Lundin Mining Corporation (OTCPK:LUNMF) Q2 2022 Results Conference Call July 28, 2022 8:00 AM ET
Company Participants
Peter Rockandel – President and CEO
Jinhee Magie – SVP and CFO
Peter Richardson – SVP and COO
Conference Call Participants
Orest Wowkodaw – Scotiabank
Jackie Przybylowski – BMO
Dalton Baretto – Canaccord
Ioannis Masvoulas – Morgan Stanley
Greg Barnes – TD Securities
Matthew Murphy – Barclays
Lawson Winder – Bank of America
Daniel Major – UBS
Operator
Good morning, ladies and gentlemen, and welcome to the Lundin Mining Second Quarter 2022 Conference Call. [Operator Instructions] This call is being recorded on Thursday, July 28, 2022.
I would now like to turn the conference over to President and CEO, Peter Rockandel. Please go ahead.
Peter Rockandel
Thank you, operator, and thank you, everyone, for joining Lundin Mining’s Second Quarter 2022 Results Call. Before we get into the formalities of the call, it is profound sadness that I’m announcing the passing of our former Chairman, Founder and friend, Lukas H. Lundin. Lukas passed away after a courageous 2-year battle with brain cancer.
Lukas founded Lundin Mining with his father in the mid-90s, and he was a member of the Board and Chairman of the company for the 25 years until he stepped down this past May. In his role as Chairman, Lukas oversaw Lundin Mining’s development from an exploration stage company into a global mid-tier producer with a strong copper focus and a portfolio of world-class assets.
The many successes of Lundin Mining and the Lundin group owed directly to Lukas’ extraordinary strategic foresight matched by his relentless drive. His guidance and support for his colleagues will be deeply missed; however, his pursuit and vision of creating a world-class base metals company lives on. Lukas would say get the right people and empower the people and have good assets. Those of us that were closest with Lukas share in its approach, and we’ll continue to build upon his legacy.
Thank you, everyone, and now I will continue with our quarterly call. I will draw your attention to the cautionary statements on Slide 2, as we will be making several forward-looking comments throughout the prepared remarks, and likely during the Q&A as well.
On the call to assist with the presentation and answer questions are Jinhee Magie, our Senior Vice President and Chief Financial Officer; and Peter Richardson, our Senior Vice President and Chief Operating Officer. As you would have seen from our news release last night, this will be the last earnings call for Jinhee and Peter with Lundin Mining. Jinhee will be retiring at the end of September, and Peter will soon be moving over to the gold space with Barrick Gold in Nevada. I want to thank both Jinhee and Peter for their dedication and contributions to Lundin Mining.
I’m also excited to also announce the appointment of a new member to Lundin Mining Board of Directors and 4 strong leaders to our executive team. Natasha Vaz will be joining our Board on August 1. Natasha is currently the Executive Vice President and Chief Operating Officer, leading Agnico Eagle Mines, operations and project development teams. We look forward to the operational leadership, insights and perspectives Natasha will bring to our Board.
Juan Andres Morel will be joining the management team as our new SVP and Chief Operating Officer next week. Juan Andres is a Lundin Mining executive with an exceptional track record over 30 years, including more recently as the General Manager of Mining Operations for BHP’s Escondida. Prior to that one spent 14 years with Antofagasta at various senior operational leadership positions, including Head of Operations at Los Pelambres. Juan also worked at CODELCO as Head of Strategy and Director of Technical Services. Juan’s Open Pit, South American experience will be a strong and natural fit.
Teitur Poulsen will be joining as SVP and CFO on September 1. Teitur is coming from Lundin Energy following its acquisition by Aker BP for approximately $14 billion, where he had been CFO since 2017, and also has many years of experience in finance and strategy.
David Dicaire is joining as SVP of Josemaria, and will have overall responsibility for the project. He has over 40 years of mining and EPCM experience gained in a variety of global projects. Most recently, David was at Lundin Gold where he oversaw the success of construction of the Fruta del Norte project in Ecuador. Before that, he was with Freeport-McMoRan as Project Director for the highly successful multibillion-dollar Cerro Verde Expansion Project in Peru. David was also General Manager of Project Development for South America for Xstrata Copper.
Lastly, I’m happy to note the promotion of Kristen Mariuzza, SVP sustainability, Health and Safety. Kristen has successfully led our Eagle Mine as Managing Director for several years prior to being appointed VP Environment and Social Performance. She joined Lundin Mining in 2015 with the acquisition of the Eagle Mine from Rio Tinto, and has held senior positions in Operations, Environment, Permitting and Health and Safety.
I’m very pleased to welcome these exceptional colleagues to Lundin Mining. I believe their depth of experience will prove to be invaluable additions to our team as we continue to develop Lundin Mining into a world-class base metal producer.
Continuing with sustainability and responsible mining on Slide 4. Earlier this month, we published our 2021 sustainability report. As many of our long-term shareholders are aware, Lundin Mining has been reporting on our sustainability performance in a stand-alone document since 2010. Within this year’s report, we are proud to have announced our new Focused on the Future long-term sustainability and strategy. Focused on the Future is comprised of a promise, a purpose and 5 pillars as described in the image on this slide. The foundational work incorporates initiatives already underway at Lundin Mining as well as new wins. It will guide us as we continue to develop meaningful performance indicators to track and measure our sustainability efforts.
Under this framework, we are pleased to have announced an interim Scope 1 and Scope 2 GHG absolute emissions reduction target of 35% by 2030 compared to our 2019 baseline year. Though we are already a leader with an industry low GHG emission intensity for the base metals we produce, we acknowledge our role in the call for action to reduce emissions, commit to low-carbon alternatives and develop climate resilience.
The bullet points on the right side of the slide outlines just a few of our 2021 safety, environment and social performance highlights discussed in this year’s report. I encourage those interest in additional detail and more information on our approach and performance to read this report. And as always, please reach out with any questions.
I will now turn the call over to Jinhee.
Jinhee Magie
Thank you, Peter. On Slide 5, second quarter copper and zinc production exceeded that of the prior year quarter, while nickel production was in line. We produced over 120,000 tonnes of base metals, and approximately 39,000 ounces of gold. We also sold over 110,000 tonnes of base metals and approximately 32,000 ounces of gold on a payable basis, generating revenue of $590 million. Unfortunately, second quarter revenue was affected by significant provisional pricing adjustments given the late quarter decline in base metal prices.
We remain predominantly leveraged to copper with the metal generating nearly 60% of the second quarter’s revenue after pricing adjustments. Zinc contributed 15%, an increase over recent quarters, in part given increase in zinc production with the ramp-up of Neves-Corvo zinc expansion project, and nickel contributed 12%.
Slide 6 presents a summary of our second quarter financial results compared to the same quarter last year. With the late quarter decline in base metal prices, our second quarter revenue and financial results were significantly impacted by provisional price adjustments. Prior period adjustments and the mark-to-market of current period sales that remain to be settled at the end of the quarter were approximately negative $220 million. Details of pricing adjustments are in our MD&A and financial statements.
Ultimately, we realized a copper price of $2.82 per pound, including a negative $0.96 per pound prior period adjustment. The nickel price of $7.64 per pound, including a negative $3.40 per pound prior period adjustment.
Second quarter revenue of $590 million was 32% below that of the same quarter last year due to lower realized metal prices net of price adjustments. On a year-to-date basis, revenue was comparable to the first half of 2021. We reported an attributable loss of $0.07 per share and adjusted loss of $0.05 per share, and details of these adjustments are broken down in our MD&A as well.
Despite the earnings loss, we generated adjusted EBITDA of nearly $150 million and cash flow from operations of over $365 million. Adjusted operating cash flow before changes in noncash working capital was $50 million or $0.06 per share. On a cash basis, capital expenditures were roughly $215 million in the second quarter for first half year total of approximately $360 million. Capital expenditures at Eagle and Neves-Corvo and Zinkgruvan are all tracking well to guidance.
As will be discussed in the operations section, capital expenditure guidance for Candelaria and Chapada have been revised given inflationary cost impacts on capitalized stripping, including diesel and other mining consumables. We generated over $215 million of free cash flow in the quarter, paid over $170 million in dividends to shareholders, and purchased $8 million of shares under our normal course issuer bid in late June.
The balance sheet remains in a very strong position with cash equivalents of approximately $500 million and total liquidity of approximately $2.3 billion at quarter end. Lastly, our Board of Directors declared a regular quarterly dividend yesterday of CAD 0.09 per share.
I will now turn the call over to Peter Richardson to speak to our operations.
Peter Richardson
Thank you, Jinhee. Starting with Candelaria on Slide 7. The operation had a strong second quarter. This is now 3 quarters in a row of on-plan or underperformance of Candelaria. The operation produced nearly 41,000 tonnes of copper and approximately 23,000 ounces of gold at a cash cost of $1.86 per pound. Tonnes milled, ore grades and recovery rates were all in line with plan tonnes and production is tracking well to annual guidance.
So the Open Pit ore mining is continuing primarily from Phase 10 pushback with ore production from [indiscernible] pushback to start later in the year. Consistent with many other miners have indicated for this reporting season. Candelaria saw increased costs for energy and mining consumables during the second quarter.
Copper cash cost of $1.06 per pound was greater than planned in the prior year quarter due mainly to high cost for energy and consumables, partially offset by favorable foreign exchange effects. Full year cash cost guidance has been increased to $1.75 per pound copper from $1.55 to effect the first half actuals and the expected impact of inflationary increases primarily electricity, fuel, maintenance and contractor costs. Candelaria’s second quarter capital expenditures were approximately $85 million during the first half totaled to roughly $170 million. As noted on the first quarter call, capitalized waste trending above the annual guidance. Given the inflationary increases in diesel explosives and other consumables, Candelaria’s full year capital guidance has been revised to $400 million from $370 million primarily reflecting the increased cost of mining input.
On the growth and exploration costs initiatives debottlenecking, the Candelaria plant [indiscernible] crushing circuit are advancing on plan and are expected to increase low capacity starting in 2023. As we have previously discussed, technical study work evaluating the expansion of the north and south sector underground mine from the current 14,000 tonnes per day to 26,000 tonnes has been finalized. The study indicates a technically and financially robust project, and we will be looking to update the royalty and taxation assumptions ahead of a decision to [indiscernible] the project once there’s greater clarity.
Ultimately, our construction decision will require the receipt of the 2040 EIA. Lastly, we have completed over 14,400 meters of drilling as part of this year’s $15 million exploration program. Much of this work will be focusing on growing and upgrading underground resources where we have demonstrated the fact in the past. Of note, second quarter drilling has extended the mineralization of the Alcaparrosa mine including 2 holes, and have intersected 2% copper, nearly 115 meters and 3.5% copper over 65 meters.
Moving to Chapada on Slide 8. The difficult operating conditions Chapada experienced in the first quarter, particularly significant rainfall has locked on the impact into the first part of the second quarter. Chapada produced 10,345 tonnes of copper and 16,000 ounces of gold at a cash cost of $2.98 per pound of copper. Production was lower than the same quarter last year due to the [indiscernible] to the plan, which had an impact on the low throughput rate and metal recoveries. However, several daily mill throughput records were achieved in June.
While we are exploring options to increase or release the catch up on what was delayed on the first quarter, improved [indiscernible] to secure the necessary additional contract mining equipment and personnel to achieve the increase in rates required. As a result, we have revised our full year production guidance to 45,000 to 50,000 tonnes of copper and 67,000 ounces of gold as access to original plan or sources have been pushed back [indiscernible]. We continue to expect production to be weighted to the second half of the year, only to the great profile of seasonal operational conditions.
Second quarter cash cost was greater than the comparable quarter of 2021, attributable to inflation or increase in energy, mine consumables and contracted costs as well as the lower production and therefore, sale volumes. Cash cost guidance has been increased to $2.25 per pound of copper from $1.60 reflect the first half actual revised production forecast expected impact on the inflationary increases in energy primarily fuel. Chapada’s second quarter capital expenditures were approximately $30 million, bringing the first half total to approximately $35 million. Like Candelaria, capitalized waste stripping was noted on first quarter calls returning above the annual guidance. Given the continued inflation and cost increase in diesel, explosive and other consumables, Chapada’s full year capital guidance has been rise to $80 million from $65 million mainly reflecting increased capitalized waste tripping mining input cost.
Despite the slower start with the rain, Chapada’s exploration drilling is ahead of plan with over 34,700 meters completed in the first half of the year. The [indiscernible] equipment has now increased approximately 1,200 meters by 950 meters from 1,000 meters by 750 meters discussed last quarter with assay results received during Q2. The system continues to remain open in all directions.
With the time [indiscernible] in growing potential of tower, we will focus our efforts on drilling and how to be incorporated in the future expansion scenarios. We aim to issue a mineral resource at [indiscernible] early in 2023 as part of our company-wide mineral RMR object.
On Slide 9, the Sauva assay results presented have any season in the second quarter. To the end of June, approximately 36,000 meters have been completed in 99 holes, assay received for 67 of the holes. [indiscernible] continue to have expansion mainly from North towards [indiscernible] and to the west of the discovery area. This slide shows the location of completed holes where assay results pending as well as plans.
We continue to be very excited about this discovery and believe it supports our view that many opportunities increase the size and the quality of our mineral resource date for Chapada. The potential implication of this high-grade system may have an ongoing expansion studies are being evaluated as [indiscernible]
Moving to Eagle on Slide 10. The operations had a strong quarter, producing over 4,700 tonnes of nickel, 4,400 tonnes of copper at cash cost of $0.90 per pound of nickel. The mill had records from nickel recoveries, including an all-time monthly record of 88.5% in June. Production of copper and nickel are trending at the high end of guidance with production both to be closely weighed to the second half of the year on grade profile.
Cash cost was higher than prior year quarter due to inflationary increases in operating costs and lower realized cost of trends impact in the [indiscernible] product However, costs are on track to meet annual guidance, which remains unchanged at a negative $0.25 per pound of nickel.
Eagle’s second quarter capital expenditure was approximately $3 million, bringing the first half to roughly $7 million Full year CapEx guidance of $10 million also remains unchanged. We are continuing to work to include the upper kill zone into our 2023 life of mine plan, and subsequent mineral iron ore estimate updates for release in the first quarter of 2023. We’re aiming to be in development in the upper field zone in 2023 with the initial production in the first half of 2024, further extending life of mine and improvement in production profile over later years.
We’re also continuing internal study work on the lower Keel zone, which lower grade than the upper Keel zone [indiscernible] is even close date to the existing rep [indiscernible]. Second quarter drilling has extended Eagle East semi-massive sulphide mineralization for the [indiscernible]. Currently, there are 3 on rigs having the exploration area, roughly indicated around the post-mineral gas and fourth, and the fourth rig is to be gaining later this month.
Moving to Neves-Corvo on Slide 11. The operations produced over 7,800 tonnes of copper, 20,647 tonnes of lead, and a cash cost of $2.39 per pound of copper in the second quarter. Zinc production increased 40% over the first quarter as the zinc expansion project began its ramp-up in the earnings. We have reduced zinc production costs for this year to 90,000 to 100,000 tonnes from 110,000 to 120,000 tonnes to reflect ramp-up progress achieved to date, and reforecasting of when we expect to achieve 400 underground mining rate from newly developed areas.
The surface facilities continue to ramp up, all original works to be completed early in the third quarter. We have targeted a full production rate in August, although now expected later in the fourth quarter as we continue to increase underground mine rates. With this, same production is expected to continue to be second half weighted as that has ramped up over the May, the remainder of the year. Copper production guidance is unchanged. The second quarter cash cost of $2.39 per pound of copper was greater than that of the corresponding quarter last year due to high cost for consumables, particularly electricity, somewhat offset by a favorable foreign exchange rate.
Despite the elevated second quarter, cash costs remain on track to meet full year guidance of $1.80 for pound of copper.
Neves-Corvo second quarter debt entertaining capital expenditures were approximately $25 million, bringing the first half total to roughly $60 million. Both remaining debt and sustaining capital expenditures remains unchanged.
On Slide 12, Zinkgruvan continues to perform very well. In the second quarter, the operations produced over 21,200 tonnes of zinc, 500 tonnes of copper and 9,100 tonnes of lead at a cash cost of $0.44 per pound of zinc. The operation [indiscernible] to deliver on full year zinc and copper production. Forecast cash cost remains in line with the annual guidance with expected inflationary impact from consumables being largely offset by production volumes and by product. Zinkgruvan’s second quarter capital expenditures were approximately $60 million, bringing the first half total to roughly $25 million for our sustaining capital guidance of $60 million remain unchanged.
Engineering for the sequential flotation project to further improve concentrate grade and recovery rate is underway. It is a relatively minimal capital expenditure project on the order of $50 million with a high IRR and quick payback. Lastly, exploration efforts continue with over 8,200 meters of drilling, now completed this year, as part of the 20,000 unit, 2022 program. Primary focus remains on increasing mineral resources at Dalby and between Burkland and Nygruvan orebodies.
I will now turn the call back to Peter to discuss the Josemaria project.
Peter Rockandel
Thank you, Peter. As I mentioned earlier, we’re excited to have Dave Dicaire join an SVP of Josemaria, with overall responsibility for the project. He has significant global experience gained over 40 years. His experience covers all aspects of project management for many types of mining projects ranging from managing pre-feasibility studies to large EPCM projects. We’re looking forward to have Dave join the team.
As Dave joins, we are continuing to progress the project through the next stages, including working with authorities and discussions on commercial agreements and securing additional environmental and sectoral permits. With [indiscernible], Engineering work has been progressing, engineering is estimated to be 23% complete. We continue working towards an updated technical report in the fourth quarter of this year. This is to include an update of cost estimates to be reflective of current conditions and evaluation of potential scope changes as compared to the plans of the 2020 feasibility study as well as new mineral reserve and resource estimates.
Over 31,000 meters of drilling have been completed since the last 2020 estimate. As previously mentioned, we intend to spend approximately $300 million of milestones by advancing the project, including engineering, commitments for long lead time items, early works and drilling. Of this, approximately $55 million has been recorded as CapEx. We are continuing to advance all aspects of the project in a deliberate and disciplined manner to minimize the risk 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.
Moving to a summary of our current guidance on Slide 14. We have procurement strategies in place, which are mitigating the impacts associated with global inflation and supply chain delivery, though as with many of our peers in other industries, we are experiencing continuing risks with these. We have not seen a significant impact on our operations related to direct supply chain availability. However, in our forecast, we expect inflationary impacts on diesel, electricity, and contractor costs continue to increase operating costs for the remainder of the year.
As discussed in the operational section, Chapada and Neves-Corvo zinc production guidance has been revised while we remain on track to achieve the midpoint or greater production at our other assets. We also continue to be on track to meet our original annual copper and nickel guidance. Cash box guidance for Candelaria and Chapada have been updated to reflect first half actual and expected inflationary impacts on mining consumables. Similarly, capital expenditure guidance has been updated for Candelaria in Chapada reflecting higher expected open pit capitalization of waste stripping costs due to inflationary impacts on energy and other mining consumables.
The approximately $300 million we expect to spend advancing Josemaria Project remains unchanged. And as does exploration expenditure guidance of $45 million.
I’ll conclude with Slide 15. Both second quarter financial results were impacted by cost inflation and the late quarter decline of prices for many base metals, we remain favorablypositioned both financially and operationally to address potential macroeconomic challenges, and continue to execute our strategy. Noticeable progress has been achieved at Candelaria to improve operational predictability. The operation has delivered its third quarter in a row of on-plan or better production results. Unfortunately, we have not been able to accelerate or release at Chapada to the extent necessary to make up for the impact of the significant rainfall earlier in the year. Our operation got back up to planned rates as it exited the rainy season in the second quarter and is positioned to deliver a strong second half performance. The sale of discovery continues to grow.
The zinc expansion project is making progress in its ramp-up as demonstrated by the 40% quarter-over-quarter increase in zinc production. The surface facilities continue to ramp up as well. We had originally targeted full production rates in August, though we now expect this to be to occur later as we continue to ramp up underground mining rates in the newly developed set areas. The operation remains on track to deliver its originally provided copper production and cash cost guidance. Eagle and zinc-driven both continue to perform very well on track to achieve annual production, cash cost and capital expenditure guidance. And we continue to make progress advancing the Josemaria projects in a deliberate and disciplined manner.
Lastly, I’m very excited to welcome 4 experienced leaders to our executive leadership team.
Thank you, operator. I would like to open the line for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from Orest Wowkodaw with Scotiabank.
Orest Wowkodaw
I wanted to talk about the Josemaria project. Obviously, market conditions have changed quite significantly since last quarter and — wondering how you’re thinking about that project now in the context of the market. I realize you’re committing to the — spending the $300 million this year. But are you still thinking that — assuming you get the approvals you need, the stability agreement, et cetera, that you hope to sanction this project, call it, early next year? Or given the current environment, is there a chance that you could wait until things improve and maybe complete more of the detailed engineering before you start?
Peter Rockandel
I’ll take it. Thanks, Orest. It’s Peter Rockandel. Yes, we’re obviously highly cognizant of the current market, and that certainly factors into our decision-making, if you will. Right now, we are proceeding with, in particular, a lot more detailed engineering. Fluor has been doing a very good job on that front. As alluded to in the call earlier, we are working with the government and trying to finalize a number of the different commercial agreements and sectoral permits, et cetera. And we are looking at the time line with the project and what the, call it, near-term spend would be in light of the current capital markets. But our intention is to keep moving forward at the pace that we’ve kind of originally indicated, but we’re certainly highly cognizant of this market and we’ll take that into consideration as we move forward. The other thing too is, in parallel, we’ll continue with the discussions that began last quarter with a number of different counterparties that may be involved with the project on a going-forward basis to assist with some of the financing requirements.
Orest Wowkodaw
Okay. And as a follow-up, if I may, just at the Neves-Corvo, ZEP project. Obviously, you cut the guidance for this year. I guess based on the first half of the year, do you see any — at this point, do you see any knock-on impact into the guidance for ’23 at the ZEP project? Or is this strictly a ’22 issue?
Peter Rockandel
That’s a very fair question, Orest. And I suspect a lot of people that are lined up on the call with questions were going to ask the same one, and maybe they’re going to ask it on more than one asset. So if I can kind of take a step back and speak to the entire portfolio, so bear with me.
We obviously worked — we do work hard, quite frankly, on all our assets, and we put an extra focus on the last 9 months or so at Candelaria just given some of the historical challenges, and the fact that it is our biggest asset. And as Peter alluded to, we’ve been very fortunate to have 3 consecutive quarters as per plan, and it’s tracking extremely well towards the year-end guidance. So that’s definitely a positive. And Zinkgruvan and Eagle, we’re continuing to track well versus our guidance also. Not trying to cover up for the other areas where we have challenges.
At Neves, it’s positive to see the year-over-year growth, but we have a lot more work to do, quite frankly, to achieve that run rate capacity. And I think as we move in towards Q3 and Q4, and we get a feeling to where those production levels are, there is certainly the possibility if they don’t ramp up as per plan or as quickly planned, that could slip a little bit into 2023. We’ve had a number of teething issues as we’ve started up ZEP, uncommon when you start up a new operation. We had some pipes that weren’t built to spec, a few belts are ripped, et cetera. But we’ve actually been able to overcome all those issues. The other thing is with ZEP starting a little — starting a fair bit later than planned. We are mining in different areas than the original plan. So that in itself also presents new challenges.
So that being said, we’ll get a better idea as we move into Q3, Q4 with Neves and whether or not that slips into 2023. I assure you we remain very, very focused on the successful ramp-up of ZEP, and we’ve got our entire team focused in on it. So it’s a world-class ore body. The zinc price is very, very strong, so we need to ensure that we maximize it.
And maybe I’ll just mention Chapada because I’m sure it’s going to come up as well. With respect to the challenges that began about 2 years ago, when we had our first season about normally high rainfalls did impact production, but it seems like it was a one-off. And of course, that was followed up by even a bigger year.
If we go back to arguably 3 years ago and earlier, they were going through drought. So we — it’s very hard to predict what the weather patterns will be. But we have to make assumptions that this could be — this weather, if you will, could be for an extended period of time, and we have to do a lot better job with our planning, making an assumption that there could be heavy rainfall. So our new hires in technical services have been down in Chapada just recently, and we are reviewing a few different scenarios to adjust on the — likelihood that there is further strange weather patterns. I’ll be down there in a few weeks with our new COO, and we’ll be looking over those plans as well. Yes, so it’s a third question that you asked. As I said, 3 of the assets. I think we’re pretty bulletproof on. And the other 2, we’re working hard to make sure that we can give you guys guidance that’s reliable. Sorry for the long-winded answer.
Operator
Your next question comes from Jackie Przybylowski with BMO.
Jackie Przybylowski
Maybe I just start with a quick housekeeping question. It sounds like from the prepared remarks that you’re annual reserve and resource update is going to be in Q1, which is a bit later than you guys normally do in September. So how does that affect the guidance that you’re going to give us for 2023? Or is that — are you still planning to put that out in like November, December like you normally do? Or is that going to be later this year as well?
Peter Richardson
So the R&R is going to be presented in — sorry, this is Peter Richardson. The R&R is going to be presented in January, February of next year. And the guidance for the coming years will be presented as per normal course in end of November as we’ve done in previous years.
Jackie Przybylowski
Got it. That’s helpful. Maybe a question on provisional pricing. Certainly, this was a rotten quarter for your exposure to copper prices and it certainly hit your revenues pretty hard. I know some companies, some of your peers hedged that provisional pricing exposure. So we don’t have to forecast it. Is that something that you’ve given some thought to? Because it certainly would help to smooth out these kind of peaks and valleys on your revenue side.
Peter Rockandel
Yes. Maybe Jackie, I’ll answer that one. It’s not something historically we’ve done, but we have had a fairly thorough discussion over the last couple of days during a lot of the internal Board meetings and et cetera. And it’s something that we’re going to look a little — quite a bit harder at on a going-forward basis. Probably the biggest advantage they doing it is giving the analysts, et cetera, the ability to better predictability, if you will, on the assumed prices. So it is something that we will certainly take a closer look on a going-forward basis.
Jackie Przybylowski
And maybe if I could sneak in one other question. I know you gave a pretty thorough answer already to the question about what’s happening at Chapada on the operating side. Can you maybe talk a little bit about what’s happening on the project side as well? It looks like you’re still getting some good drill results from the Sauva area, but how does that feed into an ultimate expansion plan? And when might we expect to see some detail on that?
Peter Rockandel
Yes. I mean I think it’s going to be prudent for us to continue going pretty hard at Sauva. The percentage of successful drilling is incredibly high. So I think with respect to the market, we’re going to have to be patient here as we continue to drill. It seems like it’s open in every direction. And given the grades that we’re experiencing, it would have a material impact on any expansion scenarios. So we are feeding that information as we speak into some of the studies. And again, when I go down in a couple of weeks with a number of our senior leadership team, we’re going to review that information.
I think that’s probably all I can say at this — we’re very excited, quite frankly, as you can see in the presentation. It continues to grow. So as I said, I think it would be prudent to really understand what the ultimate size of this is, and then we can determine how best it is moving forward.
Jackie Przybylowski
And maybe I’ll just pass on my congratulations to Peter on his new appointment, and Jinhee on her retirement. And also, obviously, my condolences on the passing of Lukas.
Peter Rockandel
Yes. Appreciate that. It hasn’t been the easiest of the weeks.
Operator
Your next question comes from Dalton Baretto with Canaccord.
Dalton Baretto
I want to start with asking about Lukas’ favorite jurisdiction, Argentina. Peter, I’m wondering what the status of the commercial agreement is, and whether the recent resignation of the Finance Minister and all these talks to the IMF are going to have anything to do with it?
Peter Rockandel
Thanks, Dalton. No, I mean, right now, our communications with the various parties where we have always been aligned, continues to be quite positive. In fact, if anything, they’re wanting to see the project move forward even quicker than we are. I mean I shouldn’t say that we don’t want to move quicker, but we need to make the prudent decision on timing when we have all the necessary inputs. So there’s still very, very, very strong support in Argentina.
Again, as part of my South America trip coming up in a couple of weeks, I will be down there, and I will be meeting with a number of the different officials and just ensuring that we continue to have that level of support.
Dalton Baretto
Okay. And then you said to Orest earlier that you’ll be cognizant of market conditions when you green-light Josemaria. Any thoughts on maybe accelerating your buyback instead?
Peter Rockandel
So I guess what I can say on the buyback is, after close today, we’ll be out of blackout. And the buyback was in place quite recently. And there’s still capacity from what we have been approved to continue with our buyback. So I think that’s something that we think makes sense. And I would expect that it’s a high likelihood that you may see us active in that area.
Dalton Baretto
Okay. Great. And maybe one last one for me. You talked about some of the cost inflators and the large part of that is out of your control. But given the tailwinds you’re seeing in some of your local currencies, any thoughts on hedging out some of those to protect your costs?
Peter Rockandel
Yes. Ironically, again, historically, we don’t do hedging. But ironically, this is something that we’ve just had a very, very thorough conversation on. And I anticipate on select situations, you may see that occur as well.
Operator
Your next question comes from Ioannis Masvoulas with Morgan Stanley.
Ioannis Masvoulas
A couple of questions left from my side. The first on Josemaria, again, and around the scope changes that you are considering. Could you potentially discuss the order of magnitude that we’re talking about in terms of spending? Is it more in the order of $100 million to $200 million, or are we looking something closer to $500 million or higher?
And the second question is on Eagle. You already touched on the upper Keel zone, but you could — could you perhaps elaborate a bit on the opportunity in terms of mine life extension, production rates and unit costs? Just to get a better sense on what it means for the asset.
Peter Rockandel
Why don’t you go and take the first shot on Eagle?
Peter Richardson
Yes. This is Peter Richardson, I’ll answer Eagle. So we’re — as we said during the conference call, we are incorporating the upper Keel zone in our life of mine which will be updated at the end of this year. But we’ll — we won’t see any throughput increase like at the asset, we’re maxed out on what we can produce mine tonnes and mill tonnes, but we’ll see an extension of life of mine as it is more ore that we’re repeating the plan.
Peter Rockandel
Yes. And just going into your question on Josemaria, we did provide a bit of an update last quarter. So nothing has really changed on that. The scope changes were designed around increasing the power into site, crushing capacities and changes the tailings, camp size. So it was a similar things that were mentioned last quarter, and there’s no changes or updates to any of the numbers that we would have mentioned in that last quarter.
Operator
Your next question comes from Greg Barnes with TD Securities.
Greg Barnes
Peter, the cost guidance for 2022 at Chapada and Candelaria has gone up a lot. Obviously, recognize the inflationary impacts, but how sticky are these costs going to be into 2023?
Jinhee Magie
Greg, it’s Jinhee. I would say we’re expecting kind of similar levels into 2023. And as we said before that, currently, the foreign exchange has really been healthy and offsetting on the inflationary impacts in those 2 specific countries. And as Peter has mentioned, kind of protecting on the foreign exchanges is something that we’re also looking at.
So I guess, overall, I’d say into 2023, we’re probably expecting — or we’re forecasting kind of similar pricing.
Greg Barnes
So we’d probably be thinking $1.75 cash costs and $2.25-ish of Chapada in 2023 as well.
Jinhee Magie
Well, I would say on the cost side, so when you look at the C1 that takes into account, our byproduct credit as well, right? So the byproduct also will impact the C1. But I think if you look at on the gross cost basis, and that’s outlined in our MD&A, I think that will — is kind of what we’re expecting to be continuing into the trend, into 2023.
Operator
Your next question comes from Matthew Murphy with Barclays.
Matthew Murphy
My condolences on Lukas as well. And sorry, you have to do earnings at around the same time.
But just a quick one for me on Josemaria. Just on the percent engineering, do you have a target level that you want to achieve before the go decision? And where do you think that will be? And does that influence some of your discussions as well on financing?
Peter Rockandel
Well, I would say the influences our discussions on timing. And I can say, without putting a line in the sand on this call that the number is considerably higher than where we are today. So we’ll make sure that we have the necessary engineering to ensure the accuracy of the project, and there’s a lot of historical data to show what that number is. But we’re achieving great increases, if you will, on a weekly basis with Fluor. So we’re quite happy with this progress, but we certainly need more progress before we make that decision.
Operator
[Operator Instructions] Your next question comes from Lawson Winder with Bank of America.
Lawson Winder
First, my sincere condolences for your loss. And I also say just thank you for the update today. I wanted to ask about Neves-Corvo and the electricity cost in Europe, which I think we all know, have risen to fairly eye-watering levels. Could you just remind us how the electricity contracts at Neves are structured in terms of when they might be reset or have to be renegotiated? And what would be the exposure to spot prices when those contracts are renegotiated.
Jinhee Magie
All right. It’s Jinhee. I’ll take a first stab at back. At Neves-Corvo, earlier this year, we were fully exposed to the energy markets as we came off some contracts at the end of last year. And as we saw the spike, we were unable to walk into a pricing that we are happy with. But I will say that in the recent months, we have been fixing prices, and I believe about 50% fixed for the remainder of the year. So it is something that we are continuing to watch, and it’s come up quite a bit from earlier in the year as well. So I think going forward, we — our expectation is that — kind of the level that we’re seeing right now and lower going forward. And we’re also looking at an alternative energy source as well. So looking at the possibility of investing in solar.
Peter Rockandel
And I may add, Lawson, that with that possibility of looking at solar, even just moving forward, may have an impact on our current contracts with some of the energy providers that would like to be involved with that project, if we should go that route. So that’s quite interesting, and it’s something that we’re working very, very hard on as we speak. And just a brief thank you again for the condolences.
Lawson Winder
Okay. That’s helpful. And then just on the — on your exposure, the power you’re getting now, is it correct to assume that it would be natural gas generated?
Peter Rockandel
Comes off the grid. And so it’s hard to break down all the different sources to feed into that. We can get that answer for you.
Lawson Winder
Okay. I also wanted to just kind of stick with the electricity cost theme. I mean if I recall correctly, in 2023, Candelaria’s power will transition to a renewable energy contract. How is the pricing on those contracts now looking? Because I think the original expectation was for a pretty material reset lower and electricity costs as a result of that.
Jinhee Magie
Yes. Yes. It’s Jinhee. Yes. Absolutely. That still continues to be the case, and I should have mentioned that when Greg asked the question, for 2023. We are looking into the — we will be entering into the new contract in 2023. And compared to current prices, we are expecting it to be more than 60% lower in costs. So that will have a significant impact on the production cost in 2023 and going forward. So that still remains the case. And the other — the additional benefit on the new contract is that it’s fixed and just adjustable for CPI.
Lawson Winder
Okay. And so what would be your percent of cost that’s made up from electricity today versus where it will go once those contracts reset in 2023?
Jinhee Magie
Yes. Right now, our electricity accounts for about 20 — just over 20% of the cost. And I would say, historically, it’s probably been — it’s still quite high. I think probably been maybe 15% of the cost.
Lawson Winder
Okay. That’s super helpful. And if I could, I just wanted to ask another question about the reserve update. But more in particular, Josemaria. I just wanted to kind of better understand the materiality of the update that we might expect at Josemaria. So would you expect it to materially change like the shape, the dap, the size of the expected pit and/or will it add any additional pits?
Peter Rockandel
Well, I think what I would say is a lot of the drilling that’s been done to date, is really just an extension of the previous drilling that ended in mineralization. And so it’s a pretty homogeneous deposit. One can assume that the holes that are going deeper are having success. And I think when we come out with the new R&R, you will see an increase there. We have not done a lot of drilling outside of that area. So we expect to other pits not at this time.
Lawson Winder
Okay. That’s super helpful. If you guys wouldn’t mind, I’d like to try and sneak in one more question. I was just thinking about the ZEP project. You’ve provided some detail, but maybe it would be helpful just to get a little bit of a better idea in terms of what’s sort of causing the ore availability, for example, I mean, is it just developments falling short? Or are there issues with ground conditions? Or maybe are you just having issues getting like the necessary skilled labor in?
Peter Richardson
So it’s Peter here. So we’re having issues in the mine with productivity, primarily in the [La Madar] area, which is the main zinc carrier that has been developed, and is being developed for ZEP. So productivity issues that we’re working on and we’re making changes. And so that’s been the main issues in the mine. And then we’ve also had some issues with — as Peter alluded to with feeding issues with the ramp-up of the crusher, material handling system and some on the surface, where we have a number of initiatives to rectify those issues. We had a plan down 2 weeks ago or last week. So a lot of changes and upgrades have been made to get over those issues.
Operator
Your next question comes from Daniel Major with UBS.
Daniel Major
The first one, just some clarity on the cash allocation to Josemaria this year. You’ve allocated $300 million, and you booked $254 million in CapEx. When we look at the exploration and corporate line, project development increased to $41 million, which includes Josemaria, how much of that spend was Josemaria? And what should we expect in the coming quarters? Is the $300 million split between CapEx and this project development line onto the exploration? Or is that incremental to the $300 million?
Jinhee Magie
Yes. So on the Josemaria spend, we spent about $90 million in total up to June 30 from acquisitions. So $55 million being in CapEx at about $45,000 going through OpEx, or not CapEx. And I would say that includes, again, the project management, the — I guess the overhead costs and such. And I would say going forward, of the $300 million, I would say probably a similar allocation to what you — what we’re seeing — what we saw in Q2, I would expect for the balance of the $300 million.
Daniel Major
Sorry to be clear on that. Is the expense cost on top of the $300 million, or included in the $300 million?
Jinhee Magie
They are included in the $300 million.
Daniel Major
Right. Okay. So similar run rate $40 million a quarter in expense and then the balance goes through CapEx.
Jinhee Magie
Yes. Yes. Maybe a little bit less on the OpEx and a little bit more on the CapEx as we do make payments and deposits on long lead items. So I think it was about 40-60 this quarter, maybe it will be more like 30-70 or something going forward. I would say slightly higher CapEx, slightly lower expense.
Daniel Major
Very clear. Next Candelaria, 2 questions. Firstly, on the outlook for 2024 sort of beyond your explicit guidance period. I think the last technical report indicated an uplift to north of 190,000 tonnes of copper, 2024. There’s obviously been a lot of changes at the mine since then. Should we be expecting that the 2023 run rate, is kind of medium term expectation for Candelaria? Or are you still expecting to get north towards $300 million mark in the middle of the 2020s. That’s the first kind of part of the question.
And then the second part of the question with respect to more CapEx being allocated to Chile, certainly, we heard Anglo American today, I think, making a pretty explicit reference the shape of the tax changes would mean, it’s unlikely that they allocate much more capital towards Chile. What’s the threshold in the tax outcome that’s obviously still under debate that would mean additional investments in Chile off the table if the current proposal that I think implies something close to high 50s effective tax rate, would that be enough to stop you pushing forward with the underground?
Peter Richardson
Yes. So I can comment on the production thoughts. At the moment, we are working on our draft life of mine. Going forward, and we will be finalizing them at the end of this year, and that’s when we’ll be disclosing our guidance going forward. We’re also looking at updating the technical reports. So that’s a project that’s ongoing with our technical services team. So those will be also coming out later this year or early next year.
Peter Rockandel
And Daniel, I may answer the question on Chile. I had the opportunity to meet directly with the President [indiscernible] last month and a number of his deputy ministers as well. I don’t think we were surprised by the new proposal, if you will, call it, 45% effective tax rate, below 200,000 tonnes. That part to us wasn’t a surprise, but I think we were a little surprised as there are a lot of the mining companies, call [indiscernible] tax that he put on after the fact.
So I’m going to be down meeting with a number of the ministers as part of my trip in a few weeks. And I think we’ll be expressing our views on that one, which are pretty much aligned with everyone else’s views. I think this is going to be, quite frankly, viewed as a first proposal by the government. And it’s going to require a fair bit more discussion because they’re starting to see the pushback by a lot of mining companies. And whether or not this goes through in the fall will be questionable. So there’s a lot of — there’s a few other things we still need to be doing, quite frankly, like the 2040 EIA in order to proceed with the project. So we’ll see what the tax system comes out as we’re lined up with all the other moving parts.
Peter Richardson
Also, Daniel, if I may add one thing also that we’re — and we’ve communicated this before, the pebble — increase, the pebble debottlenecking project is progressing as planned. And the plan we have that up and running during next year. And with that, we’ll see greater throughput in the mill. That’s going to be a positive change going forward.
Daniel Major
Okay. And one more, if I may, just perhaps slightly high-level question. I mean we’ve seen some mining executives this reporting season seeming shocked with the copper price fell from $4.50 a pound. I mean I’m assuming in most companies, including yourselves, were not planning on that kind of price environment to move the business forward. $3.50 is not a bad price. Is there a threshold level that either you cut the dividend or don’t move forward with Josemaria?
Peter Rockandel
Yes. I mean I think at this current commodity price, what our current strategy is still solid, and I don’t see any changes to that. To the first part of your question, I spent some time yesterday with our commercial team, and even they were quite surprised by the drop in the pricing only because the demand that they’re seeing for our end products is a bit of a disconnect to what the current prices are. And we feel that these in the long run are unsustainable prices.
You’re seeing a lot of projects being challenged. You’re seeing across the board, everyone’s cost going up, and I think that’s going to spill through eventually to also the commodity prices. So I think most CEOs were surprised by the drop. Obviously, $3.50 is still a good price, but you have to take into consideration our costs all have gone up as well. So I think the outlook for the commodity is still as strong as they ever have been, but it’s difficult to predict in the short term.
Operator
There are no further questions at this time. Please proceed.
Peter Rockandel
Okay. Thank you, operator, and thank you to everyone on the call. I mean, obviously, the current climate has presented a few new challenges, but I’d like to reinforce that Lundin Mining is in a very strong position. We’ve got a great balance sheet right now. We’ve got 5 solid operating assets. And we’ve got some new people joining our senior leadership team that we’re quite excited about.
So I think the outlook is strong, and some of the current teething issues that we’re dealing with, we will certainly address. I look forward to updating everyone in due course. So thank you for the support.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.
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