Antofagasta plc (OTC:ANFGF) Q2 2022 Earnings Conference Call August 10, 2022 2:00 AM ET
Company Participants
Andrew Lindsay – Director of London Office
Ivan Arriagada – CEO
Mauricio Ortiz – CFO
Conference Call Participants
Ephrem Ravi – Citi Research
Ian Rossouw – Barclays Capital
Abhinandan Agarwal – Deutsche Bank
Ioannis Masvoulas – Morgan Stanley & Co
Jatinder Goel – BNP Paribas
Daniel Major – UBS
Jason Fairclough – Bank of America
Danielle Chigumira – Macquarie
Operator
Thank you for joining the Antofagasta Q&A session today. [Operator Instructions]
I will now pass you over to Antofagasta host for the event, Andrew Lindsay.
Andrew Lindsay
Good morning, good afternoon, everybody. Welcome to our Half-Year Call. I’m here today with Chief Executive, Ivan Arriagada; our CFO, Mauricio Ortiz; and our Vice President of Corporate Affairs and Sustainability, René Aguilar. Ivan will start with a short introduction and then we’ll move straight into Q&A and we’ll wrap it up in a nice time.
Ivan, over to you.
Ivan Arriagada
Thank you, Andrew, and welcome to — everyone to our results, half year results. Thank you for joining the call. So you have presumably by now looked at the numbers that we released and the results, and I’ll just provide some introductory comments as context.
I think during the first half of the year, our results have been impacted by a change in the copper price that we experienced especially towards the end of the first half. And also by lower production at Pelambres, which is essentially explained by water restrictions which we had anticipated. And also by the incident at the pipeline, which is now behind us. We also in our program had contemplated lower grades at Centinela.
So that explains why our results, when you compare them with the first half of the prior year are below As we look now into the second half, however, we are expecting to see an improvement quarter-on-quarter on production, as the restriction on water at Pelambres is reduced (ph) and also as grades improve at Centinela.
Now despite the challenges that we’ve observed in the first half, we think that we have a favorable outlook for the second half from a position of strength. We have a very solid balance sheet. And again, almost without net debt our net debt to retail ratio was 0.13 time, so very low. We have a robust portfolio with options to grow. And we’re finishing the project at Los Pelambres, which involves the construction of a desalination plant, which will be ready in the fourth quarter and also added milling (ph) capacity.
And we look forward also next year to take into the board, the option of growing the other big district which is Centinela with a new plant and a new development for which we have provided an updated capital cost estimate, which we will talk during the session today. So positive outlook from that point of view in terms of the optionality to grow, our ability to develop, copper — our copper resource base, which I think is good news going forward.
Also to highlight during this first half, is that from April on, we’re running 100% on renewable energy, all our mines and plants are sourcing energy from renewable sources. And I think this is very much consistent with our view that copper plays a key role in the energy transition and that this is also a [indiscernible] to change our own processes.
So having said that, I will now turn it on to Q&A. As I say, we look forward to a different half two for this year based on the fact that we will not have water restrictions and have higher grades at Centinela.
So with that, I will pass it on then for Q&A. Mauricio, Rene and myself are here to address your questions, and we’ll be happy to take them on from now.
Question-and-Answer Session
Operator
For the Q&A section, we will be utilizing the raise hand feature. [Operator Instructions] Thank you. Our first question will now come from Ephrem Ravi. Ephrem, you can go ahead and unmute, entering the camera on and ask your question.
Ephrem Ravi
Yeah. Thank you. Two questions on Centinela. Firstly, can you give a sense as to what is driving the $1 billion increase in CapEx estimate between 2020 — 2015 and now. How much would you say is general cost inflation versus the new water system versus new regulatory requirements, et cetera. And secondly, on Centinela project again, would it be fair to say that the project will not go to the board till there is clarity on tax and royalty regime post the referendum, given that you’ve indicated 2023 first half as a timeline for putting it to the board?
Ivan Arriagada
Thanks, Ephrem, for the question. I think on the capital estimate increase there are three basic reasons that drive this change. One is the general update on inflation and escalation of commodity prices. So we have brought the estimate to the very latest update on prices and inflation.
The second element, I think it’s a very important one. We have included some design improvements as we sort of been the building, the engineering on the project. And therefore, these projects includes much more in terms of autonomy, remote operations and also a different grinding configuration, in terms of using high pressure grinding walls.
So there are design improvements included embedded into the new design and essentially. it means that this is a project where we will spend slightly more CapEx at the front end for the benefit of lower operating costs later on. As this moves essentially Centinela or has the potential to move Centinela to the first part of that. So we think it’s a good return for the capital on the basis of the cost improvements so it delivers.
And the third element is that this has been largely derisked compared to the prior estimate in the sense that we have a very advanced level of detailed engineering finished for this project at this stage and therefore a very detailed execution, which also has been updated for the most recent learnings out of, for example, commit and help to construct projects with some of the challenges posed by higher absenteeism or risks like COVID where they could come back. So we think that we’ve thought from that point of view a much robust project in that sense. Inflation and escalation is about half of the increase in CapEx estimate and the design improvements and derisking makes the balance.
Now regarding your second part of the question, we expect to take this project next year. The basis is that we think it’s a great project to move ahead on the grounds that it allows us to continue to develop the district at Centinela with delivering higher production. Now we want to be able to obviously take that discussion and conversation with the full set of assessments that are required.
The royalty of fiscal regime applicable is an important part of that and information. And therefore, we would expect to be able to integrate that considering the sort of timings that have been announced by the government instead of clearing up the royalty discussion before year end. So it it does, come in at a time in which, we therefore, should be able to have that information, which is a critical part of the assessment also for these investments.
Ephrem Ravi
Thank you.
Operator
All right. Our next question will come from Ian Rossouw. Ian, please unmute yourself and turn your video on and ask your question. Thank you.
Ian Rossouw
Hi, guys. Can you hear me?
Ivan Arriagada
Yes. We get you well.
Ian Rossouw
Thank you, Ivan. First question, just on the follow-up on the Centinela second concentrator expansion. Could you maybe give us a updated CapEx for the pipeline within the $3.7 billion and confirm whether you’re still looking to syndicate that to a third-party? Maybe as part of that also, whether you’re looking to sell the existing infrastructure as well or maybe just an updated estimate for that?
And then just on this $3.7 billion spending, I guess, net of syndication. How should we think about the annual spend of that project over the next three years? I think your previous target was to get to the full capacity in 2026, which was part of your 900,000 ton copper production targets. I just seems like there’s a slight delay. How should we think of that as well in that context?
And then just, I guess, second question, just on the financial side, you had a big working capital inflow just how we should think about that in the second half. To what extent do you think that should reverse in the second half? And then also maybe on the cash taxes, it seems like there were some catch up payments just — what’s the expectation for the second half sort of at current prices? Thank you.
Ivan Arriagada
Thanks, Ian. So I will ask Mauricio to take the working capital and cash tax question and let me address the Centinela question. So on the water, as we discussed before, we have been looking at this option of being able to divest the water system and then also allow that the expansion of the water system be carried out by a potentially a third-party. We have continued to progress that alternative to a level in which we got some indicative offers and we expect to close that bidding as such before the end of the year and therefore come together with when, it’s a time to sort of make this decision.
Now, we think that is something that we would do if we find it attractive. So it’s value accretive under sort of risk allocation is adequate. But we think it’s an opportunity — may provide a good opportunity to also reduce some of the front end capital spend and recycle capital into the second concentrator at Centinela. Now how much of that exactly is embedded in the 3.7 billion, I’ll ask Mauricio to comment on that specifically. But it’s a significant amount that we may be able to deal differently than a standard investment form. So I’ll pass it on to Mauricio to address that as well.
I think on the timing, we’re still — if the project gets approved during the course of next year, we still expect that this will be consistent with being able to achieve the project to first production, late 2025, early 2026. So that’s the execution plan. We’ve continued to work on the engineering, and therefore, this time has been spent basically developing the detailed engineering necessary in any events to do the project. So it’s time that has been invested in progressing the studies to a level in which the execution should run smoothly.
Remember that this is a project that essentially enables us to increase production by 170,000 tonnes of copper equivalent per year. Therefore, it does provide a significant increase in our copper production, it has an extensive life and it allows us basically to monetize a significant resource base, in the Centinela District at the time in which we think copper will be in shortage. And therefore, it’s a high return project, a very interesting prospect for us to continue to develop. So I will ask Mauricio then if you can address the — how much of the CapEx is the water system expansion? And then your questions on working capital and tax. Mauricio?
Mauricio Ortiz
Well, thank you, Ivan. Hi, Ian. Good to see you. Well, regarding the CapEx on the water system. So let me put it in this way. We are presenting an update of 35% in comparison with — from the general point of view, we are updating the figure from $2.7 billion to $3.7 billion. So that is roughly speaking, 35% of the total amount — 35% uptick. So I will say that, as Ivan described, most of the big chunk of this number has driven by escalation and inflation and also advanced detailed execution plan.
So that is the significant amount. So — and there is also some design improvements, but the design improvements are mainly in the concentrate, not in the banking system. The banking system remains equal in terms of design. So basically, if we take out and — as a rough number, we said in the past, something like 500 million for the water system. So basically, with the update included in this or the additional cutting included in this uptick is around additional 25% to 30% increase, on the base of the 500 million that we guided initially. That to answer the water piece.
So regarding to tax charge, I’ll put it in this way. So our tax charge for the period — for the first half was, roughly speaking, $250 million to $280 million. So you find out that we have a higher tax outflow in comparison with the tax charge of the period. That is mainly driven for the settlement of 2021. So basically, we pay 330 million in settlements for the 2021 tax period. Just to remind you how the system works in Chile. We have this monthly installments or monthly payments every month, and we adjust them on a quarterly basis.
So basically, what drives that difference of 330 million was the different — the price difference between the third quarter and the fourth quarter in 2021 and that settlement, we paid it in 2022. So going forward, trying to directionally answer your question, going forward, as far as we don’t have a big swing or bid increase or decrease in the copper price, our tax charge will be similar to our tax outflow. And that is a good way to address the modeling going forward.
Regarding the working capital, well, maybe there are two reasons for the decrease in receivables. The first one is we need to factor in the lower production. So at the year end, so for example, in December, we sold something like 79,000, 80,000 tonnes of copper. In the end of June, we sold 31,000 tonnes of copper sold. So that represents the main driver behind the change in the working capital. And the balance of that, that is roughly speaking, 60-something, 65%. And the balance of that is mainly driven because of the different price, remember that in December, we had a price of $4.40 per pound, and we closed the first half of the year with $3.75. So that are the two main reasons behind the change in working capital.
And once again, just to give you some directional indication how this is going to look like for the second half. For the second half, we have — we are planning to increase our production. So that is something that you may factor in, in your forecast. And the other one is that we are going to reduce inventories as we sold the concentrate that we stocked by in Pelambres concentrator. So I will say that those are the main drivers for the working capital going forward as payables will be in the same space for the rest of the half.
Ian Rossouw
Thanks. Sorry, maybe just 1 follow-up to Ivan. Just on the scope changes. Could you just talk about the 95,000 tonnes per day versus 90. Obviously, you’ve changed the milling grinding to another technology. But within that, I noticed the copper production as — equivalent production has fallen from 180 to 170, maybe just the reason for that? And also, what is the copper production part of that within the equivalent figure, please? How has that changed from the previous feasibility to now?
Ivan Arriagada
So on the — yes, we have increased slightly the throughput capacity, which that is an upgrade in design in the sense that it gives us added flexibility especially to deal with variability in the hardness of the ore. And it’s also, I guess, consistent with the fact that using high pressure grinding rolls coming in sizes, which fit better than 95,000-tonne capacity. So we think that’s a good improvement. The plant will have more flexibility, which allows us to better manage variability or hardness and that’s the positive.
Now in terms of the copper — component of the copper equivalent production is up and Mauricio, you may have those numbers at hand, but it’s up compared to what it was before. So there’s a slight decrease in the byproducts, but the rest is actually the copper is up, given that we have a higher throughput contemplated in the 170. So Mauricio, you may have the exact numbers here, but that’s the composition. Copper is up and the byproducts are slightly down in the copper equivalent equation.
Ian Rossouw
Okay. Thank you very much.
Mauricio Ortiz
I don’t know — well, just to supplement what Ivan said and just put some numbers around the Ivan’s answer as he requested. So we have the 170 tonnes of copper equivalent. And we have something like 140, 000 tonnes of copper, 4,000 tonnes of moly. So we have — that is the base metals. And then we have the precious metals, which is gold of 120,000 pounds per year. This is the split.
Ian Rossouw
Thank you.
Operator
All right. Our next question comes from Abhi Ag. Abhi, go ahead and unmute yourself, turn your camera on and ask your question. Thank you.
Abhinandan Agarwal
Hey, good morning and thanks a lot for the questions. A couple of questions, a follow-up on Centinela. So the question is if the effective tax rate goes up to, say, 50%, which the initial proposal does suggest, it actually suggests a bit higher. Does the project still meet your internal threshold? So — but the question I’m asking is what sort of tax assumptions have you baked in — baked into your project? And the second part of this question is, what sort of stability agreement would be associated with this — with Centinela second concentrator?
Ivan Arriagada
Okay. Yeah. On the effective tax rate, I mean, that’s — that will depend on the outcome of the royalty discussion, which is taking place right now. We would expect clarity on that by year end. I think the view that we have on the proposal are all on the tax rates, which exceed 50%, is that those certainly make investments in projects much more challenging. And therefore, they do have an impact on the competitiveness of the industry locally. So we — that’s something that we conveyed that message.
And I think there is concern in the industry about the tax rates, which are being contemplated in this new proposal, especially since it could have an impact on future investments. So we will look at it carefully, and we think that moving from 38 in excess of 50 will make — there’s another project challenging. And therefore, we would have to see what that means in terms of the final proposal, which gets approved by the — by Congress when this process is finished. I think Chile has — and the industry has the potential to continue to invest and grow and our project is a good example.
It’s very important, therefore, to keep the effective tax rate at a level in which these projects remain attractive. So we will have to see what the specific outcome of the reform is, we don’t know. But certainly, at the rates that are contemplated in the current proposal, EVs and other projects will be — will have another more challenges, which we will have to look at. So we expect to be able to have a clear answer on this one. This is clear and sort of we have this conversation next year as we move into the time in which this project gets considered.
With respect to the stability agreement, those vary between different sites. In the case of Centinela, we have a stability agreement that takes us to 2030. And therefore, partially the life of this project is — falls within that stability regime, so 2030 for Centinela.
Abhinandan Agarwal
So a second concentrator will be covered until 2030, if I got that correctly?
Ivan Arriagada
Yes, it’s within that envelope of protection provided under the current stability. Now this is a project that if we undertook construction in — or started construction next year, we expect to be producing late 2025, early 2026. So that will sort of be the time frame in which we would get some revenue out of that — of the project.
Abhinandan Agarwal
Got it. Very clear. And one more question, please. So you mentioned that the higher CapEx does lead to lower OpEx down the line because of the design changes you’ve introduced. Can you quantify that — can you quantify how much we cash — how much unit cash costs could come down by because of these changes versus your previous plan? Thank you.
Ivan Arriagada
Yes. I mean it’s — I would say that this allows us basically to play Centinela in the first quarter and I think with the prior project, we were at the bottom end of the second quartile still. So it’s that sort of percentage change in both moving from one quartile — the bottom of the second to the top of the first. And I think that’s a big improvement. One of the key features is the low cost of energy and at the plant, and therefore, the processing cost which in our estimates come down over $1 per tonne of ore processed. So without giving you specific numbers because it’s still something that we’re working on. But this basically allow us to think of Centinela as moving to the first quartile whereas the project as it was configured before, was not achieving that same outcome. We’re still in the sort of bottom of the — of the second quartile.
Abhinandan Agarwal
Thank you very much.
Operator
Hi. Our next question comes from Ioannis. Ioannis, if you could please turn on your video and audio.
Ioannis Masvoulas
Good morning, and good afternoon. Most of my questions have been answered. Just a couple left, actually. Again, on the Centinela expansion, just again on cash costs. Can you perhaps provide a range when we talk about first cost quartile because obviously the cost curve has been moving a lot over the past 12 months. So it would be useful to have some sort of range. And when you talk about top of the first cost quartile, what happens if you were to sell down the water infrastructure, would that tip the asset back up to the second cost quartile?
Ivan Arriagada
Yes. Okay. Thanks for the question. So when we talk about first quartile, we’re talking of costs, which are below $1 per tonne, net cash cost — at or below $1 per tonne. And the — in the case of the water system, we — that would add, obviously, operating cost to the plant. But not in a way that would move the plant to a different position in the cost curve. That’s our assessment. Now those term needs yet to be fixed. That’s something which we have not fully rolled out in terms of the numbers as we’re sort of in the process of discussion with potential interested parties. But the way that we’re looking at the numbers today, and this is, I would say, on uncommitted terms, but on provisional terms is that this would not move the company to a different quartile. So we will still be in the first quartile.
Ioannis Masvoulas
Okay. That’s clear. And one more point to clarify here.
Ivan Arriagada
Let me just add that one obviously of the key components there is energy cost. And I think one of the key features is that we’ve been able to secure very efficient energy cost as we sort of move the company from fossil fuel into renewable, which in Chile is mostly associated to solar. So that is a big advantage that we’re getting and — which will have the full benefit of in the DMC.
Ioannis Masvoulas
Understood. And one more point to clarify. When you talk about first cost quartile for Centinela, is it just for the second concentrate or are you talking for the entire asset?
Ivan Arriagada
We’re talking for the DMC for the project.
Ioannis Masvoulas
And then just the project, great. And then just the last question from me on the bond issuance, you announced earlier in the year $0.5 billion at 5.6% to 5% interest, which looks fairly expensive for a company that disclosed the net cash. Can you elaborate on the reasons that you have to issue the bond? And is it about optimizing your taxes by paying through the PLC or is there any other reason for that?
Ivan Arriagada
Yes. Mauricio, you want to take that question on the bond issues?
Mauricio Ortiz
Well, basically, as you know, we opened the company to the DCM back in 2020 in very good conditions. And I think that was a great benchmark that we settled back in 2020. Now regarding the issuance that we did back in — back in May 2022, yes, we realized that was not in the same situation at the same condition as 2020, what was fairly market conditions by then. So thinking in the, let’s say, drivers to do that. So basically, we are now committed and diversify the source of funding, building the curve on a regular basis. So potentially in the future, you will see more papers of Antofagasta coming online and that is one thing.
And the other one is in some way to refinance and avoid debt walls (ph) going forward. So basically, we are reshaping also, not only open it to the DCM but also reshaping our maturity profile. So from the strategic point of view, for us to make a lot of sense, do that, diversifying source funding and having a much more stable and affordable maturity profile. So that were the main drivers.
Ioannis Masvoulas
Understood. Thank you very much. Thank you.
Ivan Arriagada
Thank you, Ioannis.
Operator
Thank you so much. And the next question is from Jatinder Goel. Please don’t forget to unmute yourself and turn your camera on.
Jatinder Goel
Good morning and good afternoon. Just starting with Centinela second concentrator. Is there a case of delaying the project from its current indicated time line rather than running the risk of locking in peak inflation on the CapEx side? What’s your view? And have you contemplated that scenario as well? What does that do?
Ivan Arriagada
Yeah. We think that certainly, the updated estimate includes the latest update on inflation and costs. However, the way that most of these is contracted is in such a way that we’ve got what we call unit price contracts. And therefore, if the underlying commodities were to move in our favor that we would be able to capture most of that benefit going forward. So that’s the way that we’re sort of thinking contractually about the project.
And on the other hand, when we look at the labor market locally, the big projects in Chile are now finishing QB2, our own construction work at Pelambres. So at a time in which the economy will be contracting, we think there may be more flexibility in the labor market to be able to pick up that opportunity. So from those two angles, we think that rather than trying to time specifically when we would — when has inflation peaked that we’ve built into the contractual arrangements. Flexibility to take advantage of some of these commodity prices if they come down over the construction period of the project and therefore, that we’re protected from that point of view.
I think that’s the way that we look at the project rather than try to time exactly when might inflation come down. I think for us, it’s important time-wise, to get clarity on — I mean, on the studies, engineering that we have to finish and complete in the project and also the fiscal terms applicable, will be quite important with respect to the specific time making, which we would make this decision.
Jatinder Goel
Thanks, Ivan. That’s very clear. On capital allocation framework, company doesn’t list buyback as one of the possible options. Is that a disbelief in that tool or are there any other reasons why Antofagasta wouldn’t like to do a buyback in the event of cash availability? Obviously, it’s not something near term because there is a CapEx profile. But there seems to be a very clear preference for just dividends depending on your payability but not to go for buybacks.
Ivan Arriagada
Yeah. I think we’ve — yeah, we have — one of the things that I think are very a robust attribute of these companies that we — Antofagasta is that we have a very consistent dividend policy embedded in our capital allocation. And I think we have followed that through the cycle, and we’ll continue to follow it in a very consistent way. And therefore, that’s a very core element of Antofagasta. Now we — in terms of buyback, there are some, I would say, disadvantages when we look at it compared to applying dividend given the sort of ownership structure that Antofagasta has. And I think that’s the main reason. But I think from a dividend point of view, we have a sound dividend policy and that — it’s been the sort of key way of returning cash to shareholders, and I think it will continue to be that way.
Jatinder Goel
Excellent. Just last question on Chilean constitution. If the new constitution gets approved, is there an implementation time line and the resources that will get channelized into that direction, potentially impacting the permits that the mining industry needs. Do you think a four vote will be adverse versus retain the current constitution vote, which way do you think will it work out better for the mining industry?
Ivan Arriagada
Yeah. Look, I’m not going to give a specific opinion on which vote should prevail. I think the — I think the referendum is due to take place on the 4th of September. I think we will — we have to wait until that stage. I think from the point of view of what we’ve seen in terms of the draft constitution, it certainly — there is less certainty provided in terms of the applicable regulatory framework for business generally and for mining, particularly compared to the existing constitution. And that means basically that the legislative work that follows in terms of the specific laws that are applicable and the need yet to be developed are going to be extremely important in the case that the new constitution is approved.
And therefore, that uncertainty is important that is addressed promptly, I think, in that scenario for the purposes of ensuring that investment can — and continues. So I think that’s the key element for us. There is less in the constitution about the applicable framework for mining, then there is in the current one, and that creates uncertainty, which needs to be resolved subsequently through legislation. And that will have to run its own period, and that will depend on the outcome of the referendum. So that’s the situation with respect to the referendum and where it stands, and we’ll have to see what happens on the 4th of September.
Jatinder Goel
Thanks, Ivan and team. All the best.
Ivan Arriagada
Yeah. Thank you, Jatinder.
Operator
Next question will be from Daniel Major. Please don’t forget to unmute yourself and turn your camera on.
Daniel Major
Hi. Sorry, my Zoom is a little bit slow switching on, hope you guys are well. Yes, most of my questions have been asked, but I had two follow-ups. So can you give any update on the Pakistan settlement? Any sort of indication on timing or tax rate is the first one?
Ivan Arriagada
Yeah, nothing especially new, Daniel, on that. I think we are — we have an agreement and that sudden conditions need to be fulfilled by next year when if fulfilled payment would happen. And we’re basically seeing that, that is evolving according to plan, and our teams are working for that — those conditions to be in place. So that’s where we are. No specific news, but I think that’s good news in the context. So we’re continuous as planned.
Daniel Major
And just to follow up that. In terms of the use of proceeds, is it right to assume this just go into the broader funding of the normal run rate of dividend and financing, assuming you go forward to Centinela project rather than viewing this as a sort of special dividend item?
Ivan Arriagada
Yeah. I mean, look, a decision would have to be made at the time. But I think the way that we look at this is through our capital allocation framework in the sense that this is a cash inflow, which will go into the general cash generation in the period. Obviously, it’s an extraordinary amount, which is unrelated to the sort of ordinary course of sales, and therefore, would be looked in the balance of that capital allocation decision making. And if you recall, we use that cash to fund our CapEx, sustaining CapEx. We use it to pay our minimum dividend of 35%. And then what’s left out of that will normally return to shareholders unless we have a project. And in the case of the projects, what we’ve done mostly, is fund them at the company level with debt. So it would follow within that logic. So that’s the way that we would look at it.
Daniel Major
Great. Thanks. And then just final one, sir, maybe slightly higher-level question, but we’ve seen some interesting M&A in the space and one of your peers probably in the name (ph) happen to make a decision about what long-term copper price they feel is appropriate to potentially get a transaction over the line. How have you been looking at that progression of the long-term copper price needed to get your projects to the level of return that you need in the current inflationary environment? Have you changed those assumptions at all?
Ivan Arriagada
Yeah. Well, we want — our assumptions are for internal use. But if you look at consensus, I mean, what’s been happening, certainly that we’ve seen an increase in the long-term consensus of copper price. If it used to be 12 months or 18 months ago, closer to $3, it’s probably consensus is talking now a number, which is probably at 350 or slightly above that. So there is a movement in how the market is looking at the long-term price.
And I think that’s consistent with the fact that we see that this is a market which is moving into a situation of shortage. I mean if you look at the demand growth from electromobility and from sort of the energy transition, more copper will be required, especially up to 2030, and that just isn’t sufficient projects which can be identified to supply those — that copper requirements. So certainly, the direction in which we think the long-term price is moving is consistent with what the fundamentals of the market share.
And I think from that point of view, copper is a very important and critical commodity going forward. The current price performance, I think, very much driven by short-term factors and therefore, to some extent, be coupled from the sort of long-term fundamentals. But I think if you look at the long term, we think that there will be increasing shortage and that would have to get reflected in the copper price, just to reflect the reality of the energy transition and the commitments that are being made with respect to copper consumption.
Daniel Major
Great. Thanks for the [indiscernible].
Ivan Arriagada
Thanks, Daniel.
Operator
Thank you. Next question will be from Jason Fairclough.
Jason Fairclough
Okay. [Technical Difficulty]
Ivan Arriagada
We can’t hear you very well, Jason.
Jason Fairclough
Hello.
Ivan Arriagada
Hello. That’s better.
Jason Fairclough
Okay. Better now. Okay. Good. Sorry I have to do with this my phone, because our [Technical Difficulty] blocking your system. Two sort of big picture questions for me. First, on Chile, I mean, historically, the group has tried to move outside Chile with limited success. I mean, obviously, Pakistan maybe it works out okay in the end because you get paid, but it really didn’t work out. And then Twin Metals, similarly, I think there’s a lot of resistance to that project. But what’s going on in Chile make you saying again about spreading your wings and going beyond your home land as it were, right? Secondly, just on water and again, a bit of a think in terms of business planning about having zero access to terrestrial water?
Ivan Arriagada
Yeah. Okay. So I got you a bit cut, but I’ll try to pull the pieces together to get your question and answer what you — so on the — on our intent of strategic interest in growing for copper. I think we very much remain committed to a strategy of looking broadly at the copper beyond Chile and therefore, if we find interesting opportunities, we want and are looking at it in that way. Now that’s why — I mean — but we all know that it’s difficult to find assets which are attractive and properly valued. And that’s been a story which has been consistent for the industry. That’s why a lot of our effort outside Chile is focused really on exploration, which — we have now an exploration team in Peru.
We have an exploration team in Canada, which is covering North America, both the states and Canada. So that effort will continue, and it’s very much geared towards finding opportunities in a broader footprint than Chile, which we think would be a great way of continuing to grow. So we are absolutely committed to that. But at the right — I mean, for the right targets which we know are challenging.
Now in the case of Twin Metals, I think that’s an interesting one because we — obviously, it’s a project that’s challenged as most projects have been and are in the U.S. We think that we have a very good prospect there of developing a mine — an underground mine with a very limited environmental footprint and with very high standards. So we will continue to pursue that. I mean we think that, that’s something that we should continue to look at and to fight for.
And we’re seeing a swing in the opinion slightly emerging in the U.S. with respect to the importance of self-sufficiency for the purposes of national security around critical metals. So to the extent that, that takes hold, we think this project and others may be looked at in a different light and that’s a positive development. Now we’ve got to be persistent. We’ve got to be consistent and committed, and that’s what we are thinking of as we look at these projects and others outside. So that’s a very important, I would say, feature of how we look at growth opportunities.
Now in terms of water, we will be, by 2025, if we complete the expansion at Centinela almost 90% running on water from the sea. And I think we see that as a trend that will continue to move in that direction when it relates to big mining companies. So we’re committed to move in that direction — in that sense. Now we think that may not be the solution for every single mine, some mines have shorter life, are smaller in nature. And it may be technically and from an environmental point of view, sound to be able to continue to use continental water. And in those cases, we think, therefore, that shouldn’t be an issue. But certainly, we see ourselves moving in that direction, and we have a clear line of sight that by 2025, 90% or more of the water that we use will be from the sea.
Jason Fairclough
Thanks. Could I just follow up on that, Ivan. So how do we think about water at Zaldivar, specifically?
Ivan Arriagada
Well, in the case of Zaldivar, there are two things. One, we look at the ore body there with the potential to extend the mine life through the development of our primary project, which will take mining beyond the current mine plan probably for another 15 or 20 years. And what we’re asking there is for a permit to be able to continue to extract continental waters until 2029.
So a limited period of time, which will allow us basically to bridge into a potential primary ore body. So the way that we look at Zaldivar, we think we have a robust case technically and environmentally to be able to continue to extract water from continental sources for the limited period of time that we are requesting between 2025 and 2029 and that would provide a bridge in the case that we do the subsequent primary ore body development later on. So that’s the way that we look at water at the level.
And as I say, we think that our permit is solid in the sense that we’re asking a permit, which is well below the natural recharge of that aquifier for a limited period of time and that would allow us basically to continue to operate and then potentially bridge into an expansion or further development down the road, which would have a water solution later on.
Jason Fairclough
Okay. Thank you very much, guys. Appreciate the time.
Ivan Arriagada
Thanks, Jason.
Operator
Next question will be from Danielle Chigumira. Please don’t forget to turn your camera on. I see that Danielle has some technical issues with the audio. Yes. So the next question will be from Ian Rossouw.
Ian Rossouw
Hi. Just a follow-up question on overall CapEx. Obviously, your guidance for this year is $1.9 million. And I think previously, Mauricio, you said that the sustaining and mine development CapEx for next year is also still going to be above the sort of normal long-term range, is with the spending on the DMC project probably around $1 billion. I mean, should we expect the CapEx for the next couple of years to actually be above this year’s number?
Ivan Arriagada
Yeah. I think the way that we look at CapEx is that we have — I mean, our project at Pelambres is sort of tailing off as we sort of finish it this year. And that will be replaced in the case that we do the expansion at Centinela for capital expenditure at Centinela. So we would expect, therefore, levels which are not too dissimilar to what we’ve guided for in 2022, considering there is that replacement factor in the development CapEx component.
Ian Rossouw
I think the Pelambres CapEx is around 600 million a year or 700 million, right? So this is a bit of a step up to that. So just curious on that.
Ivan Arriagada
Yeah. In the case of Pelambres, I mean, we have — and we have a few, what we call infrastructure projects, which have enabled us for the remaining life of Pelambres, which are important. One is the replacement of the concentrator line. The other one is the expansion of the diesel water to 800 meters per second and the other one is a few ancillary investments in the milder tailings (ph) dam. So there is — those three projects, which probably make up to close to $1 billion will be spent during this time frame. And that’s why we’ve seen an increase in the CapEx of Pelambres consistent with the development of those projects and other sustaining CapEx.
But those are key enablers for what we think is the continuation of Pelambres in a way that it addresses any concern with respect to environment, community and adaptation to climate change and also a key stepping stone for what might come next, which is a further extension of the mine life, the Pelambres, which is really what we’re working on in terms of permitting right now. We think that Pelambres mine life ends in 2035 or ’37, and there is the ore body potential to extend that beyond that time line and that’s really what we’re thinking of, given the quality of the ore body at Pelambres, which is amongst the best in the world.
Ian Rossouw
Okay. All right. So we shouldn’t expect decent pickup in CapEx next year? Is that how we should understand it?
Ivan Arriagada
Yeah. At levels that are similar to what we’ve sort of seen this year, give or take.
Ian Rossouw
Okay. All right. Thank you very much.
Operator
Thank you. And next question will be from Danielle again. Please don’t forget to unmute yourself and turn your camera on.
Q – Danielle Chigumira
Hi, there. Hopefully, this works this time around. Apologies for that. A couple of questions. One, very general. So you mentioned decelerating local economy event. Do you think that inflation has now peaked at your operations currently?
Ivan Arriagada
We think that certainly, the signs are that things seem to be turning and we’ve seen some of the key commodities if you look at what’s happened to oil and some of the sort of steel-based commodities starting to move down. So that is a sign that we think might be an indicative — indication that inflation may have peaked, so I would say too early to say at this stage, but there are signs that, that might be happening, which I think is good. I think certainly, what we’ve seen is government have consistently taking measures to bring inflation down in a decisive way as we’ve seen, given the hikes in interest rates. And therefore, if you look at what happened with the inflation, information that was released yesterday, in the U.S., it seems to be that way. And that will be great news and expected in terms of what we’ve seen happening at the macro level. Yeah.
Danielle Chigumira
All right. Thank you. That’s very useful. And just one follow-up on Zaldivar. So in the event that you don’t receive the extension to the water license, there’s a potential timing mismatch before you firm up the primary sulfide resource. So would you consider investing in a desalination solution for Zaldivar before you have the detail in terms of how large that underground sulfide resource could be to kind of bridge that gap before you get to 2029.
Ivan Arriagada
Yeah. I think we would certainly not make an investment on a water solution that’s not associated to the development of the primary ore body. And therefore, our plan is that we continue to pursue the permit that we have currently for the existing plan. Any other different solution will only — we have to be linked to a primary ore project, which we have not yet full definition of. So that’s the way we would look at any investment associated to that expansion only.
Danielle Chigumira
That’s very clear. Thank you.
Operator
Thank you. The next question is from Ioannis Masvoulas. Please don’t forget to unmute yourself and turn your camera on.
Ioannis Masvoulas
Okay. Great. Thanks so much, guys. Just a couple of follow-up questions from me. The first, could you please talk about the H2 production increase? What are the main moving parts? And the second question, can you talk about the interest rate movements and how those could impact the value of the water infrastructure as you think about the potential monetization towards the end of the year? Thank you very much.
Ivan Arriagada
Yeah. So on half two production, the increase that we expect to see and which is sort of embedded in the guidance for the year, is essentially located in Pelambres where we expect to see an increase in production driven by higher throughput rates because of the release of the water availability restriction. So that’s a pretty straightforward increase in production coming out of not being limited by water supply in the second half. We also expect to see in the case of Centinela a recovery in the grades.
As you know, in the case of Centinela, we’ve gone through the initial basis of opening a new front, which carries lower grade, and then that starts to increase. And so we’ll see some increase of that in the second half and then most of it when we get to 2023. So that’s basically what’s driving the increase in production in the second half and why we expect to see it very differently because the capacity of Pelambres plant exists, it’s been limited in the first half because of water availability, which we have available now for the second part.
In respect of interest rate, I mean, that’s something that — I mean, we’re looking at the potential for divestment and those considerations in considering that this is a long-term transaction, so we would not. And we would consider that in the context of long-term parameters and long-term returns rather than spot interest rates or short-term interest rates. So — that’s the way that we would look at it. So we would — if we move in this direction, we will block a water supply contract, which is based on interest rates, which would affect the long-term nature of the investment and therefore, that’s the sort of term of interest rates that we would look at rather than the specific rates in the short term.
Ioannis Masvoulas
That’s very clear. Thank you very much. Good luck with everything.
Ivan Arriagada
Thank you.
Operator
Thank you so much for joining us today and this Q&A session with Antofagasta. Unfortunately, we ran out of time and need to end this session.
Ivan Arriagada
Okay. Thank you very much.
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