Capstone Copper Corp. (OTCPK:CSCCF) Q3 2022 Results Conference Call October 31, 2022 11:00 AM ET
Company Participants
Jerrold Annett – SVP, Strategy and Capital Market
John MacKenzie – CEO
Raman Randhawa – CFO
Cashel Meagher – President and COO
Wendy King – SVP Risk ESG and General Counsel
Conference Call Participants
Dalton Baretto – Canaccord
Orest Wowkodaw – Scotia Bank
Ralph Profiti – Eight Capital
Stefan Ioannou – Cormark Securities
Craig Hutchinson – TD Securities
John Tumazos – John Tumazos Very Independent Research
Operator
Good morning. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Capstone Copper Q3 2022 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.
Mr. Jerrold Annett, you may begin your conference.
Jerrold Annett
Good morning. I’d like to welcome everyone to Capstone Copper’s Q3 2022 conference call. Please note that the news release and regulatory filings announcing Capstone Copper’s 2022 third quarter financial and operational results are available on our website and on SEDAR. If you are logged in to the webcast, we will advance the slides of today’s presentation, which is also available in the Investors section of our website.
I’m joined today by our CEO, John McKenzie; our President and COO, Cashel Meagher; our Chief Financial Officer, Raman Randhawa; and our Senior Vice President, Risk ESG and General Counsel, Wendy King. Following our brief remarks, there will be an opportunity for questions.
Please note that comments made on the call today will contain forward-looking Information within the meaning of applicable securities laws. This information by its nature is subject to risks and uncertainties and actual results may differ materially from the views expressed today. For further information on the risks and uncertainties pertaining to our business, please see Capstone’s most recent filings which are available on our website and on SEDAR. And finally, I’ll just note that all amounts we will discuss today are in US unless otherwise specified.
Now, I’ll turn the call over to John MacKenzie.
John MacKenzie
Thank you, Jerrold, and good morning, everyone. This was our second full quarter as Capstone Copper. And I’m very pleased with the progress of our integration efforts, following the closing of the Capstone Mantos transaction earlier this year. Last week, a team form Ausenco and our board visited both Monteverde and Mantos Blancos and we are extremely pleased to see the advancement of the Monteverde development projects and the progress and potential for additional upside at Mantos Blancos.
In the third quarter, we produced a total of 45.700 tonnes of copper at consolidated C1 cash costs of $2.76 per pound across our four operations. Despite lower than planned throughput at Mantos Blancos, the mine delivered substantially lower sulphide costs of $2.17 per pound and this should further improve once the mill achieves its target run rates in the fourth quarter.
As for the cathode business, all-time high sulphuric acid prices contracted during the second quarter and delivered during the third quarter. It was the main driver that impacted costs. Specifically, both Mantos Blancos and Monteverde operations paid over $260 per tonne for acid over the quarter. However, we’re currently securing significantly lower prices to be delivered during the first half of next year with contract pricing in the $120 to $140 per ton range.
Overall, despite the inflationary pressures, I’m pleased that we managed to keep our operating costs in line quarter-over-quarter, with similar production to Q2. And our C1 cash costs came in lower this quarter. On the right hand side of the slide, we show the first of four Komatsu Electric rope shovels that was commissioned at our Monteverde mine in September. Transitioning to electric equipment at Monteverde will not only help reduce our environmental footprints, but will also increase the mines productivity, driven by the larger loads that these new shovels can handle. The second shovel will be commissioned imminently and the final third and fourth to follow.
Turning to slide six. We show our nine month production and cost guidance between April 1 and December 31, which remains unchanged, reiterating our consolidated range for copper production of 136,000 to 150,000 tonnes, with C1 cash costs trending towards the upper end of our guided range of $2.55 to $2.70 per pound. We expect improved concentrated throughput levels in Q4 at Mantos Blancos, as well as at Pinto Valley. The ramp up at Mantos Blancos is progressing well. The mill operated above the design 20,000 ton per day throughput level over 20 out of 27 planned operating days in October, with copper recoveries in line with expectations.
Now, I’ll pass over to Raman for our financial results.
Raman Randhawa
Thank you, John. We are now on slide seven. Our Q3 financial results were meaningfully impacted by the sharp decline in copper prices that began in late Q2 and continued into and through the third quarter, resulting in negative provisional pricing adjustments that have impacted earnings across many of our base metal peers.
Our realized price for the quarter was $3.29 per pound, which was $0.22 per pound lower than the LME average for Q3 and approximately $1 lower than the LME average in Q2 this year. Our lower realized price for the quarter was due to 29.7000 tonnes of copper priced at average of $3.75 per pound at June 30, which final settled at lower average prices during Q3 and by 34.6000 tonnes of copper provisioning price at an average price of $3.45 per pound at September 30, which was lower than the average price in the third quarter.
Adjusted EBITDA in Q3 of $34.1 million was impacted by a realized provisional pricing loss of $32.5 million, as well as continued inflationary pressures felt across our portfolio. Particularly with respect to sulphuric acid within our cathode business, as John mentioned earlier. The $32.5 million relates to Q2 provisional pricing. Thus, excluding that amount, EBITDA would have been $66.6 million. Our adjusted EPS of negative $0.02 per share was also impact by incremental $22.5 million in realized provisional pricing losses. Going forward, we aim to minimize the impact of provisional pricing through our recently implemented QP hedging strategy, which I will describe in more detail in the next slide.
Moving on to slide eight. On the left hand side, we summarize our available liquidity, which was $711 million as at September 30, including $196 million of cash and short term investments, $405 million of undrawn amounts on our $500 million corporate revolving credit facility, as well as $110 million of undrawn amounts on our $520 million Monteverde development project facility. Further financial flexibility exists within the $100 million accordion and the undrawn balance of our $60 million cost overrun facility with our Monteverde partner Mitsubishi Materials Corp.
As at September 30, we had drawn $22.9 million on the cost overrun facility, which we are contractually obligated to do so regardless of our operating cash balance. Based on the previously announced capital increase from $785 million to $825 million in Q2, which remains unchanged. On the right hand side of the page, we highlight the proactive steps we took in Q3 to protect downside risk with additional 2023 copper hedges as we approach the final years of construction at Monteverde. In summary, 85,000 tonnes of copper production next year is hedged at a weighted average price of $3.45 per pound.
As previously mentioned, in late Q3 we commenced a QP hedging program, which utilizes derivative contracts to offset copper sales with the objective of fixing revenue at the time of shipment. Thus, eliminating significant deviations in realized copper prices from the LME average. Our recently implemented QP hedging program also enables better liquidity management, especially in periods of falling copper prices to protect our business plans going forward and our balance sheet. We remain well positioned to fund the remaining CapEx in MVDP, a project that will be transformational to our portfolio once it’s commissioned in late 2023.
Now, I’ll hand it over to Cashel for the operations review.
Cashel Meagher
Thanks, Raman. Now on slide nine, Pinto Valley produced 14.1000 tonnes of copper during Q3. Mill throughput averaged approximately 48,000 tonnes per day and was impacted by unplanned downtime at the water pumping system at one of our large makeup water sources, combined with the thickener rate failure, impacting the ability to run at full rates. The mill is currently operating at normal throughput levels as we have reestablished normal operation in these areas.
C1 cash costs of $2.60 per pound were on the upper end of our nine month guidance range and $0.22 per pound lower than last quarter. As for PV4, we continue to work on engineering detail and network, which has the goal to increase the mine life with additional tonnage from 2039 to beyond 2050.
Moving to slide ten. During Q3, Cozamin achieved good grades and throughput levels, yielding solid copper production of 6.4000 tonnes at C1 cash cost of $1.20 per pound, both in line with guidance. The paste backfill and dry stack tailings project continues to make good progress and will facilitate the mine’s planned long-term sustainability with project completion expected in Q4 and ramp-up in the first half of 2023. To date, we have invested $41 million of the total $55 million budget for the project. Cozamin’s exploration program continues to focus on testing the Mala Noche Main West Target from surface and underground. Testing of other targets along the San Roberto mine commenced in Q3 and the results of the ongoing exploration program will be incorporated in to an updated mineral resource estimate in the second half of 2023.
Moving to slide 11. Throughput is steadily improving at Mantos Blancos, averaging above design levels over 70% of the planned operating days in October. Multiple sampling and testing programs around the new mill eight indicate that it is operating at better than expected grinding efficiency. Specifically, this new mill is operating a 15% to 20% above design driving efficiency and drawing 10 megawatts out of the 13 available of motor power. Our operations team are actively engaged with the mill vendor to increase the mill speed and draw more power, while at the same time increasing the throughput of the fine crushing plant to take advantage of the higher efficiencies. We are very pleased with the results and are confident that the front end of the plant can achieve higher than designed throughput. This is evidenced by October’s production performance, where the mill averaged above the design throughput level over 20 out of 27 planned operating days. The highest daily mill throughput was just under 25,000 tonnes.
In August 2022 we filed for the required environmental permits for Phase 2, which is an additional 35% expansion over Phase 1. The feasibility study for this expansion has moved to the first half of 2023, as we are incorporating recent operating performance and fresh understanding of where bottlenecks lie.
Now on slide 12. Q3 cathode production at Monteverde was 11.6000 tonnes at a C1 cash cost of $3.87 per pound. As John said earlier, this was impacted by record high sulfuric acid costs, which have peaked and we have secured acid supply for delivery in Q1 of 2023 at less than half the prices paid in Q3 of 2022. Last week, I was at Monteverde and I’m very happy with the momentum and progress of our MVDP project, which remains on track for construction and completion and were commissioning in late 2023. As of September 30, we achieved an overall progress of 67% and construction progress of 37%, having spent $490 million of $825 million capital budget for the project. At this point in the project, with most major equipment delivered to site, I feel that the areas of possible capital escalation are greatly reduced.
With reference to the next four slides, 13 through 16, construction activities are really ramping up. Currently, 40% complete with the principal concrete foundation work near completion. As we can see from slide 13, the primary crusher and the concentrate thickener and filter building are well underway. Slide 14 shows the grinding and flotation areas. Then on the right side, you can see the ores stockpile and reclaim infrastructure area. Slide 15 shows the work at the tailings thickener and the trenching and wall construction for the tailings storage facility. On slide 16, you can see a photo of a mill shell. As of now, all major components for the wet and dry circuit have been delivered to site. You’ll also note the electric rope shovel. This is number one of four and has been operating on the pre strip for a number of weeks now with the second to be commissioned imminently and the final third and fourth to follow. Work progresses on all fronts of the Monteverde development project and we look forward to hosting our Chile tour in just two weeks’ time.
Finally, on slide seventeen, work on the Monteverde, Santo Domingo District Integration Plan continues. The plan will outline how we utilize our existing and future planned infrastructure to maximize value creation across the district. Our goal is to create a world class district capable of producing to 100,000 tonnes of copper per year at low cost and with the additional benefit of a leading cobalt business, which would be one of the largest outside of the DRC and China. We continue to mature the overall strategy for the district, balancing the potential revenue opportunities with cost saving synergies. We know that the desalination plant, the electrical infrastructure and the operating team and the project delivery team will all benefit Santa Domingo greatly. And conversely, the port and future cobalt plant and the potential additional oxide leach production from Santa Domingo will benefit Monteverde. We look forward to discussing this in more detail soon when this plan is released, and we can discuss it during our site tours two weeks from now.
Now, over to Wendy King for the sustainability review.
Wendy King
Thank you, Cashel. We’re now on slide 18. We’re proud that Monteverde and Mantos Blancos formerly became participants of the Coppermark Assurance Framework in August. In the 12 months that follow, they will complete self-assessment and an independent assessment against the Copper Mark criteria. Our greenhouse gas emissions target setting process continued in Q3. We worked on establishing the business as usual forecast that will become the base case for our decarbonization pathway.
We’ve also started reviewing Scope 3 emissions at our Chilean sites and will begin to assess broadly across Capstone in 2023. We have set our initial ESG priorities, which are on the right of slide eighteen, and we’re developing and rolling out our goals, including our emissions targets very soon. Monteverde inaugurated the first of four electric shovels, which will contribute to reducing the site’s Scope 1 greenhouse gas emissions in the expansion phase. Pinto Valley hosted its annual Old Dominion’s Day event, which is a celebration of the history of mining in the region. It provides a valuable opportunity for broad stakeholder engagement and for members of the surrounding area to take guided tours of the site.
Pinto Valley also completed its Peeples Pond construction project with a liner installation and pump system to support water conservation and reuse. We are in discussions with some key corporate partners to support community investment projects in Chile and Mexico to further enhance our social impact in these regions. Cozamin advanced the remediation of the historic Chiripa tailing site, securing a final permit for the confinement cell. Chiripa is an important example in the industry as it’s one of the few historic remediation projects in Mexico. Finally, Mantos Blancos successfully submitted its environmental impact statement for increasing the concentrator capacity for the Phase 1 expansion.
Now, I’ll turn it over to John for final remarks.
John MacKenzie
Thank you, Wendy. Finally, on slide 19, our nine months production and cost guidance ranges reiterated, expect to produce around 185,000 tonnes of copper for the 12 months in 2022. We remain focused on the execution of our near term growth profile, growing copper production by 40% to approximately 260,000 tonnes by 2024, with the completion of the Monteverde development project, which remains on time and on budget. Following this, we have a fully permitted transformational project with the taxability agreement in place to advance at Santa Domingo which unlocks an additional 45% of copper production growth to 380,000 tonnes per year, with further upside and expansions across our portfolio, including an exciting cobalt opportunity at Monteverde and Santa Domingo.
With that, we’re now ready to take questions.
Question-and-Answer Session
Operator
Ladies and gentlemen, we will now begin the question and answer session. [Operator Instructions] First question comes from Dalton Baretto at Canaccord. Please go ahead.
Dalton Baretto
Thanks. Good morning, everybody. John, I’d like to start by asking you for your thoughts on the proposal from the [indiscernible] government on the new mining [indiscernible] last week? Thanks.
John MacKenzie
Hi, Dalton. Yes, thanks for the question. And maybe just starting off talking about the — sort of obviously, there have been two processes going on. One is the constitutional referendum and the second is the sort of new OT legislation. So I think, we obviously saw that the draft constitution was rejected by a very significant majority, 62% against 38% a few weeks back. And I think, about a year ago 80% of Chile voted in favor of changing the constitution. So I think we are — we believe it’s most probable that the constitution is going to continue to be adjusted and adapted and changed. But I think it seems to be heading towards a process that should land up with a far more sort of measured outcome and that process is currently being discussed in parliament.
I think, with regards to the royalty proposal, certainly the new proposal is a very significant step in the right direction. I think the previous proposal would have made Chile sort of an outlier. And I think this new proposal moves at sort of very much back closer towards sort of where suppose other jurisdictions tax rates are. I think in our view, it’s still work in progress. It was still in its current form. Act to make Chile sort of less competitive than it would otherwise be. And I think, we will sort of certainly continue to engage with the governments and seek an outcome that’s sort of is a win-win for both Chile and for mining companies.
Dalton Baretto
Great. Thanks for that, John. And then maybe I could switch gears a little bit to my second question. The integration study that’s coming out next week, can you tell us what level of detail we’re going to see?
John MacKenzie
Yes. I think, Dalton, for that, I might just pass you across to Cashel, who’s obviously been very close to that study, so across to you Cashel.
Cashel Meagher
Yes. Hi, Dalton. I think what we need to realize is, since the integration of the two companies what we’ve seen is a tremendous amount of opportunity that’s sort of uncovering itself at the various operations, whether it’s Mantos Blancos, Cozamin or Pinto Valley. But specifically to the integration area between Santa Domingo and Monteverde, as we dig, we find more. And with that, knowing that Santa Domingo, the last technical report was 2018, and now it’s going to greatly benefit from the infrastructure already installed at Monteverde. There’s a considerable amount of engineering work to bring up to that quality. So I think what you can do is that, you would get an idea of the scope and the benefits of what the current infrastructure is. While we’ll probably — we’ll lay out — we will lay out the time frame for some of the more detailed work and more the feasibility work, which is, what is the cobalt flow sheet? When do we expect to have, like, oxide delineated at Santa Domingo? And those types of things. But we can surely sort of give more detailed color on what the expectations or what the value might be for the addition of a port to Monteverde or the addition of the desalination plants or some of the electrical power infrastructure.
The difficulty really comes with — with that technical report being dated and with new information arising, it’s not a deduction of what the previous CapEx was due to inflationary pressures and some design considerations and optimizations. So what we hope — what we — what we’re going to layout is this sort of optimize pathway going forward and that there are some key infrastructure integrations that materially affect Santa Domingo’s efficiency going forward.
John MacKenzie
Thanks, Cashel. And maybe I can just squeeze in one more. On PV4, actually you are working through it. Are you just contemplating a mine life extension or will there be a production expansion as well? Thanks.
John MacKenzie
Fire away Cashel.
Cashel Meagher
Yes. We’re always evaluating the expansion opportunity. There are expansion opportunities and right now we have them sort of in a, what we would call, an evaluation or a trade off or value engineering process. The base case is a life expansion, obviously, with bringing in the reserves and coming up with suitable tailings options. But with that also, we’re evaluating the opportunity to expand the operation. So there are several of those trade-offs underway. I would say, again, the base case is additional reserve to mine life, but there is opportunity for some expansion there that is being evaluated. But the jury’s out, we don’t have the scorecard in yet.
Dalton Baretto
Perfect. That’s all for me, guys. Thank you.
John MacKenzie
Thanks, Dalton.
Dalton Baretto
Thank you. Next question comes from Orest Wowkodaw at Scotiabank. Please go ahead.
Orest Wowkodaw
Hi, good morning. I’m just following up on Dalton’s questions about the Chilean operations. I’m just wondering where the thinking is right now with respect to Santa Domingo, just given the uncertain market environment for projects and for the copper market itself, whether you still envision the construction of Santa Domingo starting shortly thereafter the completion of Monteverde or can we anticipate more of a pause and kind of a rebuilding of the balance sheet before you’d start another big project?
John MacKenzie
Yes. Orest, thanks for that question and it is a very good question. I think as you know, we have sort of stated previously that we have no intention of running two major projects in parallel. And so clearly, our first objective is to complete and ramp up the Monteverde project. As you know, that project will be completed and sort of first ore will be through sort of towards the end of next year. So to an extent, that gives us a little bit of time to actually assess the macro environment.
And with that, that gives us sort of — I would say overall, we are rather conservative in terms of how we look at sort of our balance sheet management and how we look at our sort of future commitments. And so I think the timing of Santa Domingo will clearly sort of take into account the ramp up of Monteverde, the buildup of cash within the business and the current macro environment. And that’s on both the side of copper prices and inflationary environment.
So we’re using this time to advance the studies and move the studies forward. So that’s sort of — we remain flexible that we can pull the trigger on that to what we regard as the optimal time to do so. And obviously, that question is sort of multiple parameters we need to take into account. Clearly, in an ideal world one would want to pull the trigger on Santa Domingo sort of during the period when perhaps the market is somewhat weaker and capital inflation is somewhat lower, rather than sort of wait until copper prices are sort of really booming. So I think we’ll take all those factors into account, but I think ultimately it will depend very much on sort of our confidence around sort of maintaining a strong balance sheet.
Orest Wowkodaw
Okay. And thank you for that. And just as a follow on then, so when I think about sort of your projected startup timeline and then a ramp up for Monteverde, that would suggest to me that sort of the earliest timeline would be kind of, call it, second half of ’24 for the sanctioning of that project. Is that the right way to think about it?
John MacKenzie
I think that’s a fair comment, Orest. I think we — as I say, I think sort of once we have completed construction and put ore through, I do think we’re fairly hopeful that the Monteverde ramp up will proceed fairly smoothly. It’s a tried and tested design that we’ve got tried and tested equipment and the team from Ausenco who we’re working with has sort of over the past few years ramped up in a very impressive form several of these — almost identical concentrators before. So I think we’re fairly optimistic about the ramp up timeline. But clearly then we want to be in a position where we can sort of assess sort of cash build in the business and the macro environment and then we’ll take into account sort of what represents the optimal sort of point to pull the trigger on Santa Domingo.
Orest Wowkodaw
Okay. And then just on Santa Domingo itself. Before the merger there were two infrastructure transactions that were being contemplated to reduce the upfront capital port rail, are those still part of the new plan? Can you maybe give us an update on what’s happening with those two proposals?
John MacKenzie
Yes. Certainly. Orest, for that I’ll pass across to Cashel. But certainly, those are sort of both under detailed investigation study.
Cashel Meagher
Yeah. With this combined entity now, we sort of rather than rushing forward with these as you’ve sort of pointed out and John just so eloquently put, we were sort of waiting for the right economic conditions to move Santa Domingo going, while not trying to increase our complexity or workload by running two projects at the same time, but we still have a full Santa Domingo office of engineers and business people, that are evaluating the different options in the integration. It becomes more complex when we start talking about the possibility of cobalt not only from Santa Domingo, but also from Monteverde and the possibility of oxide from Santa Domingo over at Monteverde to fill some of the unused capacity at the [FXW] (ph). At the same time, we’re focused on that other large revenue generator at Santa Domingo, of course, which the iron ore. And, really, the iron ore is what is the catalyst to major port consideration, which is Port of Santa Domingo or the idea of trade-offs still continuing on this idea of trade-offs versus slurry and filtering at the port location versus transport by rail.
And those trade-offs are still continuing, simply because of the integration of two assets, the return water, the quality of water, where the pumping stations are, what the electrical infrastructure are. So they seem very simple on the outset, but when you start getting into the detail, there is a right answer, and we’re working towards it. So we still keep those partners and those partnerships engaged in what those trade-offs are. They keep continuing to evaluate with us what is the best scenario for the shareholders of Capstone. And we work with our joint venture partner at Monteverde and updating them and incorporating them what is the best option for the Monteverde joint venture also. And invariably, it always turns out to be what is best for Capstone Copper and Santa Domingo is also a best for Monteverde in sharing and all those optimizations. So all those conversations, all those relationships and all those evaluations are still part of this value engineering exercise and trade-off process.
Orest Wowkodaw
So will this become clear with the integrated study that’s coming out next week? Or is that something that we have to wait for the updated feasibility for?
Cashel Meagher
I think what it does is, in the next couple of weeks what we’ll be able to disclose is what we’re working on specifically and what the merits of each are, but we won’t have a final evaluation. And that will come with more of detailed engineering and trade-offs of those as those mature. So, yes, it’s about laying out the pathway in the map more clearly, and then those evaluations in time will reveal themselves.
Orest Wowkodaw
Okay. One more question if I could squeeze it in. Just on the Monteverde sulfide project, how much contingency is built into the $825 million CapEx? And of that, how much has been consumed to date?
John MacKenzie
Yes. So I think what’s important is, just looking at that overall figure, what the — sort of what it’s comprises of. And I think you heard in sort of Cashel’s presentation a little bit earlier. It’s really made up of several categories. Now the one is the EPC sort of lump sum turnkey project with Ausenco. A very large part of that is all fixed price, an element of it, which is on the sort of some of the earth moving on the tailings facility. However, that part of it now sort of has — is pretty close to being sort of cost in stone. And then the other major cost elements of the mining equipment, now all of that mining equipment is actually priced and the vast majority of it is already delivered. And then the kind of remaining portion of it is the pre strip and obviously the previous increment we reported was sort of primarily around that. And that was the result of sort of increased diesel and exposed prices and the impact they had on the pre strip.
So we have, I would say, sort of a small contingency that remains in that $825 million number, that’s sort of a handful of million dollars. But at this stage, we think there’s sort of relatively limited scope for further cost slippage.
Orest Wowkodaw
Thank you.
Operator
Thank you. Next question comes from Ralph Profiti at Eight Capital. Please go ahead.
Ralph Profiti
Thanks, operator. Good morning. Thanks for taking my questions. Maybe a couple for Raman, if I can. Raman, on the QP program, is the goal to hedge out completely provisional pricing? There’s still disclosure in the MD&A about open pounds for Q4. And just wondering how long would you expect the QP program to be in place? Could we see sort of it coming off when we get the higher copper prices?
Raman Randhawa
Yes. So the QP hedging program will just — it’s going to continue to roll. We started it first month of September, so that’s why there’s some open exposure on the MD&A there for a couple months of Q3. So you’ll see that kind of flush out here in Q4 now. And then that should be our last quarter of really having provisional prices. Essentially, with the concentrate business, you got a three month kind of floating price out there, we’re kind of swapping that for a one month kind of near term fixed price, so locking in a price closer to it versus having that exposure out there. And essentially, when you move to this route, we just stay on it, because what we know and so I think we discussed with you a little bit is when the price falls, it falls hard, when you lose a lot of money when it goes up, it doesn’t move up as fast. So this essentially allows us to achieve LME average each quarter, but you’ll probably start seeing that in a full quarter and in the first quarter, Q1.
Ralph Profiti
Yes, that’s helpful. And second question, just how good is the liquidity in the sulfuric acid market to lock in those Q1 2023 prices sort of into later quarters? Do you have a goal in terms of the proportion of sulphuric acid exposure that you’re aiming to be hedged on?
Raman Randhawa
Yes. I mean, it’s a fluid strategy. That’s actually discuss at the [Exco] (ph) weekly basis, I’d say. But typically the fourth quarter is when you can kind of make a pivotal decision on how much do you want to fix versus float, let’s call it, for the next year. So as we talked about, we have sort of fixing into Q1 for Monteverde at really good price of [$120] (ph). And based on our market intelligence, then we can decide if we want to fix a bit more here in the fourth quarter heading into next year or leave a bit more open for spot. So we’ll be working through that strategy here in the fourth quarter and that will be baked into our 2023 guidance then.
Ralph Profiti
Thanks, Raman. Appreciate it.
Raman Randhawa
Yes.
Operator
Thank you. Your next question comes from Stefan Ioannou at Cormark Securities. Please go ahead.
Stefan Ioannou
Yes. Thanks very much guys. Just wondering on the value with throughput being down on that sort of 48,000 ton level in the last quarter versus sort of PB3. I think it was trying to get up to around 58,000 tons a day. It sounds like you spent some money on some water retention and water infrastructure. Should we read into that that there’s a seasonal issue here or just consideration going forward? And like with the new infrastructure, do you think we’ll actually be able to keep it at 58,000 ton a year throughout the entire calendar year? Or is it going to be a summertime thing when throughput does go down just because of water?
John MacKenzie
Thanks, Stefan. I’ll pass that question across to Cashel.
Cashel Meagher
Yes, Stefan. There is no doubt there is a seasonal nature and it’s no mystery. It’s quite hot in Arizona then. Much of our water or much of our makeup water is actually some ground sources. It gets affected by a recharge per year, so it’s less affected on the immediate growth on the recharge and getting that additional makeup water. And so the infrastructure items we indicated with some of the thickener issues to rake and some of the water infrastructure was actually individual breakdowns that limited our ability to gain some of that recharge water. So that’s sort of on us in our infrastructure management and asset management going forward, so limit that exposure.
That being said, certainly one of the major sources of water also is reclaimed water. It’s recycling and reuse of water and that happens within our principally in the thickeners and our tailing stand where we take water back. And when it’s dry, we suffer where in the sense that, in that natural reclaim of water from wherever the [indiscernible] is to where the reclaim pumps are, it is reduced in those seasonal areas. So what we do at a local level is, what we do is, we sort of plan out the extra production. If you recall — I recall, it was before my time in Q4 of 2022, they had very good production in Pinto Valley and that’s because the reclaim was very high and they were able to utilize the installed capacity in the middle to achieve higher than 58,000 tons per day. So the idea probably going forward is to sort of format that, but I still think we’re looking at and we’re going through the detail exactly where it will be with our late January guidance since we put out in each year what is expected out of Pinto Valley, but at an average, it will be in the high 50s. But seasonally, we’ll have to profile that water dependent on that reclaim, while also having much more confidence in our ability for the freshwater makeup with a greater focus on asset integrity for 2023. Okay.
Stefan Ioannou
Okay. That’s very helpful. Thanks very much.
Operator
Thank you. Next question comes from [indiscernible] at Clarksons Securities. Please go ahead.
Unidentified Participant
Yes. Hi guys. Thanks for taking my questions. I don’t really have much left, but I’ll ask one on the premiums we’re reading about. I think in the last couple of weeks there has been several news reports on premiums for European and Asian customers kicking in in 2023, that’s quite above the levels we’ve seen today. Is this something you’ll be able to leverage on?
John MacKenzie
Thanks for that, Ben. I want to pass you across to [Joe] (ph) to — has also recently taken over marketing responsibilities. So, Joe, across to you.
Unidentified Speaker
Thanks. I think you’re referring to the cathode premiums, Ben?
Unidentified Participant
Correct.
Unidentified Speaker
Okay. We haven’t — we have a third party marketing our cathodes up. I think it’s under contract till the end of 2025. And right now, we don’t have exposure to the higher premiums. But post 2025, we will. So we’re looking forward to that day that we can realize the upside to the premiums.
Unidentified Participant
Okay. Thanks. I’ll return to the queue.
Unidentified Speaker
Thank you.
Operator
Thank you. Next question comes from Craig Hutchinson at TD Securities. Please go ahead.
Craig Hutchinson
Hey, good morning, guys. Just one question for me. Just with respect to the Mantos Blancos space to take it from 7 million tons to 10. There’s a note that you guys are — you applied for the DIA application in August 2022 here for the environmental, I guess permitting. Can you just talk about what’s involved with permitting Phase 2? How onerous that process is? Thanks.
John MacKenzie
Yeah. Certainly, I’ll have a first crack at that and then I’ll pass it across to Cashel. But in Chile there are three different levels of permitting. You get what’s called a proteinuria, which is just a sort of minor adjustment to sort of something generally within a plant. There’s a DIA which means there’s sort of some additional throughput or scale or more materials going to go into tailings then. And then there’s the EIA, which is the sort of fully pledged environmental permits. Our belief is that and which the authorities have accepted is that this expansion at Monteverdeis is the one in the middle, the DIA and hence is basically a relatively straightforward process it really just means some additional processing infrastructure within sort of an existing brownfields plant. And obviously, the main reason why it sort of triggers DIA and not just the proteinuria is because we’ll be actually growing the amount of reserves that will be processed and we’ll go into the sort of tailings facility. And then what we are doing is doing that sort of within sort of tailings facilities that are already permitted and which we believe should be fairly straightforward.
So I think our expectation is that, this is a relatively straightforward permitting process. But obviously, we do need to make sure we sort of got all the eyes and crossed all the teeth with it. Cashel, do you have anything further to add to that?
Cashel Meagher
No. No. I think that explains it well, John.
Craig Hutchinson
Okay. Thank you.
Operator
Thank you. Next question comes from John Tumazos at John Tumazos Very Independent Research. Please go ahead.
John Tumazos
Thank you for taking my question. Congratulations on large derivative profit. Do you have the flexibility to collapse derivative positions and just take the profit? And if you do, do you want to?
John MacKenzie
John, thanks for the question. I’m going to pass you across to Raman for that to respond.
Raman Randhawa
Hey John, good question. When you look at our mark to market on our hedge book, it’s kind of broken out into two parts. So some of it is corporate hedging that we do up here. So, yes, we’re in a profitable position that we could potentially close out if we wanted to. And then part of the hedge book is tied to the project financing. So it was a requirement of the Monteverde development project facility. So those hedges are in place in relation to that debt infrastructure that we have put in place. So that would require a bit more discussions with lender consent if we ever want to do that or unwind that?
John Tumazos
Do you have a general philosophy about hedging and sometimes prices recover and it turns against you?
John MacKenzie
[Multiple Speakers].
Raman Randhawa
Go ahead, John.
John MacKenzie
Maybe if I can just give a sort of — before passing back to Raman, just sort of a high level view is, our philosophy with regard to hedging is really sort of a defensive strategy. Obviously, at this point we have significant sort of capital expenditure on our projects. We have some high cost cathode production. And in our view, it remains sort of sensible and prudent to sort of whether we’re locking in on the sort of the cost or the revenue side to be doing so to sort of ensure our balance sheet strength through the construction. I think as we transition to lower cost operations, I think we’ll be sort of revisiting at that stage sort of hedging philosophy. But obviously, there are things like sort of on capital projects where we have a fairly standard view, which — when we move across to Santa Domingo, for example, if we raise the financing in US dollars, we will look to, for example, hedge out any peso exposure within that capital and ensure that sort of at the end of the day we’re able to sort of manage the capital expenditure. But I do think sort of — whilst we’re in this particular phase, we are very much sort of focused on sort of a strategy to sort of protect margins during our major construction. So, Raman, I don’t know if you would like to add to that?
Raman Randhawa
I think those well said, I mean essentially our hedging strategy, we look to hedge away input costs, which are FX and interest rates and lock those in from a guidance cost perspective. And then copper is only viewed in a risk management perspective. As John said during the build of MVDP, typically we have been unhedged on copper historically. And in the QP hedging that we mentioned that we’ve introduced, which will be small, but it’s very short term to look now.
John Tumazos
Do you reject other risk management strategies like selling equity or taking a partner?
John MacKenzie
I don’t think sort of we certainly don’t reject those strategies, but I think what we do is, we look at sort of what are our financing options, we look at our balance sheet and then we typically sort of prioritize what are our sort of preferred sort of modes of finance. And I think at this stage, we remain comfortable that those steps are not sort of either desirable or necessary. But that said, as we move forward, when we look at the sort of Santa Domingo, we’ll be obviously looking at it in the context of both the sort of base case project, but also potentially the oxides and the cobalt. And I think at that stage, we’ll look to see whether, for example, a sort of equity partner in the project makes sense.
John Tumazos
I just interject that one of my concerns is that, we’re in a highly inflationary period. And when you fix your selling price and you don’t fix your cost, you’re vulnerable to the unanticipated inflations. That’s all [indiscernible] short form of risk?
John MacKenzie
John, you’re absolutely right. And we try and take this very thoughtful approach to that. And on one side, we do try and, for example, where we have our high cost cathode business, we do try and make sure that we are sort of locking in our sort of biggest cost component, for example, the asset price around the time we’re sort of locking in our copper price. But that said as well, you’re absolutely right, when — if copper goes up to $5 a pound, you will see cost inflation in a number of other areas. And so what we do look to do is make sure that we’re not over hedged on the copper and we can be sure that sort of the net benefit from that higher copper price will outweigh any sort of other inflationary increase on any unhedged parts of sort of cost inputs.
John Tumazos
Thank you for taking my questions.
John MacKenzie
Thank you.
Operator
Thank you. There are no further questions. I will now turn the call back over to John Mackenzie for closing remarks.
John MacKenzie
All right. So as we discussed earlier, we’re working hard to deliver the Monteverde, Santa Domingo district integration plan and to host our Chile tour in two weeks. We look forward very much to seeing those of you who are joining us and to showcasing the exciting growth opportunities that we have underway and in front of us. In January, we’ll announce the date for the release of our year end results. Until then, stay safe, and feel free to reach out to Jerrold or Katina if you have any further questions. Thank you for your continued support and have a good day.
Operator
Thank you. Ladies and gentlemen, this concludes your call for today. We thank you for participating and we ask that you please disconnect your lines.
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