's totally fair. Okay, thanks very much. That's it for me. I appreciate you addressing my questions.
No problem.
Thank you. Next question will be from Fahad Tariq at Credit Suisse. Please go ahead.
Hi. Thanks for taking my question. Just switching gears to the sinkhole. Has there been any communication on potential fines that you've received from regulators? There are some numbers that were speculated in the media, but I just want to know, from you if you've heard anything.
Fahad, this is Juan Andrés. I'll take the question. We have been informed by the SMA of potential fines. This is a process that will take some time, so our legal team is working on that and gathering all the information. For now, it's probably too early to put a number around the potential fines around the sinkhole.
Okay, fair enough. Then on the underground expansion at Candelaria, I know you mentioned that you're looking for taxation royalty clarity, and maybe some of that came yesterday. Are there any, you know, concerns that potentially from a regulatory perspective or permitting perspective, there could be pushback given, you know, what happened with the sinkhole? Any color there would be helpful.
We have not seen any impact between the sinkhole and the 2040 EIA. We keep working with government agencies with the EIA. We remain optimistic that once we finalize the questions, the last questions that we received, we will be filing the third addenda by early next year, and the process will continue. Again, we have not seen any impact, negative impact on the EIA.
Okay, that's clear. Then just a housekeeping item. There was a pretty significant working capital build in Q3. Is that expected to release in Q4?
Yeah. I mean, we would expect that to reverse over time and potentially during Q4. It's obviously we have booked around about $80 million of mark-to-market adjustments for pricing adjustments going forward, but that's based on the forward curve. So depending on what the actual prices are doing during Q4 and and potentially a little bit beyond that should reverse the working capital position, yes.
Okay, great. That's it for me. Thank you very much.
Thank you. Next question will be from Sandeep Peety at Morgan Stanley. Please go ahead.
Good morning, gentlemen. A couple of questions from my side. Firstly, on Josemaria. So you have alluded to the fact that there will be one year delay in the technical report. Can you also maybe provide some guidance? Is there any delay to development timelines or the CapEx that we should expect? Secondly, on Neves-Corvo, for the company to achieve the lower end of the guidance, it needs to increase the production by 43% quarter-on-quarter. How realistic is this number? Thank you.
Maybe I'll start with the Josemaria question. Yeah, I think initially we were trying to maybe get a technical report out by the end of the year. From our perspective, unless I was misquoted earlier, I don't see it as a one-year delay. Regardless, if it does get pushed out, say, six months in order to get the engineering up to the level that we're more comfortable with, we'll have to wait to see what the report delivers.
If we're at, you pick the number 65, 70% engineering, then we can figure out the path forward from there. You know, perhaps it pushes it out by six months, but it's really too early to say until we see the completion of that study. Juan Andrés, maybe I'll let you go for the Neves-Corvo question.
Yeah. As I said before, bringing the ZEP project into the nameplate capacity has been challenging. We're definitely seeing difficulties in achieving the annual guidance for zinc. As Peter mentioned before, we are working on our 2023 budget and the five-year plan. Once that process is finalized, we'll have a better line of sight to the progression on ZEP to reach guidance.
All right, thank you.
Thank you. Next question will be from Stefan Ioannou at Cormark. Please go ahead.
Yeah, thanks for taking my question. Just further on the ZEP. It sort of sounds like you're gonna push the expansion as hard as you can through year-end, and then wherever you're at at year-end, that will kind of dictate the run rate going through 2023. Does that suggest I guess the question would be, would that be sort of the steady-state at that point, or would you consider allocating additional capital to get it up to its original design nameplate to get it to where you originally wanted it to be?
As I said before, there are some items that we're adding as operational improvement. Once those items are finalized, we should be in a good position to continue at our nameplate capacity for ZEP.
Okay. Do you have any idea what the incremental cost will be to get there then or?
No, we don't have a final number yet. We're working on it.
Okay. Thanks very much, guys.
Thank you. Next question will be from Daniel Major at UBS. Please go ahead.
Hi there. Can you hear me okay?
Yes.
Yeah.
Yep.
Great. Great, thanks. Yeah, a couple of questions. Just one to clarify on the previous question on the CapEx or overall expenditure outlook at Josemaria into 2023. It's $300 million this year. I didn't quite catch. Is that expected to be lower than 300 or obviously lower than you previously expected? How should we think about it?
Yeah, we didn't state a number yet for 2023. When we come out with our 2023 guidance, we'll probably give better clarity on what that number will be.
Okay. All right. Thanks for that. Just thinking about the timelines for technical reports and updates on Chapada versus Josemaria. I mean, I think you previously indicated Josemaria would probably come before Chapada. That seems, I guess, less likely now. How should we be thinking about, as you see it now, the timeline for the update at Chapada following what seems to be good drilling results at Saúva?
Yeah, I think in Q1 when we have the new mineral resource estimate out for Saúva, we'll start to get a better grip on, you know, the path forward there. I think I mentioned earlier in the call that one of the items that we are looking at in addition to the expansion studies is something that would be more along the lines of just some debottlenecking and optimization, which could or should get the production up, and then maybe can tie into Saúva. If we do that, it'll be a significantly lower CapEx number, and therefore, you know, you could be doing both at the same time.
Is it still more likely to be second half of next year when we get a definitive update on Chapada expansion? Is that the right way of thinking about it?
You know, it could be earlier, quite frankly. I'm hoping that it'll be in the first half.
Okay. Very clear. Thanks. Just final one, just on the cost progression, obviously, there's quite a few moving parts in the unit cost. If we look at it on a sort of broader either sort of regional basis or company-wide basis, what sort of levels of sort of current, currency adjusted inflation are you seeing coming through now? And what's your expectations into 2023 around just sort of broader levels of inflation? Are you expecting some of these pressures to ease?
Maybe I can take that. I mean, if you look at the total costs for the group for the first nine months is around about $1.2 billion, and that's up roughly 20% compared to the same period last year. So that gives you an indication of the overall inflationary pressures we've seen. Obviously, most of that increase, I think, came through in the first half of the year.
Looking at numbers now, it seems certainly to be flattening out and potentially even dropping down a bit in certain jurisdictions. Really, the flip side to this is, of course, that we've had a weakening currency across the board. The dollar has been strong against all currencies. And as we have disclosed now in this report, is that we've entered into certain hedges to really capitalize that.
We see this as an opportune time, and we've locked in on the forward curve euros and SEK, and we've done collars on Chilean pesos and Brazilian real. In the event that those currencies weaken further, we will still benefit somewhat from that. I think that's a program we will continue to monitor as we move forward and potentially do more of these hedges as we look out in time.
Great. Thanks a lot.
Thank you. As a reminder, ladies and gentlemen, if you do have a question, please press star followed by one. Next question will be from Ralph Profiti at Eight Capital. Please go ahead.
Thanks, operator. Peter, I wanted to come back to Josemaria, and where exactly is this $300 million being spent? And I guess my concern is, you know, how are you gonna manage potentially some of the preconditions for sanctioning that you talked about earlier, kind of running into a queue for Argentina that could get pretty thick.
You know, thinking Taca Taca, Agua Rica just went through an ownership change, Filo Mining, Rio Tinto lithium strategy, all these things sort of in that 2024, 2026 period. Just wondering how that's gonna be managed from a procurement, construction and construction management standpoint.
Well, I think we're quite frankly not to say anything derogatory to other companies. I think we're quite a bit ahead of the queue on those other assets that you mentioned. I don't think we're gonna run to the problem from that perspective.
On the $300 million, again, most of it has been spent on engineering, setting up the camp, the roads, some of the infrastructure, early earthworks, a few long lead items. I do think our process is ahead of some of these other companies. You know, I do speak to them. A lot of us at our projects in Argentina, you know, we have a pretty good open line of communication, so we know where each other sits.
Thanks. Juan Andrés, I wanted to ask you about, you know, coming to the sinkhole. Can you talk a little bit about the dewatering infrastructure that's in place? Could we potentially see more required investment in that, which is a separate issue apart from some of the sanctions and fines that potentially we could see in the courts when the time is right?
Yes, that's a good point. We've been working very collaboratively with the authorities, and we're doing all the studies and engineering to conduct a remediation program for the area affected by the sinkhole. That plan will definitely involve some dewatering and some additional works. As we continue making progress on that, we will also know better the permits that will be required to implement that remediation, and there will definitely be some capital expenditure involved in that program.
Okay. Yes, that's helpful. Thank you. Thanks, Peter.
No problem.
Thank you. Next question will be from Lawson Winder at Bank of America. Please go ahead.
Hi. Thank you for taking the follow-up. I just hadn't heard the question yet, but just on your dividend and return of capital philosophy going forward, and clearly with a $42 million buyback and maintaining the dividend in Q3, I mean, I think that remains very attractive.
You highlighted the attractive dividend yield, and the return of capital yield is even higher. You know, in balancing that with the CapEx needs of Josemaria, potentially Chapada going forward, I mean, does this level of buyback activity and the current dividend remain a core strategy, or is that something that you think you'll need to remain flexible on?
Yeah, I think the base dividend is something that we look to keep intact. I think it's attractive to investors to see a return to capital throughout the cycle. We're gonna keep the base dividend there. We've always been kind of opportunistic, if you will, on the buyback. As we have a better line of sight on our cash outlay for 2023, we'll determine whether we can continue to be opportunistic on that buyback.
Okay. You'll remain flexible, I guess, would be a fair summary?
Yeah, we remain flexible, but I definitely think the, you know, the base dividend's gonna remain intact.
Okay, perfect. Thanks very much, Peter.
Yep.
Thank you. At this time, gentlemen, we have no further questions. Please proceed.
Well, thank you, operator, and thank you, everyone for joining the call today. It's been a hectic quarter for us, but I think our sites are doing a fantastic job in light of a lot of the challenges that are going on globally. I also just wanna thank my two colleagues who have joined the call today as their first call. Juan Andrés and Taylor, thank you. Thank you everyone for taking the call from an investor and analyst perspective.
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending, and at this time, we do ask that you please disconnect your lines.