Lundin Mining Corp
TSX:LUN
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
8.88
17.79
|
| Price Target |
|
We'll email you a reminder when the closing price reaches CAD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Lundin Mining Corp
You don't have any saved screeners yet
Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lundin Mining Fourth Quarter and 2017 Results Conference Call. [Operator Instructions] Mr. Paul Conibear, President and CEO, you may begin your conference.
Thank you, operator, and thank you, everyone, for joining our call. I'd like to draw your attention to the cautionary statements. We will be making several forward-looking comments throughout the course of this presentation. On the call to assist in answering any questions at the end of my presentation are Marie Inkster, our Senior Vice President and Chief Financial Officer; Peter Richardson, Chief Operating Officer; and Steve Gatley, Vice President, Technical Services.First, I would like to briefly recap some of the highlights for Lundin Mining in 2017. It was a very constructive year for the company, with many achievements that positioned us well to outperform in the years ahead. We had continued strong operational performance across our portfolio of mines. We achieved production guidance for all metals and met or bettered our cash cost guidance at each operation. This was underpinned by the company's best-ever safety performance which continued the positive trends year-upon-year over the last 5 years. We made and continue to make significant progress on all our key projects. Construction of the initial phase of Los Diques tailings facility at Candelaria has been completed well ahead of schedule, and we're accelerating future phases to benefit from cost synergies with waste mining in the open pit. The Neves-Corvo Zinc Expansion and Eagle East projects are both advancing well towards first production in the second half 2019 and early 2020, respectively. Our overall strategy has not changed, disciplined capital management. We're focused on managing the business well, taking a long-term view and growing in stages, adding good value for our shareholders. In 2017, as a maturing step for the company, we commenced a regular dividend. We also successfully completed the difficult sale of our interest in Tenke. On the strength of our balance sheet, we were able to readily buy down some high-cost debt. And to build for the future, we were busier than ever before, actively assessing potential value-add M&A opportunities to grow and improve our asset base. These achievements and many others of 2017 position us well to outperform in the years ahead. The figure on this slide demonstrates the quality of the assets we operate. Three of our assets achieved first quartile C1 cash costs in 2017. Neves-Corvo was reported as a copper cash cost net of zinc production. As the Zinc Expansion Project ramps up and once the operation is producing double the zinc it currently does, cash cost reporting will logically switch to a zinc basis net of copper. As metal prices improved year-over-year and our business improvement initiatives advance operating margins at each mine improved, Candelaria, our largest operation by far, achieved an excellent 60% operating margin. We remain predominantly a copper producer, which is consistent with our long-term vision. 67% of our USD 2.1 billion in sales for the year was derived from copper, and this remains consistent for the past few years. Zinc contribution to our business has grown over the last few years on both price and production volume improvements. Zinc contributed 15% to revenues in 2017 and will grow as we double zinc production in Portugal. Briefly recapping financial highlights. Realized copper and zinc metal prices were up nearly 30% and 40%, respectively, over 2016, and our realized nickel price was up 9%, year-upon-year. Nickel price has finally broken through the $6 range, and we expect it to slowly improve over the next few years. Copper and zinc prices, however, should continue to be strong for several years ahead, contributing excellent cash flows to our bottom line. The near 80% increase in operating earnings year-upon-year was, in part, due to higher realized metal prices but also due to the record zinc production in Neves-Corvo and high copper production achieved in Candelaria. Ultimately, we achieved the 58% operating margin across our operations and generated $830 million of operating cash flow before changes in working capital at our mines. In the first year of our regular dividend, we returned CAD 0.12 per share to shareholders. Moving to our operations, responsible mining is at the core of our business. As mentioned, we achieved our best company-wide safety performance with a total recordable injury frequency rate of less than 0.6. This puts us in the best 1/3 of Western mining companies on safety performance. On the social and environmental aspects of our business, transparent and sustainable practices are central to how we operate. We believe we are ahead of the curve on proactively managing these critical aspects of mining. We have excellent community relationships at all of our mines. And last year, we achieved multiple important environmental approvals and permits at Eagle East, Neves-Corvo and Candelaria. Candelaria, another strong operating year at this excellent mine. Obvious challenges late in the fourth quarter, however, we were able to overcome these to meet our production guidance and essentially meet our cash cost guidance for the year. Looking forward, Candelaria is well positioned for the future, supported by the investments we are making. The improved mine plan provides a near 20% increase in total copper produced from Candelaria's pit and for underground deposits over the life of mine. Each year, we have been able to improve Candelaria's life-of-mine production profile, and we believe there are additional advances we can make from here. The reinvestment in Candelaria's open pit and underground fleet and the mill optimization project are underway, and we expect to see operating benefits in stages starting late this year and continuing into the future. We have begun to take delivery of the underground equipment as part of moving to owner-operator underground at Candelaria Norte, that's an investment that was announced early in 2017. The new open pit fleet investment announced last year will start arriving in Q2, possibly integrated into the mining operations, contributing to lower production costs in stages. These investments support the significant increased mine life that Candelaria has achieved through exploration success. We continue to have a very aggressive exploration program and have high expectations of ongoing exploration success to enable additional improvements to Candelaria's production profile. The critical aspect to Candelaria when we first acquired the mine in 2014 was the need to permit and construct a major new tailings facility. We're pleased to report that the construction of the initial phase of Los Diques was completed ahead of schedule, and the second phase is nearing substantial completion. First tails were placed behind the dam early in January and commissioning is well underway. Here, you see an aerial view of the Candelaria plant in the foreground and circled in red up to the left, the Los Diques main dam as of mid-January. This has been a very well-executed project. Original capital cost was estimated to be USD 400 million. We expect to complete the project for about $295 million and within that, $45 million to be spent this year, completing the originally planned phases of the dam. We're also taking advantage of available mine waste from the pit by advancing construction of the third and fourth phases for ore overall savings compared to the original plan.Moving to Neves-Corvo. We achieved both production and cash cost guidance, with full year cash cost of $0.88 per pound of copper. But production guidance was reduced, mainly for cooper, impacted by complex copper ores throughout the year and labor action in the fourth quarter. The Zinc Expansion project is progressing well despite some impact from the Q4 strike action. Underground ramp development, which is a critical path, is advancing with roughly 50% of the ramp development completed by the end of last year. Shaft upgrade engineering is underway and surface facility detail engineering is roughly 55% complete, with all major process equipment on order.We are still experiencing labor issues at the mine. We are in open dialogue with the government, union and employees to resolve the labor issues, however, there is risk of additional strike action. Ultimately, we are focused on ensuring the long-term competitiveness of this operation. Turning to Eagle. Eagle continues its outstanding performance with records achieved on metal recoveries and concentrate quality in 2017. Full year cash cost of $0.93 per pound nickel benefited from copper and other by-product credits but also from excellent mine and mill operation. Eagle remains clearly a first quartile cash cost producer. Mill feed grades were lower quarter-over-quarter as expected and on plan, and we will see higher grades in production as Eagle East comes online in early 2020. The Eagle East project continues to advance very well. The main access ramp is approximately 50% complete, and the project is trending ahead of schedule and under budget. In round numbers, we have approximately $75 million left to spend with $30 million of that forecast this year. We will continue to explore aggressively at Eagle, focus on tracing the Eagle East feeder down dip, with 35,000 meters of drilling this year, 4 rigs turning as part of an $18 million exploration budget. Zinkgruvan, a pretty remarkable mine ahead of its -- a very strong fourth quarter to cap off its 160th year of continuous operation last year. Record quarterly throughput was achieved as well as record annual throughput, following the midyear completion of the 1350 mill expansion, which essentially replaced the front end of the mill. We expect increasing production at Zinkgruvan in the next 3 years as the expanded mill runs at floor rates and supported by improving grades. This continues to be a very solid mine with very low cash operating cost, and it still has upside on life of mine and discovery potential. We have rejuvenated our exploration program for 2018 with a USD 13 million budget, focused on the nearby Dalby deposit and several other local targets.This next slide breaks down our planned capital expenditures and total exploration budget for 2018. These figures remain unchanged from our guidance that we provided in late November. As outlined previously, we're making meaningful investments over the next few years at Candelaria, Neves-Corvo and Eagle to significantly increase the value of these mines. We consistently take a medium- and long-term view of how we manage our assets and are confident that these investments will provide low-risk, high-value returns. We don't provide CapEx guidance beyond the current year, however, this year will be a high point in CapEx compared to the next few years as the Los Diques project winds down and the bulk of the new mine equipment orders are made and our Zinc Expansion and Eagle East projects progress. There are up-to-date technical reports out in each of our operations. We filed one for each asset over the course of last year, and from those, you can get a detailed view of the CapEx and production profiles of the company by asset over the next few years and life of mine. Before completing this, we provide on this slide our detailed 2018 production and cash cost guidance, which remains unchanged from our previous release. This year in aggregate, on 100% basis, we aim to produce approximately 400,000 tonnes of copper, zinc, nickel and lead at very competitive cash costs. Looking forward, we have an excellent growing production profile ahead. We are guiding over 15% growth in attributable copper, production from our current assets between this year and 2020, primarily based on the new Candelaria life of mine plan. Attributable copper production is expected to increase beyond the 2020 level by plant. We also expect additional production benefits to come from ongoing exploration success and productivity improvements from the new mine fleet at Candelaria and increased production due to higher copper grades from Eagle East. We expect a nearly 60% increase in total zinc production over the same period, with the ramp-up of the Zinc Expansion Project at Neves-Corvo and incremental improvements at Zinkgruvan. This is a meaningful addition to our zinc production profile at a time that we believe we'll experience record-high zinc markets and high competition for delivery of our zinc concentrates. Nickel production starts to increase again in 2020 as higher grade Eagle East ore comes into the mill.All said, we ended last year with an enviable cash and equivalent position of USD 1.6 billion and a net cash balance of approximately $1.1 billion. We remain very focused and disciplined in our allocation of capital, with a clear focus on growth. We are investing in and will continue to evaluate opportunities of low-risk, high-return projects at our existing assets. Maintenance of our regular dividend remains a top priority as well. We have initially set it at a level we believe sustainable throughout the cycles and not linked to any specific ratio. And of course, we continue to actively assess M&A opportunities to maintain our balance sheet strength to be flexible to react quickly to compelling opportunities. In summary, we operate a strong portfolio of highly competitive mines that we expect to make money throughout any part of the base metal cycle. Our mines offer meaningful scale, and all have upside on exploration and expansion potential. And we remain focused on value creation through disciplined investments in exploration, expansion of our existing assets and acquisition initiatives that will improve the scale and shareholder returns for our company. We thank you very much, and I would now like to turn it over to the audience for questions.
[Operator Instructions] Your first question comes from Orest Wowkodaw of Scotiabank.
I was wondering if we could get an update on the remediation at Candelaria. And it's been, I guess, 3, 4 months since the pit wall instability. And I'm curious whether you're seeing anything that might allow you to advance the remediation plans there and maybe increase the production profile relative to the guidance that could be out there?
Thanks, Orest. We're progressing on plan, certainly in the year obviously. We're stripping waste now, both the area where the slide occurred, working from top to bottom, making sure we remove the material, progressing down safely. And so far, this year, we've removed about 5 -- just over 5 million tonnes of waste from Phase 10. And since the slide occurred, about 12 million tonnes. So we're making a lot of progress there, moving a lot of material. So it's going according to plan. There is potential to improve, I think, on this. And we'll work hard to do so, but it's pretty early in the year.
Is there anything you can do in terms of adding, say, more contractors to advance the remediation?
Yes, we are doing that. We've got contractors on site active now on waste stripping and more equipment arriving.
Okay. So it sounds like we're going to need more time to see any potential improvement or upside, is that correct?
Yes, I think this program measured quarter-to-quarter upon quarter, you'll see the tonnes of waste that we strip and the progress we make. And we're confident that we'll execute really well. The Candelaria is very, very good at moving waste. The Los Diques project, we had a need or a target to move about, on average, 50,000 tonnes of waste a day. At times, we were moving 155,000 tonnes. So these guys can move rock.
Your next question comes from Ralph Profiti of Eight Capital.
Notwithstanding the labor issues at Neves, but given where copper markets are, where does Semblana fit in the strategy now?
Semblana will definitely be mined. I think for viewers who are not aware there's a satellite deposit, copper deposit. It's -- I don't know. Steve, it's 5 million to 7 million tonnes, I think?
7 million tonnes.
7 million tonnes, 2.5% or so copper. So it's a good deposit. It's maybe about a kilometer down and a kilometer away. We'd actually started to ramp to it several years ago. It will come into the mine plan. It's not our highest priority right now. Our highest priority is getting the zinc project up and running. I'd like to see Semblana come along after that. But we're not spending money on it right now.
Okay. And just coming back to the drilling at Zinkgruvan given your positive comments there, is this sort of a step change in strategy on exploration there? Or was the drilling and the spending sort of always part of the plan?
This has been such a good mine that the amount of exploration that's been done year-upon-year was really quite minimal, sometimes $0.5 million, $1 million, a couple of million bucks at the most. And they have been slowly working away on 2 deposits, which are connected, they're very, very close, called Dalby and Mellanby. We started to get some really good drilling success, and we put some surface holes down last year and hit some really good intercepts, quite a step-out distance away from the mine. So we've got 6 rigs on that now. And we should have some more information published on that by -- in our annual update in September. So we're pretty pleased by what we're seeing. On Dalby, whether it can change the production profile, I am not sure about that. I think I have quite a bit of confidence that it will improve and extend life of mine.
Your next question comes from Jatinder Goel of Citigroup.
Two questions please. Firstly on Zinc Expansion Project, there is about $190 million of capital to be spent this year as per the CapEx guidance. And you've indicated a potential postponement as well if deliberations do not resolve. What's the kind of solution that you're looking at? Is that a regulatory change that needs to go through before you are more comfortable with the situation and business can go as usual? And just second question, what's your current exposure to spot TCs on both copper and zinc? And is there any intention from the corporate side to change that mix over near to medium term?
Yes. So complex situation in labor at Neves-Corvo, I'm confident it will get resolved. I think there is a fairly high likelihood of some more labor action. We've -- We haven't -- there's a system in Portugal where they're required to give you a notice of a strike, advance notice. We haven't received that. But we've seen stuff from the press that there might be a strike in the first week or around the 5th of March or something like that. We're in very open dialogue with the union. This all started as a national movement, motivated by a political party, and it's kind of gravitated towards one local issue in particular, which they're polarized with, which is early retirement of -- for workers in the plant. They'd like to retire earlier than Portuguese law allows and looking for somebody to support the pensions for early retirement. So that's the polarizing issue there. We -- we're willing to support that, but we're not the government. So it's complex. In the strikes that we did have -- we had 3 sets of rotating strikes in Q4, we continued to produce zinc and copper throughout that. We continued to progress the project, but it did slow us down. On the TC/RC, so maybe Marie, do you want to address that?
Sure. We find that it's a pretty symbiotic relationship between the miner and the smelter. So most of our copper and zinc is tied up in long-term contracts. So the percentage that would be subject to spot sales would be a low single-digit percentage.
Your next question comes from Oscar Cabrera of CIBC.
Paul, I was wondering if you could add a little bit more color around your comments on the Candelaria underground, and this is -- this has to do with the potential production increase beyond the currently permitted 14,000 tonnes per day. So can you give us a idea of what you think the potential upside on that throughput is? And how long do you think it will take to permit?
Okay. So I'll start with just giving you a little bit more information or a recap. So the open pit, let's say, it produces, on average, 0.5%, 0.55% copper. The underground deposits, of which we have 5, range between 0.8% and 1.5% copper, call it, average, 0.9% or 1%. When we took over operatorship of Candelaria in late 2014, 3 underground mines were contributing about 12,000 tonnes a day. We're now operating at 16,000 or 17,000 tonnes a day. And we have, I think, our 5-year plan -- correct me if I'm wrong, Steve, here. 5 or certainly within 10 years, we get it up into the 20,000, 22,000 tonnes a day, and we're doing additional study work now to see if we can take it to 25,000 tonnes, just from Candelaria Norte and Candelaria Sur because 2 of the other mines are more distant, on the other side of the valley. So I think we're highly confident in significant additional exploration upside. We are going to find more underground ore. I'm very confident of that. The permitting process to expand -- to get approval to expand tonnage on these underground mines, I guess our most recent experience was Candelaria Norte, where we got the permits, it took about 1.5 years. And I think Alcaparrosa where we just got the permits in the nick of time, at Christmas time, that probably took -- that definitely took more than 1 year. So, call it, 2 years on the outside. I'm hoping as the new government comes in that we'll streamline some of that process because it is a bit painful just to get approval to expand production where there's really no change or impact other than the tonnes material moved.
Right. The percentage of these mines in terms of the overall throughput is -- it's smaller. But how much of an impact do you think it can have on the production profile?
It is pretty meaningful as we sit today. So we put, let's say -- it really varies because of the hardness of ore, but we might do 65,000 or 70,000 tonnes a day on average from the pit. And 15,000 to 17,000 tonnes a day at double the grades from the underground. So it definitely has -- helps us produce a lot more copper.
Great. That's helpful, Paul. Then if I may, just the recurring question about capital structure and what are you going to do with all the cash that you have in the balance sheet. Maybe I can ask it this way, at what level would you be comfortable with cash and equivalents in the balance sheet?
Well, I guess, first off, we're going to continue to be patient. We are looking and have been deploying our capital to high-return investments, where we see them and have them, which has so far been on our own assets. We're more active last year than we've ever been. We hope to be pretty active this year on finding something that's a really good fit for us. So I think for the time being, we'll stay where we are with our existing cash balance, which is, I guess, gross cash we'll grow and cash equivalent to $1.6 billion. And we reassess quarter-by-quarter, where our dividend sits, what those growth opportunities are and what our projections are for cash flow. So I think expect us to sit where we are for a little bit, Oscar, and I hope that answered your question.
[Operator Instructions] Your next question comes from George Topping of Industrial Alliance.
Paul, just one question on the Neves-Corvo, just to drill deeper into the labor issues there. How many days did you lose of production in Q4 due to strike action? And...
I don't know if I could actually measure -- there were never total lost days, like there was 1 week of strike in October, 1 week in November and 1 week in December. Marie, do you -- have you got -- we had, what? 15 interrupted days?
Yes, that's correct.
Yes. But during that strike on average, so the first 2 strikes, 30% to 35% of the people didn't show up to work, the rest did. And the last strike, between Christmas and New Year's, there were very few people on the picket line. We still got some work done. But it was disruptive, for sure, which we won't want more of that. But it didn't shut everything down for the entire periods that they went on strike.
Sure. You used some pretty strong language about postponing the Zinc Expansion Project. Tell me, is there robust -- is it continuing into disgruntled labor with maybe go slow action or through your productivity or any of that, that's causing you to consider postponement?
Several things there, George. We -- I mean, we've got to take a long-term view with all of our operations and protect our investments. If you're running a project and there's labor action, that's hard on the contractors, which means it's hard on the schedule and it's hard on the CapEx. So we'll do what we need to do to protect our investments.
Your next question comes from Stefan Ioannou of Cormark Securities.
Just wondering just on the Neves-Corvo, just with the project engineering and the government, I guess, review of the engineering, you mentioned in the MD&A that, that was received back with some conditions. Can you just give any comment on what the conditions were? And I guess you resubmitted those answers and sort of what the timeline is to get sort of full approval if you will going forward.
Yes. Don't look for any complexity there, it's normal course. Every permit we get comes with a long list of conditions, and you go through them. And actually, often they give you these permits in draft, with those conditions. You go back, and you work through them. So don't expect any complexities there.
Your next question comes from Jatinder Goel of Citigroup.
Just a couple more questions, if I can. On 2022 bond maturity, you've got a redemption option for November this year, but there is potential mandatory tender in second quarter as well. What are your current thoughts? Because if you don't find anything, then it's more likely that the mandatory tender will be in place. Is that your intention, to redeem as soon as possible? And secondly, just on currency exposure, you mentioned a majority of your cost are in local currency. Can you quantify how much dollar exposure do you have in Chile and in Europe in operations?
Okay. Marie, do you wanted to answer both questions?
Sure. So on the first question -- sorry, can you clarify? You want to know what we will do when the excess proceeds is triggered? I think that was the question. We do have a bond recall date in November, it's available for recall. The requirement for the second quarter is that following an acquisition, if we have excess proceeds that haven't been reinvested and they are over $100 million, then we are required to tender the bonds at par plus accrued interest. So looking at the -- where the bonds are trading right now, if we put out that tender, it's highly unlikely that anyone would enter into -- agree to take up the tender. So we would expect, if we don't have some acquisition before that time, that we would have excess proceeds according to the indenture, and we would make that tender. In November, we will have to reassess where we are. We never want to have excess cash hanging around the balance sheet. It's not doing a great deal for us, gaining interest at 1.5% where we target to have more than 12% return on our investments. So we don't want to have a lot of excess cash sitting around. On the second question, it varies country to country. I think, most substantially in Chile, it probably is where you'll have the most U.S. dollar exposure, probably about 80%. On the other countries, if you want to give Mark a call after this call, he can circle back with you and go through that.
Your next question comes from Dalton Baretto of Canaccord.
I just wanted to follow up a little bit on Oscar's question on capital allocation and more specifically, around acquisitions. I think it's fair to say that it's probably much harder today to find assets than it was 1 year ago. So as you look at your investment criteria around size, stage, commodity, geography and even price, how is that changing going forward?
First off, I might disagree that the landscape today is tougher than 1 year ago. And that's exactly what people were speculating as it went from '16 to '17, and we were active in 3 formal processes and had 3 other things -- still have 3 things that we track, not formal processes. So as metal prices improve or other situations come up, there are sellers or there are unusual circumstances that arise. So I'm confident that one of those will arrive for us. We haven't really -- we're very disciplined with our criteria. We haven't changed our criteria. We haven't changed our price decks when we do some benchmarking in what we think an asset might be worth. And I don't think too many of our peers are changing much of their criteria either.
There are no further questions at this time. I'll return the call to Mr. Conibear.
Okay. Thank you very much, everybody. And we look forward to our next call, which is the -- in the Q1, in April. Thank you.
This concludes today's conference call. You may now disconnect.