Capstone Copper Corp

TSX:CS

Earnings Call Transcript 2022-Q3

[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. [Operator Instructions] Thank you. Mr. Jerrold Annett, you may begin your conference.

[Jerrold Annett, executive]

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 into 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 MacKenzie, 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 U.S. dollars, unless otherwise specified.

Now I'll turn the call over to John MacKenzie.

[John MacKenzie, executive]

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, management and our Board visited both Monteverde and Monte Blancos, and we're extremely pleased to see the advancement of the Monteverde development project and the progress and potential for additional upside at Monte 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 4 operations. Despite lower than planned throughput at Monte Blancos, the mine delivered substantially lower sulfide costs of $2.17 per pound, and this should further improve once the mill achieves its target run rate in the fourth quarter. As for the cathode business, all-time high sulfuric acid prices contracted during the second quarter and delivered during the third quarter was the main driver that impacted costs. Specifically, with Monte 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 tonne 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 4 Komatsu electric rope shovels that was commissioned in our Monteverde mine in September. Transitioning to electric equipment at Monteverde will not really help reduce our environmental footprint, but will also increase the mine's 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 6, we show our 9-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 Monte Blancos as well as Pinto Valley.

The ramp-up at Monte Blancos is progressing well. The mill operated above the designed 20,000 tonne 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, executive]

Thank you, John. We are now on Slide 7. Our Q3 financial results were meaningfully impacted by the sharp decline in copper prices that began in late Q2 and continuing 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 29,700 tonnes of copper priced at an average of $3.75 per pound at June 30, which final settled at lower average prices during Q3 and by 34,600 tonnes of copper provisionally priced 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 sulfuric 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 impacted 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 8. 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 of 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 for 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, executive]

Thanks, Raman. Now on Slide 9, Pinto Valley produced 14,100 tonnes of copper during Q3. Mill throughput averaged approximately 48,000 tonnes per day and was impacted by unplanned downtime of the water pumping system at one of our large make-up water sources, combined with a 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 9-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 10. During Q3, Cozamin achieved good grades and throughput levels, yielding solid copper production of 6,400 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 Vein 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 into 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 A) indicate that it is operating at better-than-expected grinding efficiency. Specifically, this new mill is operating at 15% to 20% above design grinding 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 design 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 11,600 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 asset 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 wet 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 the $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 4 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 ore stockpile and reclaim infrastructure area. Slide 15 shows the work at the tailing 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 #1 of 4 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 2 weeks' time.

Finally, on Slide 17, work on the Monteverde Santo Domingo district integration plan continues. The plan will outline how we utilize our existing and future plan infrastructure to maximize value creation across the district. Our goal is to create a world-class district capable of producing 200,000 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 Santo Domingo greatly and conversely, the port and future cobalt plant and the potential additional oxide leach production from Santo 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 2 weeks from now.

Now over to Wendy King for the sustainability review.

[Wendy King, executive]

Thank you, Cashel. We're now on Slide 18. We're proud that Monteverde and Mantos Blancos formerly became participants of the Copper Mark assurance framework in August. In the 12 months to follow, they will complete a 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 have 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 18, and we're developing and rolling out our goals, including our emissions targets very soon. Monteverde inaugurated the first of 4 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 at 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 tailings 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 2 expansion.

Now I'll turn it over to John for final remarks.

[John MacKenzie, executive]

Thank you, Wendy. Finally, on Slide 19, our 9 months production and cost guidance range is reiterated, expect to produce around 185,000 tonnes of copper over 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 agreements in place to advance at Santo 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 Santo Domingo.

With that, we're now ready to take questions.

[Operator]

[Operator Instructions] First question comes from Dalton Baretto at Canaccord.

[Dalton Baretto, analyst]

John, I'd like to start by asking you for your thoughts on the proposal from the Boric government on the new mining royalty you achieved last week?

[John MacKenzie, executive]

Dalton, thanks for the question. And maybe just start off talking about the -- sort of obviously, there have been 2 processes going on. One is the constitutional referendum and the second is the sort of new royalty 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 change. 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 was -- 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 I suppose other jurisdictions, tax rates are. I think in our view, it's still work in progress. It will, still in its current form, act to make Chile sort of less competitive than it would otherwise be. And I think so we will certainly continue to engage with the government and seek an outcome that's sort of is a win-win for both Chile and for mining companies.

[Dalton Baretto, analyst]

Great. And then maybe I can 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, executive]

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, executive]

Yes, Dalton. I think what we need to realize is since the integration of the 2 companies, what we've seen is a tremendous amount of opportunity -- that its sort of uncovering itself at the various operations, whether it's Mantos Blancos, Cozamin or Pinto Valley, but specifically to the integration area between Santo Domingo and Mantoverde, as we dig, we find more. And with that, knowing that Santo Domingo, the last technical report was 2018, and that now it's going to greatly benefit from the infrastructure already installed at Mantoverde, that there's a considerable amount of engineering work to bring up to that quality.

So I think what you can view is that you would get an idea of the scope and the benefits of what the current infrastructure is while we will lay out the time frame for some of the more detailed work and more of the feasibility work, which is what is the cobalt flow sheet, when do we expect to have the oxide delineated at Santo 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 Mantoverde or the addition of the desalination plant or some of the electrical power infrastructure. The difficulty really comes 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're going to lay out is this sort of optimized pathway going forward and that there are some key infrastructure integrations that materially affect Santo Domingo's efficiency going forward.

[Dalton Baretto, analyst]

And maybe I can just squeeze in one more. On PV4 as you're working through it, are you just contemplating a mine life extension or will there be a production expansion as well?

[John MacKenzie, executive]

Fire away, Cashel.

[Cashel Meagher, executive]

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 with it. But the jury is out we don't have the scorecard in yet.

[Operator]

Next question comes from Orest Wowkodaw at Scotiabank.

[Orest Wowkodaw, analyst]

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 Santo Domingo, just given the uncertain market environment for projects and for the copper market itself, whether you still envision the construction of Santo Domingo starting shortly thereafter the completion of Mantoverde 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, executive]

Great. Thanks for that question and it's a very good question. I think as you know, we have sort of stated previously that we have no intention of running 2 major projects in parallel. And so clearly, our first objective is to complete and ramp up the Mantoverde 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 Santo Domingo will clearly sort of take into account the ramp-up of Mantoverde, the buildup of cash within the business and the current macro environment. And that's on both the side of sort of copper prices and the inflationary environment.

So we're using this time to advance the studies and move the studies forward. So that sort of -- we remain flexible that we can pull the trigger on that at what we regard as the optimal time to do so. And obviously, that question is sort of the multiple parameters we need to take into account. Clearly, in an ideal world, we would want to pull the trigger on Santo Domingo sort of during tailwind 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, analyst]

Okay. And just as a follow-on then. So when I think about sort of your projected start-up time line and then a ramp-up for Mantoverde, that would suggest to me that sort of the earliest time line 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, executive]

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 Mantoverde 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 sort of almost identical concentrators before.

So I think we're fairly optimistic about the ramp-up time line. 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 Santo Domingo.

[Orest Wowkodaw, analyst]

Okay. And then just on Santo Domingo itself. Before the merger, there were 2 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 2 proposals?

[John MacKenzie, executive]

Yes, certainly. And Orest, for that, I'll pass across to Cashel. But certainly, those are sort of both on the detailed investigation study.

[Cashel Meagher, executive]

Orest, yes, so 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, that we're sort of waiting for the right economic conditions to move Santo Domingo going while not trying to increase our complexity or workload by running 2 projects at the same time. But we still have a full Santo 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 Santo Domingo but also from Mantoverde and the possibility of oxide from Santo Domingo over at Mantoverde, to fill some of the unused capacity at the SXW.

At the same time, we're focused on that other large revenue generator at Santo Domingo, of course, which is the iron ore. And really the iron ore is what is the catalyst to major port consideration, which is the Port of Santo 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 the 2 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 the 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 Mantoverde and updating them and incorporating them what is the best option for the Mantoverde joint venture also. And invariably, it always turns out to be what is best for Capstone Copper and Santo Domingo is also best for Mantoverde and 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, analyst]

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, executive]

I think what it does is 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 of that. That will come with more detailed engineering and trade-offs 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, analyst]

Okay. One more question, if I could squeeze it in. Just on the Mantoverde sulfide project, how much contingency is built into the $825 million CapEx? And of that, how much has been consumed to-date?

[John MacKenzie, executive]

Yes, I think what's important is just looking at that overall figure, what the -- sort of what it 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. There's 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 cast in stone. And then the other major cost elements are the mining equipment. Now all of that mining equipment is actually priced and the vast majority of that 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 a result of sort of increased diesel and explosive 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.

[Operator]

Next question comes from Ralph Profiti at 8 Capital.

[Ralph Profiti, analyst]

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. I'm 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 to higher copper prices?

[Raman Randhawa, executive]

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 of 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 3-month kind of floating price out there. We're kind of swapping that for a 1-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, Ralph, we just stay on it because what we noticed, I think we discussed with you a little bit is when the price falls, it falls hard, and 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 in the first quarter Q1.

[Ralph Profiti, analyst]

Yes, that's helpful. And second question, just how good is the liquidity in the sulfuric acid market to lock in those Q1 '23 prices sort of into later quarters? Do you have a goal in terms of the proportion of sulfuric asset exposure that you're aiming to be hedged on?

[Raman Randhawa, executive]

Yes, I mean it's a fluid strategy that's actually discussed at the [ Exco ] on a 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 started fixing into Q1 for Mantoverde. That's really good prices of [ 120% ]. And based on our market intelligence, then we can decide if we want to fix it 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.

[Operator]

Next question comes from Stefan Ioannou at Cormark Securities.

[Stefan Ioannou, analyst]

Just wondering on Pinto Valley with the throughput being down in that sort of 48,000 tonne level in the last quarter versus sort of PV3, I think it was trying to get up to around 58,000 tonnes 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 that 58,000-tonne a year throughout the entire calendar year or is it going to be a summer time thing when throughput does go down just because of water?

[John MacKenzie, executive]

And I'll pass that question across to Cashel.

[Cashel Meagher, executive]

Yes, Stefan, there is no doubt there is a seasonal nature. It's no mystery. It's quite hot in Arizona then. Much of our water or much of our makeup water is actually from 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, the 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 to limit that exposure.

That being said, certainly, one of the major sources of water also is reclaim water. It's recycling and reuse of water, and that happens within our -- principally in the thickeners and our tailings 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 spigotting 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 reutilize the installed capacity in the mill to achieve higher than 58,000 tonnes 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 we'll 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 dependence 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.

[Operator]

Next question comes from Ben Nyttingnes at Clarksons Securities.

[Bendik Folden Nyttingnes, analyst]

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's been several news reports on premiums for European and Asian customers kicking in in 2022. That's quite above the levels we've seen today. Is this something you'll be able to leverage on?

[John MacKenzie, executive]

Thanks for that, Ben. I want to pass you across to Jerrold, who has also recently taken over marketing responsibilities. So Jerrold, across to you.

[Jerrold Annett, executive]

Thanks, John. I think you're referring to the cathode premiums, Ben?

[Bendik Folden Nyttingnes, analyst]

Right.

[Jerrold Annett, executive]

Okay. 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.

[Operator]

Next question comes from Craig Hutchison at TD Securities.

[Craig Hutchison, analyst]

Just one question for me, just with respect to the Mantos Blancos Phase 2 to take it from 7 million tonnes to 10 million tonnes. There's a note that you guys 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?

[John MacKenzie, executive]

Yes. Certainly, I'll have a first crack at that and then I'll pass it across to Cashel. But in Chile, there are 3 different levels of permitting. You get what's called a pertenencia, which is just a sort of minor adjustment to let's -- sort of something generally within a plant. There's a DIA, which is -- means there's sort of some additional throughput or scale or more material is going to go into a tailings down. And then there's the EIA, which is the sort of the fully fledged environmental permit.

Our belief is that and which the authorities have accepted is that this expansion of Monteverde is the one in the middle, the DIA. And hence, it is basically a relatively straightforward process. It really just means some additional processing infrastructure within sort of an existing Brownfield plant. And obviously, the main reason why it sort of triggers DIA and not just the pertenencia 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 -- but 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 double the I's and cross all the T's with it. Cashel, do you have anything further to add to that?

[Cashel Meagher, executive]

No. No, I think that explains it well, John.

[Operator]

Next question comes from John Tumazos at John Tumazos Very Independent Research.

[John Tumazos, analyst]

Congratulations on the 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, executive]

John, thanks for the question. I'm going to pass you across to Raman for that to respond.

[Raman Randhawa, executive]

John, good question. When you look at our mark-to-market on our hedge book, it's kind of broken out into 2 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 Mantoverde development project facility. So those hedges are in place in relation to that debt structure 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, analyst]

Do you have a general philosophy about hedging -- sometimes prices recover and turns against you?

[Raman Randhawa, executive]

Go ahead, John.

[John MacKenzie, executive]

Maybe if I can just give us 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 a significant sort of capital expenditure on our projects. We have some high-cost cathode production. And in our view, it sort of 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 sort of 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 our 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 Santo Domingo, for example, if we raise the financing in U.S. 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 would you like to add to that?

[Raman Randhawa, executive]

I think that was 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 or -- John said during the build of MVDP, typically we have been actually 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 in looking out.

[John Tumazos, analyst]

Do you reject other risk management strategies like selling equity or taking a partner?

[John MacKenzie, executive]

So 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 Santo Domingo project, 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 and the project makes sense.

[John Tumazos, analyst]

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 inflation, that's all. It's a different form of risk.

[John MacKenzie, executive]

John, you're absolutely right. And we try and take a sort of 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 components, 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 our sort of cost inputs.

[Operator]

There are no further questions. I will now turn the call back over to John MacKenzie for closing remarks.

[John MacKenzie, executive]

All right. So as we discussed earlier, we're working hard to deliver the Mantoverde, Santo Domingo district integration plan and to host our Chile tour in 2 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. So until then, stay safe and feel free to reach out to Jerrold or Kettina, 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.