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Good day, and thank you for standing by. Welcome to the Lundin Mining Third Quarter 2021 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Marie Inkster, President and CEO.
Thank you, operator, and thank you, everyone, for joining Lundin Mining's Third Quarter 2021 Results Call. I'd like to draw your attention to the cautionary statements on Slide 2 as we will be making several forward-looking comments throughout the course of this presentation and in the Q&A. On the call to assist with the presentation and here to answer questions are Jinhee Magie, our Senior Vice President and Chief Financial Officer; Peter Richardson, our Senior Vice President and Chief Operating Officer; and last but not least, Peter Rockandel, presently our Senior Vice President of Corporate Development and Investor Relations and the incoming CEO of Lundin Mining. In early September, the company announced that I will be stepping down as President and CEO. This was a difficult decision for me but one that I could take with the confidence that the company will continue to do well and knowing that I am leaving the company in a strong and healthy state with considerable breadth and depth of the many talented people and teams across our organization. We have fantastic assets and a culture from which the company will continue to grow and be successful. I'm excited that the Board has selected Peter Rockandel to succeed me as President and CEO. Many of you know Peter well not only from his time with Lundin Mining but also through his prior leadership positions in the metals and mining capital markets. Peter's experience and reputation in our industry and within the company make him an ideal fit to lead Lundin Mining.
Thank you, Marie. I'm extremely excited for the opportunity to lead our team and continue building on our success. I've been working closely with Marie and the senior leadership team for the past 3 years, and the recent transition has gone very smoothly. In the past few weeks, I've had the opportunity to spend valuable time at Chapada, Neves-Corvo and Zinkgruvan with our respective site MDs, senior management, employees and a member of the unions. Next month, I will be spending time at Candelaria and Eagle. I've also been working with my colleagues in the recruitment of key personnel to complement our existing technical team. We look forward to providing more details on that in the new year. During the next quarter, I look forward to connecting with many of our shareholders, hopefully, in person where possible. With that, I will hand the call over to Jinhee to talk to the quarter's results.
Thank you, Peter. On Slide 4. Third quarter production of copper, zinc and golden concentrates all improved over last quarter. This performance is more impressive in the context of planned downtime taken for major maintenance activities out of Candelaria and Neves-Corvo operations. We produced over 115,000 tonnes of base metals and approximately 46,000 ounces of gold in the quarter. We also sold near 100,000 tonnes of base metals and approximately 42,000 ounces of gold on a payable basis, generating revenue of over $755 million. We remain predominantly leveraged to copper with the metal generating nearly 70% of the quarter's revenue. Zinc, nickel and gold each contributed 8% to 9%. Slide 5 presents a summary of the third quarter results compared to the same period last year. We benefited from significantly higher base metal prices this quarter compared to third quarter of last year. We realized a copper price of $4.02 per pound, below the average market price of the quarter, mainly reflecting a $0.09 per pound of prior period adjustments. Prior period adjustments for zinc, nickel and gold were less impactful with lower volatility and relatively small quarter-over-quarter changes in price. Details of the price adjustments are in our MD&A. Third quarter revenue of over $750 million increased more than 25% over the same quarter last year. In the first 3 quarters of this year, consolidated revenue has reached over $2.3 billion. Attributable net earnings from operations were $0.24 per share, and adjusted earnings were $0.23 per share for the quarter. Both are substantially greater than the third quarter of last year. In the first 3 quarters of this year, we have generated nearly $540 million of adjusted earnings. Details of the adjustments are broken down in our MD&A as well. We generated adjusted EBITDA of over $410 million in the quarter and through the end of September had generated adjusted EBITDA in excess of $1.2 billion for the year. Cash flow from operations was over $520 million for the quarter. This was positively impacted by working capital changes driven largely by trade receivables at Candelaria, where sales that occurred in the second half of Q2 were collected in the third quarter. Adjusted operating cash flow before changes in noncash working capital items was nearly $300 million or $0.40 per share. In the third quarter, we generated a record free cash flow of over $400 million, bringing the total generated in the first 3 quarters to over $760 million. Under the company's dividend framework, the regular quarterly dividend of CAD 0.09 per share and an inaugural semiannual performance dividend of CAD 0.09 per share was declared and paid during the third quarter. Again, yesterday, our Board of Directors declared a regular dividend of CAD 0.09 per share. In total, the dividends annualized to CAD 0.54 per share for total yield of approximately 5%. The company remains in a very strong financial position. Cash and equivalents approached $430 million at quarter end even after more than $110 million of dividend and stock repurchases and repayment of $100 million of debt. The company's financial position has improved further since the end of the quarter. Net cash is now approximately $405 million with cash and cash equivalents of $445 million. I will now turn the call to Peter to discuss our operations.
Thank you, Jinhee. Starting with Candelaria on Slide 6. The operations performed in line with expectations, producing nearly 36,000 tonnes of copper and approximately 20,000 ounces of gold at a cash cost of $1.62 per pound copper. We successfully completed 2 planned major maintenance down, which impacted overall throughput for the quarter. So tonnes milled, ore grades and recovery rates achieved were in line with plan. Similarly, cash costs were also in good plan. So compared to the second quarter, they were impacted by planned maintenance, slightly higher than forecasted magnetite, gold and silver byproduct credits fully offset modestly greater than planned operating costs. We have reiterated Candelaria's production guidance of 150,000 to 155,000 tonnes of copper and 85,000 to 90,000 ounces of gold at a cash cost of $1.55 per pound of copper. Given the production of the first 3 quarters, this implies a strong finish to the year. We forecast the average copper feed grade to increase meaningfully this quarter and we have been realizing this thus far. With only one planned maintenance down mid this quarter, we expect to achieve greater throughput quarter-over-quarter as well. The key driver to production this quarter is achieving the necessary mining rates of the high-grade ore from Phase 10 of the open pit to maintain the overall peak grade near the current levels. Full year capital expenditure guidance has been reduced by $20 million to $345 million mainly on deferral into 2022, items such as some underground development and underground mine technology as well as work on the truck shop. This leaves roughly $120 million for the fourth quarter. Moving to Slide 7. I'll give an update on where we are with initiatives to improve plant throughput and, on the next slide, the mine to mill grade discrepancy. We continue to prepare and optimize life of mine plans for all operations as part of our annual planning process. When our Board of Directors approved the final plans in late November as per our normal course, we will provide a 3-year production outlook and a 1-year C1 cash cost and capital expenditure guidance for all mines. Crushed pebbles are currently being recirculated to the SAG mills, thereby reducing the amount of fresh ore that can be fed to the plant. The aim of the debottlenecking is to reduce or eliminate the return of crushed pebbles to the SAG mills. Basic engineering is underway on several initiatives. These include modifying the pebble hopper and the loading system to better distribute pebbles across the 3 crushers to utilize all 3 as efficiently and as effectively as possible. And engineering of a partial bypass of the pebble ball mill such that excess fine pebbles can be sent directly to the secondary grinding circuit, the ball mill of the plant instead of being returned to the SAG mills. Study and investigative work is also underway evaluating the conversion of the existing pebble ball mill to a rod mill, all to be confirmed with our late November annual guidance and outlook release. Those studies complete today's envisage procurement and construction in 2022 with tie-ins in 2023. Also to be confirmed, total capital costs are expected to be in the order of $10 million to $15 million. Moving to Slide 8, on the mine-to-mill grade discrepancy investigation. We saw an improvement in the third quarter. As discussed last quarter, preliminary plans being developed to Candelaria consider a mine call factor of 5% to 8% for the next few years. This slide presents a number of the actions that we took in the quarter both in the mine and the mill. Some of these have been completed, while others are ongoing. From the list of actions and next steps, you can see that we're taking a methodical approach to identify and eliminate sources of dilution and discrepancy across the mine to mill process. One of the more exciting next steps and a good example of the use of technology is the NextOre magnetic resonance analyze our MRA trial project. This project is designed to allow direct grade estimation by each ore source and even by individual truck loading arrived at the primary crusher and will allow for easier and earlier identification of possible ore dilution by source to then develop action plans to address the root causes and at the identified source. A secondary benefit of this as a technology demonstrator for the ore sorting project, which is identified in the EIA that is currently in review process with authorities. The project is presently a 1-year trial. Equipment construction on site is underway with the installation and tie-in anticipated for early next year. Moving to Chapada on Slide 9. Chapada had an excellent quarter. Copper production exceeded 16,000 tonnes, which is a 43% increase over last quarter. Similarly, gold production increased 48% quarter-over-quarter to approximately 26,000 ounces. This was achieved primarily on greater than planned throughput and metal recoveries. Our new mill throughput record was set for the second quarter in a row with processing over 6.4 million tonnes. And our new monthly mill record was also set in August with over 2.3 million tonnes processed. Recovery rates of both copper and gold improved significant over the third quarter and were modestly above plan. Production guidance has been reiterated for both metals. Considered the [indiscernible] guidance is planned mill maintenance during the fourth quarter, copper and gold grade recoveries are expected to remain strong. Third quarter production costs on a per tonne mill basis were in line with plan, while the cash cost of $0.62 per pound copper was better than expected mainly owing to stronger production. We have been experiencing general inflation across the operation cost structure, particularly in areas that would be expected such as fuel, ocean freight, explosives and other consumables such as steel, which we have been managing well. All considered, our full year cash cost guidance of $1.10 per pound of copper has been reiterated. Full year capital expenditure guidance has been lowered by $10 million to $55 million primarily on deferral of some projects and some land acquisitions. This leaves roughly $50 million for the fourth quarter. On the exploration front, we continue to make excellent drilling progress. We completed over 20,100 meters of drilling in the quarter on near-mine targets and in the Formiga area. Having completed over 49,000 meters in the first 3 quarters and with our seventh rig added in late September, we are on track to complete 65,000 meters for the year, expanded from the originally planned 60,000. At Chapada, our primary focus remains on near-mine exploration to better understand and define the mineral resource potential and inform our ongoing expansion studies. Eagle, on Slide 10, had a good quarter. The photo on this slide is of the team members accepting the Sentinel of Safety Award for both 2019 and 2020 for the small underground metal group. This is the second year in a row that Eagle has been recognized for its safety performance by the U.S. National Mining Association and the Mine Safety and Health Administration. Mill throughput was impacted when compared to prior quarters given mine sequencing at that times limited ore production rates. Compared to recent prior quarters, production of both nickel and copper reflected nickel and copper grades as expected. As a result, third quarter production of nickel and copper both exceeded 4,100 tonnes at a cash cost of negative $0.80 per pound of nickel. With minimal capital expenditure of less than $5 million, Eagle generated nearly $70 million of cash in the quarter. For the first 3 quarters, total cash generation is over $230 million from nearly $245 million of operating cash flow. Production cash cost and capital expenditure guidance have all been reiterated. We're continuing technical and economic studies evaluating the potential of mining mineralization in what is referred to as the Keel zone. This zone of disseminated mineralization is lower than that of Eagle and Eagle East ore bodies. However, given the proximity to the existing ramp infrastructure has the potential to be economically mined at the current spot nickel and copper prices. In addition to the study work, we do infill drilling along the contact to further delineate this mill, 5 extension targets, mainly off Eagle East have also been identified for drilling from underground likely as part of our 2022 program. Moving to Neves-Corvo on Slide 11. Third quarter production totaled nearly 8,100 tonnes of copper, 16,000 tonnes of zinc and 1,400 tonnes of lead at a cash cost of $2.05 per pound copper. As previously indicated, we had planned downtime from mid-August to early September for the annual maintenance in the copper and zinc plants and during which we completed upgrades to the shaft as part of the Zinc Expansion Project. This work was completed slightly ahead of schedule, and production was as planned for the quarter. We have reiterated production guidance. Without interruptions, throughput levels are expected to improve quarter-over-quarter and metal grades and recoveries to remain strong in the fourth quarter. Operating costs in euro on a per tonne mill unit basis were modestly above plan as though were better than planned on a U.S. dollar basis due to favorable foreign exchange rate. The cash cost of $2.05 per pound copper was better than planned as higher than forecasted zinc byproduct credits offset modestly higher-than-expected operating cost on a per pound basis. Full year sustaining capital guidance has been lowered by $5 million to $60 million primarily on timing of payments. This leaves roughly $30 million for the fourth quarter. Shifting gears to the Zinc Expansion Project. Consistent with previous expectations, constructions will be substantially complete by the end of the year with ramp-up to over 2022. Preproduction capital of $430 million remains unchanged, as does our 2021 capital expenditure guidance of $70 million with approximately $30 million remaining to be spent in early 2022. Slide 12 shows the latest progress on the underground. During the quarter, as mentioned, we successfully completed the shaft upgrades. The mechanical installation of the materials handling system is now complete, including conveyor belt works, and we have commenced all remaining excavation works. Over the next month, underground work is focusing on completing the service water piping, you can see a section already completed on the support rack in the picture on the conveyor tunnel on the left. Complete final and commissioning of all the electrical rooms and then commissioning and handover of all the material handling system to the operations team. Photos on Slide 13 shows some of the progress on the surface from the third quarter. During the quarter, construction and cold commissioning of the new cyclone station was completed. All remaining works on flotation, filtration and tailings has started, and third tailings paste thickener was successfully commissioned. Over the coming months, remaining work is to include hot commissioning of the cyclones and handover to our operations team and finalization of all the remaining flotation, filtration and tailing works. The project is well positioned to be substantially complete by the end of the year and ramped up over the course of 2022. On Slide 14, Zinkgruvan continued to perform very well. Production increased and cash cost improved further over the second quarter primarily on better-than-forecasted mill feed grades. Production has totaled 22,900 tonnes of zinc, 850 tonnes of copper and 7,000 tonnes of lead at a cash cost of $0.32 per pound zinc. Operating cost on a per tonne milled unit basis were modestly above. However, the cash cost was better than planned on a higher byproduct credits. We have reiterated production and cash cost guidance. This does imply a quarter-over-quarter reduction in zinc production. We expect the mine and mill to continue to perform well as they have all of this year and are considering an extended campaign of processing stockpile copper ore this quarter. Full year sustaining capital guidance has been lowered by $5 million to $45 million primarily on underground development savings. This leaves roughly $15 million for the fourth quarter. Exploration continues with the focus at the moment on the areas between Burkland and the Nygruvan ore bodies. Nearly 5,000 meters of exploration drilling was completed in the third quarter, bringing the first 3 quarters to a total of 16,900 meters. With that, I'll turn the call back to Marie to sum up.
Thank you, Peter. Slide 15 provides a summary of current guidance. As discussed in previous sections, production and cash costs for all sites are on track to meet annual guidance and some mill changes have been made. We have revised sustaining capital expenditure guidance for all of the operations with the exception of Eagle. In aggregate, 2021 total capital guidance has been reduced by $40 million to $575 million. The reductions primarily owed to deferrals and timing of payments. So while removing them from this year, they should be considered in 2022 forecast. Full year exploration expenditure guidance remains at $40 million. We are well positioned to achieve the target of over 140,000 years of planned exploration drilling this year. And with that, I'll hand it over to Peter Rockandel for a few words on our capital returns and his view looking forward for the business.
Thanks, Marie. Our operations performed well in the third quarter, most notably with quarter-over-quarter production increases and cash cost improvements at Chapada and Zinkgruvan. With the shaft upgrades and major maintenance completed at both Neves-Corvo and Candelaria, operations are positioned for the fourth quarter to be the strongest of the year. We were able to continue to take advantage of the current price environment and set another quarterly record, generating over $400 million of free cash flow for our shareholders. We have generated over $760 million of free cash flow in the first 9 months of this year. Of this free cash flow, we have directly returned over $175 million through our dividend framework, not including the regular dividend declared yesterday. This positions us very favorably amongst our peers. At the same time, we have indirectly returned $36 million through the repurchase of our shares in the open market. As I assume the executive leadership, creating value by investing in our own assets and remaining disciplined in our approach to pursuing external opportunities will remain core to our strategy. And with that, operator, I would like to open the lines for questions.
[Operator Instructions] Your first question comes from the line of Greg Barnes with TD Securities.
A couple of questions. First, on the pebble crushing debottlenecking program at Candelaria, is that going to be enough to get the plant up to the planned capacity that you had in the CMOP, I believe, is a 5% increase in throughput? Or will you have to do other makeover steps?
Sure. Thanks, Greg. Peter Richardson, did you want to take that?
Yes, I can address that. So as I said, we're primarily focusing on debottlenecking the pebble crushing circuit, which consists of pebble crushers and a bone mill. So we have a number of actions planned to debottleneck that. We're in the midst of doing some investigations and also basic engineering. And we hope to finalize that early next year and then procure and build during next year to tie in the improvement early or late 2022, early 2023. And we have our internal targets for what we believe this is going to be, and we're going to be closing the gap versus the original CMOP project. Yes.
Yes. Okay. This is a question for Peter Rockandel directly. I've had a number of clients suggest to me that your appointment as CEO indicates that Lundin is going to ramp up its M&A strategy. I disagree with that view, but I think Lundin has always had an M&A strategy, but I'd just like to have your perspective on that.
I think you've got the right answer already, Greg. Our M&A strategy has not changed. We spent a considerable amount of time in the last 1 to 2 years reviewing opportunities, speaking with a number of counter parties. That won't change on a going-forward basis. A lot of these companies vary in size or being considerably larger than us, the equal size, in some cases, much smaller and earlier. But we're just looking always to focus on creating value and all the possible ways that we can do that. And one thing I will confirm because there was a bit of a confusing article in the paper a little while back, is at no point in time will we ever consider getting into the coal business. So I can assure you that is not going to happen. But if you look at our track record, Eagle and Chapada, I think from an M&A perspective, it's been quite positive. And we look to continue on that front. I don't think my change will affect the timing of anything. It's business as usual.
I was a bit confused by that coal comment as well and the above, but thanks.
Yes.
And your next question comes from the line of Jack O'Brien with Goldman Sachs.
First is just following up on that capital allocation point. You mentioned you have net cash of more than $400 at the end of the quarter. And if we were to revert the business back to sort of 1x consensus net debt to EBITDA, you could buy back probably 1/3 of your market cap today, and that's notwithstanding further cash generation through the fourth quarter and into next year with today's copper prices. So just interested to hear more -- given an unchanged M&A strategy, a competitive environment to pick up new assets, the extent to which you would be willing to either buy back or [ wire ] a special distribute significant returns to shareholders that way given your balance sheet strength. That's the first question.
Peter Rockandel?
Sure. Thanks, Jack. I mean I guess I would say we did purchase shares with the NCIB in the third quarter. A large amount, I believe 1.1 million shares, was just below $9. So we did transition the NCIB from a discretionary to an automatic plan, but with a price threshold. So we'll continue with that on a going-forward basis. We obviously made some bumps to our dividend in the last quarter. And we've also put in a performance dividend, which is 40% of the available cash flow. So if we do not have the use of proceeds, I think in 2022, you can see that probably continuing. That being said, it's not mutually exclusive to be all to up the dividend and still look at growth opportunities. So we'll do our best to return cash to shareholders. I think the last announcement we had on the dividend that was extremely well received. A lot of investors have been asking for return to capital during the strong commodity markets. And if not now, then when. So we were quite happy to have what I would say is probably one of the best dividend policies and strongest yields in our peer group, and we look to continue with that going forward.
And just want to touch on Candelaria. So clearly, you'll come back with more clarity at the year-end regarding '22 and '23 guidance. Can I just -- I mean, is there any scope in your view for 2022, '23 production to be below 2021 if we were just sort of looking to conservatively set our forecast into next year, do you think there's any scope for production to be below this year?
No. The simple answer is no.
Fine. Okay. And I wanted to follow up just on various feasibility studies because it feels like the feasibility studies both at Candelaria and at Chapada are slightly on the go slow whilst you're dealing with various operational issues. Perhaps you could just touch on whether the thinking has changed there.
It's Peter Rockandel. I can speak to the Chapada study. We continue to work on our expansion options. In fact, there's a group of Toronto people heading down to site and I was also just recently there. So the work continues quite positively there. The exploration we are currently doing will likely impact those decisions. We have had some favorable exploration results, and that can impact where we may put infrastructure and some of the size of that infrastructure. So if there have been delays, it's arguably so we can make the right decisions going forward. We hope to provide to the market some perspective on where we're heading in the fourth quarter. However, it will likely be the new year before we give greater detail.
And just final, final question. On that Chapada study, my understanding was the first decision could be made second half '22. And then all going well to plan, and then that could be potentially an early 2024 ramp-up. That would be the kind of earliest, earliest that production could start to pick up at Chapada.
I think the actual start date, we would have to wait to see what the decision is as far as the project because the size, location and a few other inputs will impact when it actually begins. But as far as giving direction to the market, I think your timing there is right.
Your next question comes from the line of Orest Wowkodaw with Scotiabank.
Just again on Candelaria, I realize you're doing a bunch of studies, but when do you think you would have a -- from a timing perspective, have a handle on the grade reconciliation issue?
Yes, Peter Richardson?
Yes. So we set out during late Q2. We put together an action plan that we set out. We will follow that rigorously and follow up that on a weekly basis. We're in the identification phase and -- but at the same time, we're rectifying things along the way that we see them and improve things. So we've done a lot of actions to the open pit sampling systems and the underground sampling systems, improved our short-term forecasting and have other action plan. Same at the mill, we have made a lot of changes to our sampling system. The procedures that we work around our sampling systems, our testing systems and also have some further actions to work on. We've seen that improvement quarter-to-quarter on our discrepancy, so that's good. But we still have further actions to go before we finalize that. But during say first half of next year, we should have a better grip on exactly what we need to do to finalize it.
Okay. And then just turning back to sort of M&A., just I realize your strategy, it sounds like your strategy is not going to change too much. But I'm just wondering if given the current metal price environment we're in and the immense strength of your balance sheet and free cash flow profile, whether Lundin would consider, I guess, relaxing some of its very rigid M&A criteria when it comes to things like jurisdictions or size of deposit, development project versus producer. Can you give us your thoughts there in terms of whether you see any change to that profile?
I think you're pretty accurate on that one. It's very challenging to have the beelines, if you will, kind of as firm as they have been in the past. So we're not looking to go into any jurisdictions we're not comfortable with. But would we maybe invest in something that doesn't have the same amount of production as we're anticipating but still quite large, we would. Would we maybe invest in something a bit earlier stage, we would. So we may flex 1 or 2 of the parameters. But generally speaking, we do want to stick pretty close to the way we've approached it in the past. But you have seen a lot of other companies out there. I don't think I need to mention them, but big companies speaking how they're having to go into other jurisdictions that they were previously not comfortable with. We've seen some pretty big companies looking at very small projects. So the current commodity price does make the M&A market pretty challenging, but that doesn't stop us from carrying on conversations with a lot of companies. In some cases, we've got some very interesting conversations with parties I don't think people would expect us to be talking to.
Okay. Interesting. And just a final one for me. Do you feel like, just given your balance sheet and the outlook for your assets, do you think sort of Lundin has reached the point of its evolution where you'd be willing or interested in perhaps participating in a large greenfield type of copper project? Or is that still sort of considered too risky?
Greenfield, like it's unlikely we're going to go after something when we don't see a line of sight to production. If it's something at maybe 5, 6 years out, we've always stated that though from the beginning, we would look at things maybe on that time line. But going after something that's probably 10 to 15 years out, I don't think we're there just yet.
And your next question comes from the line of Abhi Agarwal with Deutsche Bank.
I had a couple of follow-ups on Candelaria. My first question is, do you think that bubble -- the pebble crusher option which you've laid out today, is that sufficient to get throughput back to the 4 kilotonnes per day? Or is there a chance that you cannot get to those levels? That's my first question.
As I said a while ago, we had -- we're working on a number of options to improve the capacity of our pebble crushing circuit. So we have 3 options that we're working on. We're doing detailed engineering, and we hope to have everything finalized constructed next year. That will take us closer to the expectations or the team-up numbers that we presented a number of years ago. And of course, we're going to be pushing that to beat that going forward. So we will continuously look at other options to improve the capacity of the pebble crushing and make sure that we optimize the throughput in the mill.
Got it. My second question is also on Candelaria. So on the mine to mill grade discrepancy which is currently being observed, can you discuss what's your best guess in terms of where this is coming from? And also, the second part of this question is, given that the source of this problem has not been identified, is it fair to say that 2024-plus guidance -- so should we be thinking about 2024-plus guidance also if there's no potential solution identified to this in the near term?
So on the first question, I would say my best guess is an operational practice signing up the way we plan, the way we mine, the execution of the mining, but also sampling and the whole process around mine to mill. So that is -- and that is part of our action plan. So we've been looking at everything to make sure that there's nothing that we've missed. That's the answer to my first question. Could you please repeat the second question?
Sure. The second part of this question was given the source of this problem has not been identified, is it fair to say that 2024-plus guidance versus the technical report could also be impacted?
Beyond '24, that is -- well, we're working on our budget and our long-term plans at the moment. And those will be presented to the Board here end of November. We will come back to the next 3-year guidance. At the moment, we don't see any requirement to update our technical reports. But if that's the case, we'll come back to that by end of November or later this year.
And your next question comes from the line of Daniel Major with UBS.
A couple just on the numbers to start with. Good release of working capital supported free cash flow this quarter. Can you give us any guidance on how you expect that to move through Q4 and into next year? Do you see some -- will we see any reversal of that release of working capital this quarter?
Sure, Jinhee, do you mind to come?
Yes. With the metal prices where they are, we do expect a strong Q4 from a cash flow perspective. And you will see that we did lower our guidance on our CapEx. And so you'll see some of -- about $40 million of that deferred into 2022. So again, seeing it slightly higher cash flow on the Q4 based on the CapEx. So the other thing that you will see is that provisionally pricing that we did at the end of Q3, we had about over 70,000 tonnes of copper provisioning priced at about $4.05 per pound. If you take that and assume that to be settled, let's say, in Q4 at current prices, that is going to be a significant amount. Now the cash flow on that we may not get into Q1 in 2022. But again, with these metal prices, we do expect a strong Q4.
Sorry, just to be clear on that, just specifically on the working capital, do you -- will you expect a further build in working capital or release of working capital in the fourth quarter?
No, that is really tricky to predict. It's the timing, you try to do it at the end of the year, it could be a week or two off, and it can make a significant difference. If you just have 1 or 2 sales, that just miss the timing. So that is really difficult to expect. However, I guess if you think that metal price is higher at the end of the year than Q3, then that would generally signal a slight build in the accounts receivable.
We might see a little bit of a lift. We expect our inventory balances to build for our consumables and key supplies because we have been ordering well in advance of our usual time lines due to supply chain. So because of that, you'll see a modest build in the non-trade receivables area in the working inventory that aren't stockpiles, but that's minimal.
Okay. And then I know you'll obviously provide more detail on CapEx with the year-ahead outlook. But I guess looking at the previous technical reports and then the deferral of the $40 million of CapEx or there or thereabouts in this year, I guess, points to a number somewhere around the $500 million mark for next year. Is that a reasonable working assumption at this point?
Yes. We'll update the capital guidance in -- at the end of next month with the budget. But you can expect that probably, of course, just because we've been unable to execute on some of the projects due to COVID restrictions plus we've had deferrals, so I think that would naturally speak to the fact that we're trying to actively spend more CapEx to invest in the business but has been constrained.
Got it. Okay. And then just on Chapada, you mentioned providing some more details to the market in Q4 but don't expect, I guess, full 43-101 until next year. Should we imply from that you'll be publishing some interim drill results or reserve and resource update? What sort of form would that additional information on Chapada take?
Well, we have 7 rigs on Chapada right now, so it's pretty active. We're just not in the habit of putting out individual holes. So the plan would be to put out a more fulsome release in Q1 with a whole series of holes and hopefully some color around the exploration plan going forward.
Okay. And then just a final question for Peter in sort of questions. In the M&A discussion, is there any change to your preference of commodity going forward? Is it still very much copper-based, metal focused? Or is there any deviation from that in terms of M&A strategy?
No deviation whatsoever, still copper-focused.
Your next question comes from the line of Jackie Przybylowski with BMO Capital Markets.
Most of my questions have already been answered, but I'm going to ask -- you've probably already touched on this, but I'll ask you again just so I have some clarity. You've outlined -- Peter's outlined some of the initiatives you're doing at Candelaria to improve the grade reconciliation and the mill issue there. You've already given some guidance for the 2022 guidance that is going to be a bit lower than previously disclosed. Can you give any directional indication on 2023? Are you expecting that versus the guidance that you've previously disclosed for 2023, do you expect that you'll be able to recover? Or should we be bringing our estimates for 2023 down as well from that previous guidance disclosure?
No, I don't think you -- I think the numbers we gave out previously are where we're targeting. And we'll give more clarity on that in the latter part of November when we come out with the guidance. I wouldn't make any adjustments to your -- than the previous ones.
Right. Okay. On Chapada, [indiscernible] when that's due to come out. And are you going to continue exploration beyond that? So is this -- should we think of this as sort of an interim plan with more fine-tuning to come? Or are you confident that you'll get all the drilling done that you need done?
Well, from a drilling perspective, I mean, this year, I think we're going to be doing about 65,000 meters. So there's a lot of drilling going on. As I mentioned earlier, there are 7 rigs there at the moment. 5 of those rigs are up in an area called Formiga as well as a new zone that we'll discuss more in Q1. So the timing is being impacted by the exploration at the moment. That's one of the big impacts. So I'm hoping that, as I've said in an earlier call, we can provide some direction in Q4, and then we'll look to get some form of more specifics out in the new year.
Okay. So like in terms of -- sorry, just in terms of the timing on the expansion plan, should we expect that sort of like sometime next year? Is that probably the best way to think about it?
Yes.
Okay. Okay. And then -- and maybe one last question just to circle back on the M&A theme. With the comments, Peter, that you just made about copper-focused in something that has a site production, I mean some of the other smaller assets or smaller companies within the Lundin Group would fit that bill pretty well. Is that totally off the table to look at something within the Lundin Group of families? Or is that something that would be potentially of interest to you guys? I know in the past, you've said that you're trying to avoid appearance of conflict of interest, but is there a way that you could kind of look at those assets to combine them somehow?
We would treat them like we would any other company. So if there was an asset that was in another company, we would take a look. When we do the due diligence, arguably more due diligence than we would normally. Historically, our work has been focused on the deals kind of like Candelaria, Eagle and Chapada. But we have also looked at, as I mentioned earlier on the call, we've had discussions with a couple of companies significantly larger than us, where there was interesting opportunities to unlock value. And then we have looked at situations that are earlier stage and much smaller. We -- as I said, we would treat one of those companies no different than we would treat any other company.
Has it been announced who's going to succeed you as the Head of the Corporate Development Team at Lundin?
No, it has not yet.
Your next question comes from the line of Stefan Ioannou with Cormark Securities.
Just curious actually on Eagle, just with the ongoing exploration there. Do you have any sense of sort of how far out you might be from converting some of that exploration work into potentially extended mine life? Or is it still kind of early days to talk on that?
Yes. We've discussed in the past that there's an area called Keel which we're currently working on. It's not included in the mineral resource at the moment, but the mine has been designed to provide easy access in positive commodity price environment. And arguably, in the strong nickel market right now, I think that it would certainly give us the ability to expand the operation. So I believe we're going to be in a position to come out with a decision in Q1.
Yes, Q1.
Yes, Q1 of 2022, we'll have a decision. There's also 5 new extension targets underground that we're focused on. And historically, we have not been doing a lot of exploration. So in addition to this Keel area, there are some underground targets that we're now starting to garner further interest in. So I think there's a lot of potential for positive news in 2022 out of Eagle.
And your next question comes from the line of Ioannis Masvoulas with Morgan Stanley.
Most of my questions have been answered. I've got 2 left. First, on cost inflation, overall, unit costs were pretty good in the quarter, and you reiterated guidance. But could you talk about underlying cost inflation? Are there specific parts of the business that are seeing more of it? And how should we think about cost development into next year both in terms of unit cost but also CapEx?
Sure. Jinhee has been following this very closely and one of her favorite topics to discuss. So I hand it over to Jinhee.
Thanks, Marie. As we said, we have observed inflation and global demand happening. I would say mainly in our operations, fuel prices is ocean freight at this point. Overall, where we've seen the most impact is in Brazil. And with the inflation, we can be over 10% down the annual inflation. The government has increased interest rates as well to try to curb that. But overall, where, let's say, fuel prices have increased, I would say, kind of 40% or so and ocean freight has increased quite significantly. But in Brazil, where we are seeing the most inflation, we are also getting the benefit of a weaker Brazilian real. So that is having a significant impact and offsetting some of that cost inflation. So in the cash cost guidance that we have provided for the remainder of the year, it does take into account the inflationary impact, and we feel confident in the cash cost guidance that we provided. I guess going forward, I think the second part of your question is what we expect in 2022, we will be providing additional guidance on that next month and provide more clarity on that. And same thing with CapEx.
That's clear. And the second question, going back to M&A. We have seen a number of transactions this year, and Lundin hasn't participated there. Was it mostly a function of price? Or were there other considerations or restrictions such as ownership structure, jurisdictional exposure or any other elements that could restrict your opportunity set going forward?
Yes. I think we are aware of the most recent 2 transactions that have been announced in the marketplace. We would have been extremely familiar with both of them. But at the end of the day, there were certain criteria that didn't work for us, but I don't think -- I'm happy for the new owners to have the assets. So I won't speak to what our conclusions were in our due diligence.
Understood. And maybe just a follow-up here. We are seeing potential for new entrants into the base metal space, maybe more so on the nickel side to some extent coming from either downstream companies or coming from companies in the precious metal space. Do you see that as a real threat in terms of grade bidding competition in the years to come? Or is that not really a concern when you look at potential targets right now and maybe into 2022?
I think in the areas of where we've been focused over the last 2 years from an M&A perspective, we haven't run into any competition from those type of entrants.
And our final question will come from the line of Dalton Baretto with Canaccord Capital.
Lots of questions on M&A today. I wanted to start by asking about Chile and just what the latest you're hearing there in terms of the fiscal regime.
Sorry, do you want the question to be about the political situation or about investing in Chile or a combination?
Well, we'll start off with the political and the overall fiscal regime. And I've got a follow-up on the investing side.
Okay. Well, why don't I talk with the political end, and then Peter Rockandel can speak to the investment in M&A. So on the mining royalty, of course, as many things political, it's a slow goal. It seems to be mired in the Senate right now. And clearly, what was raised from the Lower House earlier is not going to be accepted by the current Senate. Now we don't expect anything to happen before the election. They may come out and have a vote on whether or not they should legislate, but I don't believe that it would be a vote on what that final legislation would look like. I believe they are still debating whether it would be a profit-based royalty, which would be an amendment to the sliding scale that we already have on mining, or whether it would be a revenue-based royalty. So we don't expect anything to happen on that end of this until after the elections and probably not until the new year because we anticipate that there will be a runoff. On the election side, the constitutional assembly, it just started really last week to discuss key issues and content. Before that, they've just been really discussing lots of order. So that will process, but they're still anticipating they'll have something by next August in order to present to the people. The presidential election, as we've seen in many other countries, has become extremely polarized. The Centrus candidates, both central left and central right, have fallen after the debate. And what has emerged is a very far left and a very far right candidate as the 1-2. So with a lot of undecided voters, so it's really difficult to call at the moment. It will be a pretty interesting November, but we do anticipate that on the original election on November 21, there will be no clear winner and that we would have a runoff just slightly before Christmas. So there won't be clarity on that for some time. But anyway, on the investment climate, I'll hand it over to Peter to talk about investment in Chile.
Yes. I think there's always -- I mean, we think Chile is a great place to do business. But as far as further investments, I think we're inclined to see how things play out during the elections and any changes that come from those election results.
Got it. Okay. And then maybe just a broader question then on M&A, Peter. The company's strategy historically has been to basically plug on lot stuff on the back of other people's coverage. So I'm just wondering, in the current environment, are you seeing more or less interest in people clearing out their coverage and trying to service value from these assets?
I think as you get into a higher commodity price environment, it does get more difficult to find value in that approach. And if you look at our assets that we've acquired historically, it has usually been a good reason why the seller had to -- were not a good reason but, unfortunately, they had to sell them for their own issues. That's probably going to be unlikely in this environment. So most of the things that will surface during this time were probably not going to appeal to us if they're -- if they're coming from another company I don't think they're going to be financially distressed, put it that way.
Okay. And then maybe just one last one following up on something Orest asked. In terms of looking at these greenfields, as you said, things that are 5 years or less out, how comfortable are you with the company's current skill set in terms of actually building something at scale?
Well, we've got a lot of strong technical people within Lundin Mining, but we've also started a bit of an initiative where we are recruiting some people right now. One of the things I can speak to is we hope in Q1 that we'll be making an announcement of some additions on the technical side. And during this process, I've been incredibly pleased with the quality of people that are coming forward. I think it speaks volumes to our reputation as an employer of choice. So I would ask you just to stay tuned there. And hopefully, we can talk more about it in Q1.
That's perfect. That's all for me, guys. Good luck, Marie. Good luck, Peter.
Thank you.
Great. Thanks very much. And I won't look forward to the next call [indiscernible] 1 year on CapEx and cash costs. So that's the next thing coming. And yes, after 53 quarter end with Lundin, thanks to all of you for your support. And the team will be happy to receive all the questions next time.
Thank you.
And thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect.