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Edited Transcript of LUN.TO earnings conference call or presentation 25-Jul-19 12:00pm GMT

Q2 2019 Lundin Mining Corp Earnings Call

TORONTO Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Lundin Mining Corp earnings conference call or presentation Thursday, July 25, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jinhee Magie

Lundin Mining Corporation - Senior VP & CFO

* Jonas Peter Haddock Richardson

Lundin Mining Corporation - Senior VP & COO

* Marie Inkster

Lundin Mining Corporation - President, CEO & Director

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Conference Call Participants

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* Jackie Przybylowski

BMO Capital Markets Equity Research - Analyst

* Lawson Winder

BofA Merrill Lynch, Research Division - VP & Research Analyst

* Orest Wowkodaw

Scotiabank Global Banking and Markets, Research Division - Senior Equity Research Analyst of Base Metals

* Oscar M. Cabrera

CIBC Capital Markets, Research Division - Research Analyst

* Ralph M. Profiti

Eight Capital, Research Division - Research Analyst

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Presentation

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Operator [1]

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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 second quarter results conference call. (Operator Instructions) Marie Inkster, President and CEO, you may begin your conference.

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Marie Inkster, Lundin Mining Corporation - President, CEO & Director [2]

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Thank you, operator, and thank you, everyone, for joining Lundin Mining Second Quarter 2019 Results Call. I would 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 most likely in the Q&A as well.

On the call to assist me with the presentation and answering questions are Jinhee Magie, our Senior Vice President and Chief Financial Officer; and Peter Richardson, our Senior Vice President and Chief Operating Officer.

Before I turn the call over to Jinhee to run through our financial results, I'd like to touch on a few highlights for the quarter. We're pleased with our overall operating results, although our financial results were negatively impacted by volatile base metal prices. Our mines are achieving operational performance (inaudible) with our plans and we are well positioned to deliver a very strong second half to this year. Following continuous close monitoring of the Zinc Expansion Project, we have revised the schedule and capital cost estimate. Commissioning is still expected to commence in the first quarter of next year, though under a phased ramp-up plan towards full processing rates. Full production rates are anticipated by the end of 2020, effectively doubling the zinc production at Neves-Corvo, and we will have detailed discussion later on in the presentation to review the updates and our actions taken on the project this quarter.

Progress developing Eagle East remains ahead of the original schedule, and we are on track to feed first ore to the mill in the fourth quarter. We had another successful quarter advancing our low-risk, high-return initiatives at Candelaria. These remain on budget and on schedule to be completed by the end of this year. Further, with the ramp-up of underground mine production and more ore resourced directly from the open pit, copper grades and production are to increase in the second half and into 2020. Lastly, while Chapada closing occurred post quarter, we were working hard during the quarter to close the acquisition and for planning for the integration. With our quarterly results, we have provided guidance for the operation through the remainder of 2019. Chapada brings high-quality, long-life expandable copper production at attractive cash costs and strengthens the quality of our base metal mine portfolio.

With that, I will turn the call over to Jinhee to highlight the second quarter financial results. Jinhee?

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Jinhee Magie, Lundin Mining Corporation - Senior VP & CFO [3]

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Thanks, Marie. Looking at a summary of our results, our operations in aggregate produced nearly 96,000 tonnes of base metals in the second quarter. We sold just over 91,200 tonnes of table base metals, generating total revenue of $369 million. We caught up on nickel concentrate sales at Eagle in the second quarter following the severe winter weather conditions in the Upper Peninsula during the first quarter, which had delayed shipments. The $369 million of revenue reflects provisional pricing on current period metal sales as well as significant negative adjustments for prior period sales. The adjustment for prior period sales alone had a negative impact of nearly $36 million or $0.05 per share on reported revenue in the second quarter. We remain predominantly leveraged to copper. Copper generated 62% of our revenues in the second quarter, while zinc contributed 16% and nickel 9%.

Slide 5 presents a summary of the quarter's financial results, the details of which are in our financial statements and MD&A issued last night. Second quarter revenue was lower than the same period in 2018 mainly due to lower metal prices and price adjustments as well as higher treatment and refining charges resulting from the finalization of 2019 contractual terms. Gross profit was negatively impacted by higher production costs and depreciation expense, particularly at Candelaria, where we have begun to amortize the capitalized cost of Los Diques, our new mine fleet investments and deferred stripping costs of the open pit Phase 10. Attributable net loss from our operations was $0.01 per share. We generated $205 million in cash flow from operations during the quarter and operating cash flow before noncash working capital adjustments of $50 million or $0.07 per share. Second quarter capital expenditures on a cash basis were $179 million.

Our Board of Directors approved our regular quarterly dividend of CAD 0.03 per share for an annual dividend of CAD 0.12 per share. We ended the quarter with approximately $735 million in cash and equivalents and roughly $660 million of net cash, considering $40 million of long term leases as well as a $35 million term loan financing at Candelaria. Subsequent to quarter end, we announced the successful closing of the Chapada acquisition. The $800 million paid on closing was financed by $515 million cash on hand and a $285 million drawdown on a revolving credit facility. As of July 24, 2019, we had net debt of approximately $170 million.

I will now turn the call back to Marie to discuss our operations and projects.

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Marie Inkster, Lundin Mining Corporation - President, CEO & Director [4]

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Thanks, Jinhee. Candelaria performed well in the quarter. Maintenance downtime for SAG mill relining and other work impacted mill throughput, though overall times processed was close to our plan. The average copper head grade improved materially over the first quarter as the first ore from Phase 10 of the open pit was processed during late-stage development of the pushback. Ramp-up of the Candelaria North sector underground mine continues well and is achieving a current production rate of approximately 10,500 tonnes per day. The overall copper head grade is expected to increase in the second half of this year as production ramps up from the Candelaria underground mines and more ore is sourced directly from the open pit. The new mine fleet equipment delivery is well underway. Overall, the investment program is 87% complete, with 74 of 85 pieces of equipment being placed into operation. Essentially, all of the remaining equipment is to be delivered in 2019.

2019 CapEx guidance for the fleet reinvestment is unchanged at $75 million. The Mill Optimization Project is progressing on track for completion by the end of the year, with approximately 53% of construction work completed to date. Construction continues to be undertaken during planned maintenance downtime so as to not impact production.

The primary crusher subproject is now complete, with the replacement motor installed and the new electrical room energized early June 2019. The first ball motor replacement has partially arrived on site. The second is to arrive mid-August and all new cyclone feed pumps and motors are on site. The 2019 CapEx guidance to complete the mill optimization is unchanged at $50 million.

Similarly, the development of the Candelaria South Sector Underground mine is progressing well, with a projected production startup date by the end of the third quarter 2019 on budget. Candelaria is on track to achieve annual production and cash cost guidance of 145,000 to 155,000 tonnes of copper at $1.60 per pound. Significant progress was made advancing our growth project, and I'm confident that Candelaria is set for a strong second half of the year. We are well positioned to deliver 30% production growth from Candelaria by 2021 with improving cash costs. Medium-term annual production is forecast to average over 180,000 tonnes per annum over the next 10 years.

On Slide 7. Neves-Corvo had a good operational quarter. Copper production was affected by lower-than-planned head grades as we processed more lower-grade copper stockwork ores relative to the higher-grade massive sulphide ores than planned. The C1 cash cost of $1.88 per pound copper was higher than the prior year period and the first quarter of 2019 primarily on lower zinc by-product credits and lower copper sales.

We have lowered the annual copper production guidance range given production in the first half of the year and the planned copper head grades for the remainder of the year. Overall, operating costs in the quarter and year-to-date on a U.S. dollar per tonne milled basis has been better than planned. We have reiterated Neves-Corvo's annual cost guidance of $1.70 per pound of copper despite expecting a slightly lower copper production number than previously planned. As previously mentioned, following continuous close monitoring of the Zinc Expansion Project, we have revised the schedule and capital cost estimates. We have been actively monitoring and regularly updating the cost schedule estimates -- cost and schedule estimates to forecast costs and completion dates. Commissioning of surface facilities is still expected to commence in the first quarter of 2020, though under a phased approach ramp-up is expected to take several quarters, with full throughput rates expected by the fourth quarter of 2020. Commissioning of the underground crushing and conveying systems is expected to occur during the second quarter of 2020 when first ore is to be fed to the new plant. As a result of the scheduled revisions and the phased approach, zinc production guidance during the ramp-up in 2020 is now expected to be between 90,000 and 100,000 tonnes, from the previous outlook of 120,000 to 130,000 tonnes. Copper production guidance is unchanged.

Total preproduction project costs are estimated to be EUR 360 million or $430 million, up from approximately EUR 305 million in our previous guidance. The EUR 55 million increase includes: EUR 7 million for an underground paste backfill expansion that was not included in the initial project scope; EUR 10 million of potential contractor claims for surface delays and time extensions; EUR 10 million of owners and indirect costs on schedule delays; and EUR 28 million of undrawn contingencies, which represents 15% of the remaining estimate of capital spend.

Capital spend for 2019 has been reduced to $140 million or EUR 120 million and that is from the previous estimate of $210 million or EUR 170 million, and that work will be deferred to 2020. I'll now turn the call over to Peter to walk through the zinc expansion progress and project management changes in a little more detail. Peter?

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Jonas Peter Haddock Richardson, Lundin Mining Corporation - Senior VP & COO [5]

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Thanks, Marie. To your comment, we have made good progress advancing the underground aspects of the ZEP since earlier this year. Earlier in the quarter, we changed the management reporting structure of the ZEP project, integrating and reporting it into operations. The underground project development now reports into the Neves-Corvo mine manager. This has led to a more integrated approach, enabling much better coordination and scheduling, reducing congestion and interferences between the project's ongoing requirements with the operation. Underground works are now approximately 70% complete and have been achieving planned advance rates since earlier in the year.

Slide 8 shows some of the progress achieved underground. Underground development of the materials handling ramps was completed in the quarter. Several mechanical and electrical installations of the crusher and the conveyors are well underway. Concrete work progressed well throughout the quarter, including 4 ore storage silos, as can be seen in the photograph on this page. Mine development of the lower zinc ore stopes is well underway with the first sublevel accesses established in the lower Lombador orebody. Surface construction has continued to be impacted negatively by engineering and construction delays and lag targeted advancement rates. During the second quarter, we changed the management reporting structure of the surface project development to be directly into the Managing Director of the Neves-Corvo and brought in a new surface construction manager. The intent, similar to what was achieved underground and elsewhere, is to enable much better coordination and scheduling, removing interferences and completing -- competing interests of the project works with operations. In addition, we are drawing on more of our internal engineering expertise from other sites with people who have recent success integrating projects with operations. Surface construction in the second quarter focused on mechanical installations of the surface materials handling system as well as continuing construction of the SAG mill, flotation equipment, tailings and water supply piping systems and a new paste thickener, as can be seen by the photographs.

In summary, we continue to make meaningful progress on the ZEP and believe recent changes made in the surface construction management approach position us to make further improvement. Commission is expected to commence in the first quarter of next year with a phased approach and ramp-up to full production by the end of the year.

I will now turn it back to Marie to go through our remaining operations and projects.

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Marie Inkster, Lundin Mining Corporation - President, CEO & Director [6]

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Thanks, Peter. Eagle performed well in the second quarter. A slight change in mine sequencing to recover secondary stopes in a single pass rather than in sections has modestly reduced the planned nickel grade for the second half of this year. On this, we have lowered the top end of the nickel production guidance range to 14,000 tonnes from 15,000. Copper production guidance remains unchanged.

Similarly, nickel C1 cash cost guidance has been increased given the reduced nickel production guidance and a lower copper by-product price assumption. Aggregate site operating costs remain in line with expectations, and per tonne milled unit costs including transportation costs are expected to remain similar to previous levels of $150 to $155 per tonne milled. Development of Eagle East continues to progress well, ahead of the original schedule and under budget. Silo decline into the ore body and vertical raise development for the vent circuit progressed well during the quarter. The main booster fans were installed and commissioned. First ore feed to the mill is scheduled for the fourth quarter of 2019 with approximately $13 million remaining to be spent to complete the project. At Zinkgruvan, zinc and lead production were higher than the second quarter of last year on planned higher grades and following focused efforts to improve dilution and ore loss experienced in the first half of 2018. On the exploration front, Dalby remains our highest exploration priority for Zinkgruvan and the focus of the 2019 program as we aim to expand and upgrade the mineral resource estimate. Nearly 18,000 meters were drilled in the second quarter, with 6 surface and 3 underground rigs. We expect to drill 65,000 meters at Zinkgruvan this year, having completed over 30,000 in the first half as part of a $20 million exploration program at the asset.

We are very excited to have completed the acquisition of the Chapada copper-gold mine earlier this month. The integration of Chapada has progressed very positively, and we are excited for the future potential of this operation.

With our quarterly results, we have provided production, cash costs, CapEx and exploration guidance for Chapada. For the second half of 2019, we expect copper production of between 27,000 tonnes and 30,000 tonnes at a cash cost of $1.10 net of the precious metals by-products. The gold by-product credit assumption is based on production of 50,000 to 55,000 ounces over the same period and assumes a $1,250 per ounce gold price. Chapada cash costs are calculated on a by-product basis and do not include the effect of the copper stream arrangements. Effects of the copper stream agreements will be reflective in copper revenue and will impact our realized revenue per pound. Additionally, we are guiding for $25 million of sustaining capital expenditures and $4 million of expense to exploration investments.

As we continue with the integration of Chapada, we look next to include its mineral resource and reserve estimate in our June 30 annual update, which we publish in late August or early September, and we also aim to issue a technical report in October of this year likely to be based on the current facilities and capacities.

On Slide 13, our total capital expenditures excluding capitalized interests are forecast to be $695 million, $50 million lower than the previous guidance. As outlined, project cost review of ZEP has confirmed lower spending requirements in 2019 as costs are deferred into 2020, but the revised capital expenditure guidance includes second half capital spending for the Chapada mine.

2018 and 2019 are expected to be high watermark capital investment years and reduce significantly following the completion of the Candelaria initiatives, the Zinc Expansion Project and Eagle East. Our exploration expenditures remain unchanged at $70 million, of which $4 million has been reallocated to Chapada for the second half.

Turning to Slide 14. From our current assets, we have an excellent growing production profile. This is further enhanced with the acquisition of Chapada. The investments we are making now have set us up for multiple years of production growth, decreasing cash costs and free cash flow generation starting later this year and accelerating through early next year. Annual copper production is expected to increase nearly 50% in 2020 over that of 2018 and approximately 300,000 tonnes of copper starting next year. A 55% increase in total zinc production is forecast by 2021 over that of 2018 as the Zinc Expansion Project is commissioned next year and fully ramped up, doubling the zinc production from Neves-Corvo. And lastly, nickel production is set to increase starting in the fourth quarter of this year as the higher-grade ores of Eagle East are brought online.

Before opening the line for questions, I would like to reiterate that Lundin Mining is set for a particularly strong second half of this year and in coming years. The integration of Chapada has progressed very positively, and we are excited for the future potential of this operation and for all of Lundin's operations.

Operator, I would like to open the lines for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Orest Wowkodaw of Scotiabank.

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Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Senior Equity Research Analyst of Base Metals [2]

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I wanted to get more color on the ZEP update. Obviously, pretty disappointing and it looks like now the capital cost is increased by about 40% from the original capital at the time of sanctioning. I'm just curious, of that 40% increase, are you able to quantify sort of how much of this has to do with execution versus, say, maybe underestimating capital for facilities and equipment and that kind of stuff? And I'm also wondering if there is a knock-on impact to the zinc production guidance in 2021?

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Marie Inkster, Lundin Mining Corporation - President, CEO & Director [3]

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Okay. I guess for the first part, yes. We're aware of the increases. And we've looked at the increases over time and the trending. It's pretty much a combination of both the productivity of the contractors and some probably not exact estimates of costs going forward in the program at the beginning when it was approved. So in terms of the increases, say, for example at the beginning, we had surface works of EUR 74 million, which is now EUR 111 million. So on a EUR 257 million, which is where we started, it was EUR 74 million and the increase is now to EUR 111 million. Underground similarly, EUR 118 million at the beginning, now it's EUR 157 million. So the owners, same thing. If you look at indirects and overheads, EUR 31, now it's EUR 64 million. So we see an increase across the board, so it's pretty even. And a lot of it is to do with the, first of all, in the underground and productivity rates at the beginning were not good. It took us quite a while to get that under control. That's under control now with the new underground manager that we assigned earlier in the year and the restructure of the program to have it report to the underground mine manager for the coordination. And also, we did bring in a third-party consultant to help us improve the productivity of the contractors and focus particularly on the contractor productivity. On the surface, it was first starting out that the underground was the critical path. The surface is now the critical path. That's a little bit different. There's -- the main reason for the delays there are to do with the surface engineering progression and contractors probably mobilized in part a little too early and there's a lot of engineering holds which affect the productivity and things happen slower. So all of these things are things that we've been addressing. So the underground, which was critical path, was our focus. The surface is now the critical path, and we're putting the effort into the surface. We've replaced quite a bit of the personnel. We've brought in a product manager from our operation in Candelaria to manage the surface construction, who is experienced in operating a project within an operating mill. So we are making active changes. We want the productivity to change so we're changing the things that can affect the productivity. Peter, I don't know if you have anything to add there, I've been quite verbose on that?

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Jonas Peter Haddock Richardson, Lundin Mining Corporation - Senior VP & COO [4]

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Yes.

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Marie Inkster, Lundin Mining Corporation - President, CEO & Director [5]

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And then the second part of the question -- sorry, Orest, can you remind me of the second part of the question?

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Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Senior Equity Research Analyst of Base Metals [6]

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Yes. You've cut your 2020 zinc guidance at Neves. Is there a knock-on impact on '21?

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Marie Inkster, Lundin Mining Corporation - President, CEO & Director [7]

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We're looking at our life of mines right now. We're actually doing our first pass of life of mine. I mean, it's going to push out the production but the -- we expect 2021 to be at full levels of production. So there shouldn't be any reduction in 2021 and we're looking at ways to optimize. I mean, we recognize that we've had some value loss here, and I know some of the analysts have taken quite a bit of a haircut in the target prices, not as much as we would think that this would warrant but -- or sorry, they have taken more than we think this would warrant. But we realize we've lost value of $0.10 to $0.15 per share on this we'll be doing all we can to get that value back. So that's our objective.

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Operator [8]

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Your next question comes from Ralph Profiti of Eight Capital.

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Ralph M. Profiti, Eight Capital, Research Division - Research Analyst [9]

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I do want to address another ZEP question because it's a very comprehensive review. How much is due to revisiting things like underground congestion, working faces and development? And how much is due with the availability of the surface facilities? I'm trying to get a sense of underground versus surface challenges in the new guidance.

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Marie Inkster, Lundin Mining Corporation - President, CEO & Director [10]

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The guidance has a lot to do with the surface and the ramp-up. The underground, regardless of whether the conveyor ramps would be commissioning, we could have done some development and actually accessed enough ore from the upper levels to feed it, it just would have been at lower rate. So it's not the underground that's the critical path, it is the surface facilities. And the guidance is primarily impacted by the stage plan that we have for the commissioning. So in terms of commissioning, we planned -- the original plan was to basically have everything ready and turn it on and start going, which we feel has a lot of risk. So what we've done is redesigned to reduce the risk by allowing more time on each of the aspects. So the high-level strategy is commission the new SAG in Q1 and start commissioning with waste, introduce ore and operate that one at existing levels in Q2 while we convert the rod mill over to the ball mill. And then we would operate at a slightly higher rate using both mills in Q3 and then commission up the floats also. So Peter, I think that's correct?

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Jonas Peter Haddock Richardson, Lundin Mining Corporation - Senior VP & COO [11]

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Yes, that's correct. Phased approach.

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Marie Inkster, Lundin Mining Corporation - President, CEO & Director [12]

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Yes. And then by Q4, we should be at full capacity and going forward in 2021.

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Ralph M. Profiti, Eight Capital, Research Division - Research Analyst [13]

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Okay. Yes. The frame of reference for operating cost per tonne is some of the previous technical reports but also how the project has been trending. On this new guidance, how should we think about operating cost per tonnes on a unit basis when we think about ZEP?

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Marie Inkster, Lundin Mining Corporation - President, CEO & Director [14]

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I don't believe there should be any change in that. It's -- right now our -- the thing that's pushing the cost up is labor. We have a lot of materials that have already been purchased, the big-ticket items have been purchased. The major ramp development has been done and it's labor. We have a lot of contractors. We have what, Peter, 800 bodies on site right now. And the longer it takes to complete each of the aspects, the more it will cost because we're on time and materials now.

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Operator [15]

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Your next question comes from Jackie Przybylowski of BMO Capital Markets.

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Jackie Przybylowski, BMO Capital Markets Equity Research - Analyst [16]

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I had a question on the operating costs. They were a little higher than I guess what I had expected across several of the operations, and I just wanted to ask you how many of these costs are going to be maybe persistent going forward? I know you've changed the guidance for Eagle but maybe, for example, like Candelaria, you did talk about higher power and diesel costs, for example. Would something like that be persistent going forward?

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Marie Inkster, Lundin Mining Corporation - President, CEO & Director [17]

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Yes. So in each of the mines, we're actually trending on -- if you look at our gross costs as oppose to the costs per unit, we are trending on target and where we would have expected to be. So in Candelaria, with the diesel and the other costs, it's a bit of a trade-off because normally you would see that buried in the contractors so as we use more of our own fleet in order to do production haulage and stripping and things like that, we are using diesel but it's a trade-off because our contractor costs are going down. So when you compare quarter-over-quarter, we would see a higher diesel cost, but we don't see the reflection of the reduction because it's a lesser component in the total contractor costs. I don't know if that's clear or not. But we're on track with where we are -- where we were expecting to be, and it's just basically -- the unit costs are high because of the lower production levels and the cost per tonne milled because we had the maintenance, a major down stop this quarter. Last year it was in the first quarter, so when you look at last year's quarter compared to this year's, you would see a big increase this year because it wasn't in this quarter last year, it was in the first quarter. So comparatively, we're on track. The costs will be trending down on a per unit basis as our production comes up in the second half. At Eagle, same thing. We increased the cash cost there. That was the only place where we did increase the unit cash cost. But much of that was related to the tightening of the guidance. So if you look at the midrange of the guidance and just use that as a denominator instead of the previous midrange, you're going to have a different, increased cash cost. I think that was about 30 to 40 points of that, and then the by-product, we originally had estimated $2.80 as a by-product credit for copper and when we reran the numbers this quarter, we used $2.70. So that has an impact as well.

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Jackie Przybylowski, BMO Capital Markets Equity Research - Analyst [18]

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Okay, that's clear. And one other question, maybe just to change the subject, on Chapada. I recognize that you've put out some guidance and I'm expecting that most of this guidance is based on the Yamana previous mine plan and you did mention that the tech report is probably going to be based more on the current facilities and the plan as well. Can you give us a little bit more of a sense now that you're the owner of the asset, when we could see a sort of first glance at Lundin's plan for Chapada?

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Marie Inkster, Lundin Mining Corporation - President, CEO & Director [19]

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Well, we have had an initial look at their mine plan based on what their previous plan was. I know, Peter, you've already been down there looking at mine plans and looking at things to optimize. Do you want to take that one?

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Jonas Peter Haddock Richardson, Lundin Mining Corporation - Senior VP & COO [20]

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Yes. We're evaluating -- they've given us a first pass of the remainder of this year and we've asked them to revisit some of the plans. We're on our way down in a couple of weeks again to revisit that, and also we are looking more in detail in their proposed expansion plans for further evaluation. But we're going to need some time before we can put on a Lundin stamp on our plan going forward.

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Operator [21]

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(Operator Instructions) The next question comes from Oscar Cabrera of CIBC.

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Oscar M. Cabrera, CIBC Capital Markets, Research Division - Research Analyst [22]

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If I may, getting back to the Zinc Expansion Project, Neves-Corvo. The contingency, it's about 15% of the CapEx increase. Could you just perhaps provide some color on why that is? What are you looking at and is there a potential for another CapEx overrun here if labor is the problem?

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Marie Inkster, Lundin Mining Corporation - President, CEO & Director [23]

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Yes. The -- so the current contingency is 15% in the remaining spend and the reason for that is that -- where I see the risk to this project is in the surface engineering and materials, particularly the electrical and instrumentation. So our field execution, we have to improve the productivity. Much of the contingency why it's still 15% at this stage of the project is because of the trending. We've had not good trending over time, and we've put in our -- we've got action plans to address all of that. But we did a detailed review, both with our internal finance area -- Jinhee, your team has reviewed all of the work of the local finance team -- plus we had a third party come in and do a bottom-up estimate and independent, the two, the independent plus our internal estimates, came to the same numbers within, what, $3 million, Jinhee. So we're fairly confident that we have a good, reliable number here and our objective is to not have any further creep in this. But those were I see the risks, and that's the reason for the 15% contingency at this stage.

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Oscar M. Cabrera, CIBC Capital Markets, Research Division - Research Analyst [24]

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Okay. Okay. Now that's helpful, Marie. And then if I may on Chapada? When -- after the acquisition of Candelaria, I think it was clear to everyone -- I had been looking at the project before that the opportunity within that asset was the underground consolidation as well as mill expansion. Now that the transaction with Chapada has closed, what do you think are the opportunities for the asset? Is it on the exploration side? Pushing production forward? Like can you talk about that?

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Marie Inkster, Lundin Mining Corporation - President, CEO & Director [25]

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Yes. I think it's all of those things, Oscar. We have a lot of exploration potential there. We're pretty excited. Our exploration VP was on the ground on Day 1 and excited to meet with their exploration team and had some really good meetings about how we could put some additional funds into exploration and where the primary target might be first off. So we have a lot of targets there and the challenge will be to prioritize them. And so we'll do a lot of work there, and we really do see Candelaria as a blueprint and doing the same thing there that we will not have probably one answer after, say 6 months or a year, here is the new answer, but it will evolve over time and with a continuous improvement mentality. So one of the things that we need to do is study what's been done. We had, during our diligence, some work on the engineering for the expansion plans. We need to step back and take a hard look at that and what really -- with an unconstrained balance sheet and with a new look, what that might look like. So there are many opportunities here, I think, to improve and Peter, you even saw some near-term things that we can do in order to improve the mine plan without doing anything.

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Jonas Peter Haddock Richardson, Lundin Mining Corporation - Senior VP & COO [26]

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Yes. We're looking at a revised short-term mine plan, as you said, Marie, seeing if we can cut down on stripping and low-grade ore mining. But in the long run, we are reviewing the expansions -- explorations, start with exploration to see what we have on the ground, what more options are out there. And then also the different expansion studies that Yamana did prior to our acquisition. So we are reviewing all of those things. Next meeting is a couple of weeks down in Brazil. So I agree with Marie, there's a lot of opportunities.

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Oscar M. Cabrera, CIBC Capital Markets, Research Division - Research Analyst [27]

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If I just may just ask one more? The CapEx that you provided. Would it be fair to assume that on a yearly basis, we can prorate what you provided for this year or following years?

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Marie Inkster, Lundin Mining Corporation - President, CEO & Director [28]

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It will vary, and we'll put out new numbers in the technical report. So look for that in October.

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Operator [29]

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Your next question comes from Lawson Winder with Bank of America Merrill Lynch.

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Lawson Winder, BofA Merrill Lynch, Research Division - VP & Research Analyst [30]

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I just wanted to ask a few questions on Candelaria, basically to try and help frame the second half of the year. And 2 main points that I want to look at was, one, it looked like in Q2, the depreciation was up a fair bit on a unit basis and maybe some guidance on that for the second half would be helpful. And then also, in Q1, we spoke about maintenance in Q2. And I think at the time you had said there was a chance some of that maintenance would be in Q3. So looking into Q3, can we expect some additional downtime as a result of maintenance at Candelaria?

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Marie Inkster, Lundin Mining Corporation - President, CEO & Director [31]

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Sure. So on the first part of that question, the depreciation. Yes. A lot of this had to do with the capitalized stripping. And Jinhee, you looked at this in particular during our analysis for the quarter. Do you want to address the stripping and maybe give some color as to what they can expect going forward?

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Jinhee Magie, Lundin Mining Corporation - Senior VP & CFO [32]

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Sure, Marie. So in Q2, we did see higher depreciation because we started to mine the Phase 10 ore. And so I would say in Q2, we saw about, I would say, approximately $16 million increase due to the Phase 10 amortization of deferred stripping. Going forward, for the remainder of the year, we would expect that to increase. And again because we will be increasing more from Phase 10, I would say overall for the year, we're approximating about $100 million related to the amortization of Phase 10.

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Marie Inkster, Lundin Mining Corporation - President, CEO & Director [33]

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Yes. And then on the second part of the question was the maintenance. Q2 was a big maintenance quarter, not just the Candelaria but also at Neves-Corvo. We had I think 8 days down in the shaft and we also had a shaft down in Zinkgruvan. And then -- so Q2 is probably the quarter where we did our big maintenance stops. I know we have a small stop in August at Candelaria but that shouldn't affect the throughput for the quarter. Peter, any?

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Jonas Peter Haddock Richardson, Lundin Mining Corporation - Senior VP & COO [34]

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No. And we monitor this continuously and try to push maintenance as far as we can. It also depends on hardness of the ore and how abrasive it is and how that affects on the mill liners. But we did have a lot of maintenance, as you said, Marie, in Q2, early Q2.

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Marie Inkster, Lundin Mining Corporation - President, CEO & Director [35]

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Yes.

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Lawson Winder, BofA Merrill Lynch, Research Division - VP & Research Analyst [36]

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Okay. And just -- sorry just a follow-up on both of the questions. The one on the maintenance. The maintenance that you referred to in -- on the Q1 call, that's done. At Candelaria? I just wanted to be clear on that.

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Marie Inkster, Lundin Mining Corporation - President, CEO & Director [37]

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Yes, yes. Our major maintenance stop is done for Candelaria for the year. You can see it in the -- we do the quarter-over-quarter look at the throughput. So last year, it was in Q1, this year it's in Q2. So you would have seen quite a reduction compared to the other 3 quarters in the one quarter that we have the major stop. So it -- we don't expect any other major ones.

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Lawson Winder, BofA Merrill Lynch, Research Division - VP & Research Analyst [38]

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Okay. And then, Jinhee, just in terms of the depreciation going forward, I know you don't provide guidance on that, but if we just use sort of the per unit of copper sales that we saw in Q2 for Q3 and Q4, I mean, is that reasonable?

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Jinhee Magie, Lundin Mining Corporation - Senior VP & CFO [39]

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I would say it's going to be a little bit higher because in Q2 we only had, I guess, part of that quarter producing from Phase 10 whereas for Q3 and Q4, we'll have the full quarters producing from Phase 10. So I would say it's going to be higher in the Q3 and Q4 than you saw in Q2.

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Marie Inkster, Lundin Mining Corporation - President, CEO & Director [40]

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Okay. We'll take one more question, operator.

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Operator [41]

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Your next question comes from Orest Wowkodaw of Scotiabank.

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Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Senior Equity Research Analyst of Base Metals [42]

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I'm just wondering, with the increase in capital at the ZEP and the deferral of some the capital timing to 2020 from 2019, does that change at all your thinking on capital allocation with respect to potentially pursuing a project to add to the portfolio? Or perhaps increasing capital returns to shareholders? I noticed you did buy a little bit of shares back in the quarter, but just curious if we could expect that to accelerate now that Chapada is closed or whether you're going to take a pretty cautious approach on share buybacks?

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Marie Inkster, Lundin Mining Corporation - President, CEO & Director [43]

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We will continue to look at the buyback and go into the market opportunistically when we see opportunities. I wouldn't expect it to be a huge part of the capital allocation strategy in the next couple of months, and we're still watching the copper price as well. And we've actually -- we're $0.30 or 10% below our long-term price for copper, which is $3 that we run everything on. So we're taking a bit of a cautious approach until we see where trade war ends up. There is a very bullish case for copper. We also see people coming out with bearish case for copper and then maybe talking (inaudible) book, but we think there is a very bullish case for copper. So we'll continue to look for copper project or asset to acquire. It takes some time. We've continued to look for opportunities that can create value, and if we find the right opportunity, we are prepared and able to go for that opportunity. So we continue to look at all aspects of the capital allocation.

Great. Thanks, everyone. And to reiterate, we are very well positioned for a strong second half of the year. Not the best quarter that we've had in our history, but according to our plan, we are on track to meet our guidance and within 1% of the original copper guidance that we had at the beginning of the year for the company and trending well on costs. So we'll continue to work hard on all of our projects, and we'll have our next update at the next quarter and hopefully be able to report you some good results.

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Operator [44]

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This concludes today's conference call. You may now disconnect.