LUNMF - Lundin Mining Corporation (LUNMF) Q3 2022 Earnings Call Transcript
Lundin Mining Corporation (LUNMF)
Q3 2022 Earnings Conference Call
October 26, 2022, 08:00 AM ET
Company Participants
Peter Rockandel - President and CEO
Teitur Poulsen - SVP and CFO
Juan Andres Morel - SVP and COO
Conference Call Participants
Greg Barnes - TD
Bryce Adams - CIBC Capital Markets
Dalton Baretto - Canaccord
Orest Wowkodaw - Scotiabank
Lawson Winder - Bank of America
Fahad Tariq - Credit Suisse
Sandeep Puvvadi - Morgan Stanley
Stefan Ioannou - Cormark
Daniel Major - UBS
Ralph Profiti - Eight Capital
Presentation
Operator
Good morning, ladies and gentlemen, and welcome to the Lundin Mining Third Quarter 2022 Conference Call. [Operator Instructions] Also note that this call is being recorded on Wednesday, October 26, 2022.
I now would like to turn the conference over to President and CEO, Peter Rockandel. Please go ahead, sir.
Peter Rockandel
Thank you, operator, and thank you, everyone, for joining Lundin Mining's third quarter 2022 results call. Before we get into the formalities of the call, it is with great sadness that I address the passing of our Board member Ms. Karen Poniachik, on October 1 in Chile, as well as the tragic loss of a contractor colleague at Neves-Corvo in Portugal on September 30.
Karen was appointed to our Board in February of 2021 and brought with her a lot of wisdom, local context and insight gained through her distinguished career and many contributions to mining in Chile. We extend our heartfelt condolences to Karen's family and friends. She will be greatly missed by many.
Also, unfortunately a fatal accident occurred underground at Neves-Corvo in late September. In this isolated incident, employee of the material handling contractor was fatally injured while driving a piece of mobile equipment. We continue to support those impacted and have held safety standdowns at every operation and at our head office to reflect on the loss and to reconfirm our safety commitment to zero harm. Thank you.
I will now draw your attention to the cautionary statements on Slide 2 as we will be making several forward-looking comments throughout the prepared remarks and likely during the Q&A. On the call to assist with the presentation and answer questions, are Teitur Poulsen, our Senior Vice President and Chief Financial Officer; and Juan Andres Morel, our Senior Vice President and Chief Operating Officer.
Juan Andres joined us as SVP and COO on August 1. Juan Andres has an exceptional track record with over 30 years in the industry. More recently, he was the General Manager of Mining Operation at BHP's Escondida and Chile, currently one of the world's largest copper mines. From 2005 to 2017, he held progressively senior roles with Antofagasta including Head of Operations at Los Pelambres and Chief of Technical Services. Earlier in his career, he spent seven-years with CODELCO as Chief Strategy Officer at the El Teniente Division, Director of Corporate Operational Excellence and Chief of Open-Pit Mine Planning amongst other roles.
Teitur joined us as SVP and CFO on September 1. Teitur brings over 20 years of financial experience, most recently as CFO of Lundin Energy, which was acquired by Aker BP for approximately $14 billion earlier this year.
Continuing with the key highlights in the third quarter on Slide 4. Overall, we had a strong quarter. Candelaria, Eagle and Zinkgruvan operations all continued to deliver as per plan. Chapada rebounded from the weather impacted first half of the year with mill throughput, feed grades and metal recovery rates all improving in the third quarter. Copper and gold production increased 35% and 50% respectively over Q2. Ramp-up of the Neves-Corvo zinc expansion project is progressing. Quarter-over-quarter improvements have been seen in all processed grades and recoveries. Overall, production of all metals is tracking to their annual guidance ranges.
Despite the macroeconomic conditions, we generated adjusted EBITDA of over $200 million and adjusted operating cash flow of over $180 million, exceeding Q2 by 35% and 260% respectively. Our balance sheet remains strong with $1.9 billion of liquidity at quarter end, and as Teitur will speak to, we have initiated a foreign exchange hedging program to protect operating costs and business plans.
We continued our balanced and disciplined approach to capital allocation. We remain growth focused while at the same time delivering leading cash returns to our shareholders. We have paid nearly $225 million in dividends and purchased $10.8 million shares for approximately $50 million year-to-date. The current regular dividend yield of 5.42% is the strongest within our direct peer group.
With Josemaria, Lundin Mining is well positioned to deliver meaningful growth in the coming years. We are continuing to progress the project and are targeting to complete an updated technical report for publication to the market in the second half of 2023. And as I will speak to a bit later, the high-grade copper gold mineralization at Sauva continues to grow and remains open. The maiden mineral resource estimate Sauva is targeted for release in early 2023.
I will now turn the call over to Teitur to speak to our summary of results.
Teitur Poulsen
Thank you, Peter.
Peter has joined the mining sector and I'm looking forward to talk to some of the financial highlights on this -- my inaugural earnings call on Lundin Mining.
On Slide number 5, we produced over 116,000 tonnes of base metals and approximately 45,000 ounces of gold in the third quarter. In terms of sale volumes, we sold close to 107,000 tonnes of base metals and around 43,000 ounces of gold.
Total copper production was essentially in line with the second quarter of this year, though below that of the third quarter last year. This is primarily due to lower production from Chapada year-on-year, while being in line to best in size for this quarter.
Total zinc production exceeded the third quarter last year, primarily due to ramp up of the Zinc Expansion Project. Production was slightly lower quarter-over-quarter as improvement in process a greater portion of copper ore in Q3 than did in the second quarter during the market schedule.
Similarly, nickel production was greater this quarter than prior year quarter, though lower than the second quarter on lower feed grades on Eagle. Gold production increased to over 15% in the third quarter compared to the second quarter on improved operations at Chapada, and was flat compared to last year's quarter.
Our metal mix remains predominantly leveraged to copper, with the copper generating 60% of quarter's revenue after pricing adjustments. Zinc and nickel contributed 13% and 11% respectively, while gold contributed 10%.
Moving to Slide 6, third quarter revenue increased 10% over the second quarter to nearly $650 million lower. With the price declined for several of the metals produced over the quarter-over-quarter, revenue was negatively impacted by $65 million due to prior periods price adjustments. So Slide 6 provides a summary of the realized metal prices for the quarter, breaking out the prior period adjustments as well as to mark to market at the end of the quarter.
Ultimately, for the third quarter, we realized prices of just over [indiscernible] per pound of copper, $1.43 per pound of zinc, and just below $9 per pound of nickel including pricing adjustments.
At the end of the third quarter, approximately 19,000 tonnes of copper were provisionally priced at $3.46 per pound and remained open for final pricing adjustments, as did over 31,000 tonnes of zinc at $1.36 per pound and 5,500 tonnes of nickel at $9.56 per pound. These pricing adjustments are outlined at the MD&A and financial statements.
Turning to Slide 7. Production costs totaled just over $1.2 billion for the first 9 months this year and have been approximately 20% higher compared to the same period last year. This increase has largely been a result of higher consumable costs, primarily Candelaria, Chapada and Neves-Corvo, given inflationary pressures, particularly diesel and electricity earlier in the year, and partially offset by the effects of favorable foreign exchange.
And this figure on this slide presents the relative impact of the key driver to total operating and capital costs for each operation year-to-date. Forecast cash costs remain consistent with guidance for Candelaria and Chapada, where Neves-Corvo forecast cost is trending above, considering mainly electricity prices and forecast by product in volumes and pricing.
Eagle's forecast nickel cash cost is also trending above guidance, considering mainly forecast by copper pricing while increments cash cost is trending favorably due to foreign exchange impacts.
Total capital expenditures are tracking well to guidance with third quarter to $200 million, while the spend for the first 9 months is totaling $562 million. And as Peter mentioned, we have initiated some foreign exchange hedges on our foreign currencies to protect operating costs and business plan.
And turning to Slide 8. Here, the company has entered into a series of foreign exchange hedges over recent weeks to provide better visibility on the U.S. dollar funding requirements for our future operating cost and capital expenditure over the period from now to end of the [2024]. The company entered into forward swaps or euro and Swedish kroner was defended into zero cost collar for the Chilean pesos and the Brazilian real.
The comp has hedged over GBP 0.5 billion worth of Chilean pesos and just below $0.5 billion worth of Brazilian real and euros respectively, and $234 million worth of Swedish krone. These hedges cover a certain proportion of the estimated exposure in these respective currencies, and the company will consider advancing into further hedges for 2024 and potentially also for 2023 in due course and assuming that the market conditions are favorable.
Turning to Slide 9. This is a summary of the third quarter key financial metrics. Third quarter revenue was nearly $650 million, was 10% greater than the second quarter, though below the same quarter last year, mainly due to lower U.S. net prices, net of adjustments and offsetting higher sales volumes.
We generated adjusted EBITDA of over $200 million, adjusted earnings of over $30 million and adjusted operating cash flow of over $180 million. Details of the adjustments are broken down in our MD&A.
The ongoing metal prices and growth inflationary pressures impacting these metrics compared to prior quarters are in Josemaria expense costs. Cost for engineering drilling and other related costs for Josemaria project were nearly $55 million quarter-over-quarter of 2022. We remain in a strong net cash position of nearly $180 million at quarter end, which includes our working capital build during the third quarter of $145 million. The company's liquidity headroom by the end of the third quarter was approximately $1.9 billion.
Slide 10 presents greater detail on the sources and uses of cash in third quarter. Before changes in working capital, the direction and time which is influenced by provisional pricing, our operations generated over $118 million of adjusted operating cash flow that was nearly $55 million for the expense of the Josemaria project as well as $58 million paid in cash taxes.
Ultimately, cash and cash equivalent on quarter end were approximately $230 million, a decrease of approximately $270 million with cash flow from operations used to fund capital investments in our assets in a private appreciation in gold price contingent payment, share the dividends of $50 million and share buybacks of over $40 million. As of October 25, the cash and net cash balances has improved to approximately $255 million and $205 million respectively.
I will now turn the call over to Juan Andres to speak to our operations.
Juan Andres Morel
Thank you, Teitur. Great to be on my first quarterly conference call with Lundin Mining.
Starting with Candelaria on Slide 11, the operation had a strong third quarter, which is now four quarters in a row on off plan or better performance for Candelaria. The operation produced over 37,000 tonnes of copper and approximately 21,000 ounces of gold at a cash cost of $1.97 per pound of copper.
Tonnes milled were slightly below target while ore grades and recoveries were above plan. Better copper grades from Phase 10 of open pit on Candelaria and Santos underground mines offset the relatively lower grade use of ore stockpile with Alcaparrosa mine suspended. I will speak more to the sinkhole at Alcaparrosa in a moment.
The cash cost of $1.97 per pound of copper reflects the year-on-year inflationary pressure on operating costs, mainly for energy and consumables as well as the dominant impact of slightly lower quarter-over-quarter copper production. Capital expenditure of roughly $275 million for the first three quarters are trending toward the full-year guidance of $400 million.
On the growth and exploration fronts, the prior initiatives debottlenecking the Candelaria pebble crusher circuit are advancing with some delays due to some supply chain issues, and they are expected to increase mill capacity by Q4, 2023. We have completed over 34,000 meters of drilling as part of our 2022, $15 million exploration program. Much of this work continues to focus on growing and upgrading underground resources of the various mines, where we have demonstrated success in the past.
And lastly, as the company previously discussed, technical study work evaluating the expansion of the north and south sector underground mines from the current 14,000 tonne per day to 26,000 tonnes has been finalized. The study indicates a technically and financially robust project, though we are awaiting clarity on potential taxation and royalty changes and require approval of the 2040 EIA ahead of a decision to advance the project.
If we move now to Slide 12, I will provide more details on the Ojos del Salado Alcaparrosa sinkhole. There has been no material changes to the size of the sinkhole since detection on July 30, and mining operations at Alcaparrosa remain suspended. Candelaria and corporate crisis management teams were formed immediately and have since shifted to their focus to technical and remediation work streams.
We are continuing to communicate with all stakeholders as we continue to monitor, investigate causal factors and cooperate fully with regulatory authorities. We have been working collaboratively to collect and analyze geophysical, geotechnical and hydrogeological data. One of the communications channels you can use to stay informed is the website setup at the link below, www.mineraojosdelsalado.cl.
Based on data collected on and analyzed today, we believe there were multiple influencing factors including our mining activities. In early October, we completed construction works to seal and isolate the Gabi sector to control ingress of water into the mine in the lower levels of Alcaparrosa.
Importantly, we're working with the authorities on solutions to minimize the impact on employment in the region and are committed -- and we are committed to the remediation regardless of the causal factors.
I'm happy to answer any questions you may have during the Q&A, and we'll turn the call back to Peter to speak to Chapada and our drilling at Sauva.
Peter Rockandel
Thank you, Juan Andres.
Moving to Chapada on Slide 13. Chapada achieved a significant step up in production and improvement in cash cost as the operation rebounded from the weather impacted first half of the year. The operation produced nearly 14,000 tonnes of copper and 24,000 ounces of gold at a cash cost of $1.92 per pound of copper in the third quarter. Production increased 35% for copper and 50% for gold over the second quarter as mill throughput, feed grades and metal recoveries all improved. Year-to-date, production of 34,000 tonnes of copper and 52,000 ounces of gold is trending well to annual guidance.
The third quarter cash cost was greater than the comparable quarter of 2021, and triple the year-on-year inflationary increases in energy, mine consumables and contractor costs, although benefited from the increased production volumes. Year-to-date capital expenditures of approximately $60 million are on track to full year guidance.
Despite the forward start in the first half of the year, Chapada's exploration drilling is ahead of plan with over 52,000 meters completed to date. The high-grade mineralized area footprint at the Sauva system has further increased to approximately 1,200 meters by 1,000 meters with assay results received during the third quarter. The system continues to be remain open in all directions.
With a sizable and growing potential of Sauva, we will continue to focus our efforts on drilling and how to best incorporate it into future expansion scenarios. We aim to issue a maiden mineral resource estimate for Sauva in early 2023 as part of our company-wide mineral reserve and resource update.
Slide 14 presents highlight assays from Sauva drilling during the third quarter, and it shows where assays for completed whole rest still pending. As mentioned, the high-grade mineralized area footprint has increased to approximately 1,200 meters by 1,000 meters with the assay results received and continues to remain open.
Six rigs continue to test extensions mainly to the north towards Formiga and to the west of the discovery area. We continue to be very excited about this discovery and believe it supports our view that many opportunities exist to increase the size and quality of our mineral resource base at Chapada. The potential implications this high-grade system may have for our ongoing expansion studies are being evaluated at Sauva and the area continues to evolve with drilling.
I will now turn the call back to Juan Andres to speak to Eagle, Neves-Corvo and Zinkgruvan.
Juan Andres Morel
Thank you, Peter.
Moving to Eagle on Slide 15, the operation delivered a consistent performance again in the third quarter, producing nearly 4,400 tonnes of nickel and 4,000 tonnes of copper at a cash cost of $1.05 per pound of nickel. Year-to-date, production of approximately 13,000 tonnes of both nickel and copper is trending well to guidance. Cash cost was higher than the prior year third quarter due to inflationary increases in operating cost and lower realized copper prices impacting the byproduct credits.
Eagles forecast nickel cash cost trending above guidance consideringly mainly electricity and forecast by-product copper pricing. We continue work to include the Upper Keel zone in our 2023 life of mine plan and the mineral resource and reserve estimate updates for release in first quarter 2023. The aim is to be in development in the Upper Keel in 2023 with initial ore production in the first half of 2024 further extending the mine life and improving the production profile of the later years.
We're also continuing internal study work in the Lower Keel zone to possibly extend mine life further dependent on metal prices. Year-to-date 12,400 meters of drilling has been completed and 300 underground rigs continue to focus on further near term life of mine extension opportunities.
We now move to Neves-Corvo on Slide 16. So on Neves the operation produced over 7,000 tonnes of copper and over 22,500 tonnes of zinc at a cash cost of $2.69 per pound of copper in the third quarter. Zinc expansion project ramp up progressing with the quarter-over-quarter increase in zinc production on grade throughput and metal recoveries. Current attention and focus are on achieving further operational improvements in new mining areas and material handling infrastructure needed to meet the annual guidance. The 2023 production profile will be dependent on operating rates, we can achieve on a sustainable basis by the end of this year.
The third quarter, cash cost of $2.69 per pound of copper was greater than that of the third quarter of last year due to higher costs of consumables, particularly electricity and somewhat offset by a favorable foreign exchange rate. With cost pressures persist in the third quarter and lower than originally forecasted by-product zinc volumes, annual cost is trending above guidance. Here today, total capital expenditures of nearly $80 million is trending towards the full-year guidance of $125 million.
Let's move now to Zinkgruvan on Slide 17, the operation continues to deliver strong results. In the third quarter, the operation produced over 17,800 tonnes of zinc, more than 1,700 tonnes of copper and approximately 7,000 tonnes of lead at a cash cost of $0.18 per pound of zinc. Both the mine and mill continued to perform well and in line with expectations. The operation is on track to deliver full-year production guidance, while cash cost is trending favorably to guidance primarily due to the foreign exchange impact and by-product copper volumes.
In October, we received the Dalby mining permit. Exploration efforts continue with over 10,200 meters of drilling now completed this year as a part of the 20,000 meter 2022 program. Primary focus remains in on increasing mineral resources at Dalby and between Burkland and Nygruvan orebodies. Engineering for the sequential flotation project to further improve concentrate grades and metal recovery rates is progressing for construction in 2023.
I will now turn the call back to Peter, to discuss the Josemaria project.
Peter Rockandel
Thank you, Juan Andres.
We are continuing to progress Josemaria through the next stages, including working with authorities and discussions on commercial agreements and securing additional environmental and sectoral permits. Engineering is estimated to be 33% complete at quarter end. We continue to work toward an updated technical report, which we now expect to be able to release to the market in the second half of 2023. This is to include an update of cost estimates to be reflective of current conditions and evaluation of potential scope changes compared to the plans of the 2020 feasibility study, as well as new mineral reserve and resource estimates.
Over 31,000 meters of drilling have been completed since the last 2020 estimates. We intend to spend approximately $300 million for engineering commitments for long lead items, pre-construction activities and drilling. Of this nearly $200 million has been incurred with a little over $100 million expensed and the balance capitalized. We are continuing to advance all aspects of the project in a deliberate and disciplined manner to minimize the risks and towards a construction decision at appropriate time. This includes multiple discussions and avenues for project financing including traditional debt sources, joint ventures and offtake partnerships.
I'll conclude with Slide 19. Despite the challenging macroeconomic environment, we continue to have solid operational performance leading to strong cash flows and a strong balance sheet from which to grow. We remain well positioned both operationally and financially to deliver on our strategy of operating, upgrading and growing a base metals portfolio that provides leading returns for our shareholders throughout the cycle. We look forward to updating you on our continuing efforts in the coming weeks and months.
Thank you, operator. And with that, I would like to open the lines for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And your first question will be from Greg Barnes at TD. Please go ahead.
Greg Barnes
Yes, thanks Operator. Wondering if Juan Andres can talk a little bit more about the particular challenges you're facing at the ZEP, the new ore zones that you're trying to develop and the challenges getting the ore to surface by the sound of it.
Juan Andres Morel
Greg, thanks for the question. It's been, of course, a challenge to bring the ZEP project into the nameplate capacity. We have faced some challenges in getting our material handling system to perform as planned. Right now, we're working on several operational improvements regarding conveyors and hoppers, apron feeders, scrapers in the conveyor belts, ventilation, dewatering. So a few items that we need to improve to ensure that we reach the nameplate capacity for the ZEP project.
Greg Barnes
It sounds like a lot of changes Juan, is pretty much everything. So is there anything -- is there a particular bottleneck that's causing these issues?
Juan Andres Morel
It's the material handling system of the conveyors underground, which building conveyor underground is a challenging task. So we're working hard on putting that system to work as plan -- as the engineering specification set.
Greg Barnes
Okay. Peter, turning to you on Josemaria, obviously, delaying the project feasibility study. I think it's probably the right thing to do in this environment. But can you lay out the preconditions that you will need to have in place to make a sanction decision when the time is right for Josemaria?
Peter Rockandel
Sure. I don't know if I'd use the word delaying, but rather just continuing with all the work we're doing to get it to a level where we can make that decision. So we -- I think I said earlier in the call, we're progressing through the basic engineering. So we're currently at about 33%. Clearly, we need the number materially higher than that to make a decision. So Dave Dicaire, SVP of Josemaria is working closely with Fluor. We anticipate the number will be arguably double that by the second half of next year, and we'll be putting out a new technical report at that time.
So that will be a key milestone, if you will. And there's still some government items and permitting things that we need to get cleared up. Just quite frankly, nothing no big hurdles there, but just a few changes. And then also we -- in parallel, we have been maintaining conversations with a number of different parties I mentioned earlier in the call, just with respect to financing. So I think if we could get that whole package together for the second half of next year, that would be the appropriate time to move forward.
Greg Barnes
And what level of part would you like to bring in, Peter?
Peter Rockandel
Well, I think we have to wait-and-see what the different proposals are, but it's obviously two different ways you could look at it, right? You could pick a trading house, which is a common practice with projects like this. So we've obviously maintained those conversations, but there's also a number of larger global mining companies that are struggling to find projects, and I think they recognize not only this project, but the district is something that's pretty rare. And so it's gained a lot of interest with some of those people.
Greg Barnes
Okay. I'll leave it then. Pass it on. Thanks a lot.
Operator
Thank you. Next question will be from Bryce Adams at CIBC Capital Markets. Please go ahead.
Bryce Adams
Good morning, Peter and team. Thanks for taking my questions. I've got two of them. Greg already asked on Josemaria and the update there. I might just follow on with that, and I guess, maybe at a higher level, how much of this decision to push that feasibility work into second half of next year. How much of that is engineering and technical versus strategic decision? And I think Greg already asked on it, but how much is it to line up with potential partners?
Peter Rockandel
I think when we talk about engineering, as I said, we're at 33% in order to make a decision moving forward, you need a higher number. So that number keeps going up week-by-week. So that's part of it. And also, as you get that information, you'll have more material to present to those people that you may have been in discussions with. So it is kind of -- they're interrelated, if you will.
Bryce Adams
Yes. No, that makes sense. My second question on Chapada. So a much improved quarter over the first half rainy period or weather impacted. Do you think that it's a strong setup here into Q4 and that Q4 can be a step higher compared to Q3? And then can you remind me when the rain returns? Is that in December or it really gets heavier in January?
Peter Rockandel
No. It seems like every year, it starts earlier and goes later. So it does start in December. And given that we've had two years back to back of, call it, one in 100-year rains, it's quite frankly, hard to predict Q4 until you really know the weather pattern. And we've done a lot of things to prepare for the rain. We've done a lot of dredging, put in some piping drainage systems, things of that nature. And we've also changed a little bit of the mine sequencing in case it does have a heavy rain. But the last couple of years, there's a lot of different companies in Brazil that have been impacted quite heavily by the rainy season. So we'll just have to wait-and-see. Hopefully, it's not quite as strong as the last two years.
Bryce Adams
Okay. Thank you very much. I’ll jump back in the queue.
Operator
Thank you. Next question will be from Dalton Baretto at Canaccord. Please go ahead.
Dalton Baretto
Hi, thanks. Good morning, everybody. Peter or Juan Andres, I'd like to start by asking your thoughts on the new proposal on tax and royalties that the Chilean government presented yesterday. Thanks.
Peter Rockandel
Maybe that we have a Chilean on the line. I'm calling in from LME, so I can't look across the table. Juan Andres, do we like to address that one?
Juan Andres Morel
Sure. Of course, Peter. Thank you. Well, after the referendum in early October -- I mean, early September, we have seen a significant shift in the priorities from the Chilean government. And one of them being the royalty and the tax reform. Recently, we saw that the government presented a bill to the Senate in order to get approved a new much more moderate proposal on the royalty. So we're optimistic. We have seen some significant changes on the proposal. One of them being the ad valorem royalty, which is now being flat compared to more of a scale and proportional ad valorem royalty So, we remain optimistic that eventually by the end of the year, we will have more clarity on the royalty for Chile.
Dalton Baretto
Great. Thank you. And then maybe switching gears and going back to Josemaria very quickly, Peter, you talked about scope changes. Wondering if you can comment on what kind of scope changes we'll see in the updated tech report.
Peter Rockandel
Yes. We spoke earlier in the year that we were looking at a few different things. We made some changes to the tailings design. We've changed some of the crushing. We increased the power lines into the area. That's one of the things we're looking at. And in addition to that, we're kind of doing some trade-off studies as we speak on grinding and flotation.
So those are the main areas. We want to do whatever we can to optimize the operation, but we are also taking into consideration today's inflationary environment. So that would be the bulk of it.
Dalton Baretto
Okay. Great. Maybe I can squeeze one last one. And a similar question on Chapada. It looks like the expansion is not going to wait until Sauva is more flushed out. I'm just wondering, is that going to have any impact on kind of the scope of the project that was proposed?
Peter Rockandel
Well, we didn't have a specific -- we were looking at a number of different projects. So there wasn't one specifically that we said we were going ahead with. But to your point, I think Sauva is probably turning out even better than we anticipated. So as we speak, we've got six rigs on their drilling right now through the whole trend. I think we mentioned earlier in the call that the mineralized area has increased to roughly 1,200 by 1,000 meters and still remains open. So we'll have a maiden resource estimate out in the first quarter. From there, we should be able to have a better understanding of how Sauva can play into Chapada.
And one of the things we're looking at Chapada in addition to the expansion studies, we are looking at some opportunities for doing debottlenecking and optimization that could increase the production, but at significantly lower CapEx. So we're weighing all those off against one another as we speak.
Dalton Baretto
Great. Thanks Peter. That’s all for me.
Operator
Thank you. Next question will be from Orest Wowkodaw at Scotiabank. Please go ahead.
Orest Wowkodaw
Hi, good morning. A couple of more questions on Josemaria. You're spending, I guess, $300 million this year. With the pushback in the technical report to the second half of next year, I assume that means you're going to be spending sort of less than expected next year on advancing the project. But can you give us any idea on what that number could look like for 2023?
Peter Rockandel
That's probably a tough one because we're working through that as we speak actually. We do have our budget meetings in about three weeks. But to your point, it's highly likely the number will be lower because it will still be going through the study phase. So most of the money that's being spent right now is on the camp, on the roads, some earthworks. So it should bring that number down a little bit but I'm happy to give you an update as soon as we have it later this year.
Orest Wowkodaw
Okay. And just on the $300 million for this year, I think the disclosure talks about $180 million being capitalized. Does that imply then there's only $20 million going to be expensed in Q4?
Peter Rockandel
I don't know if we've given the -- Teitur, you got the breakdown of hub.
Teitur Poulsen
I can on this. So year-to-date, it's $200 million spend, but that includes the gains on the blue chip swaps that we have had so far this year, which is around about $68 million included in that number. So depending on what we do on blue chip swaps in the fourth quarter, we are saying the total spend is $300 million, of which $180 million is expected to be capitalized.
Orest Wowkodaw
Does that imply there's $20 million left for Q4?
Teitur Poulsen
It implies $120 million for the full year is being expensed. In the third quarter, lower expensed $55 million on the project and $40 million in Q2. So that leaves around about $25 million, $30 million share.
Orest Wowkodaw
Okay. Okay. Thank you very much.
Operator
Thank you. Next question will be from Lawson Winder at Bank of America. Please go ahead.
Lawson Winder
Thank you, operator, and good morning and thank you for the update, Peter and team. I wanted to ask about the three-year guidance planning process. So as you alluded to, you'd be having your budgeting meetings in three-weeks and shortly after that, we should be getting updated three-year guidance. Just sort of thinking philosophically in terms of how you think about forecasting three-years out. Do you assume the current inflationary environment dissipates? Or do you assume that it continues to be a headwind over the next three-year period? Sort of any thoughts around how you factor that in would be really, really helpful. Thank you.
Peter Rockandel
Juan, you should take that one.
Juan Andres Morel
Well, one of the things I'll say is we're lining up our three-year planning. We're changing the cycle. So it's all lines up in Q1, some of it was a bit off sequence. But to your point, yes, we certainly take today's inflationary environment into consideration, I would say. But I do think that we see the numbers longer term ratcheting down a little bit. So that's also probably aligned with our commodity price assumptions as well, which are not that aggressive long term.
Lawson Winder
Okay. That's very helpful. Thank you. And then if I could ask on Josemaria. When you think about strategic partners and particularly in light of the fact that you mentioned a big global mining companies as potential partners, is there a level of comfort with Lundin becoming a minority partner in Josemaria and sort of turning the operations over to maybe a much bigger, better capitalized mining company?
Peter Rockandel
I mean I think it's pretty mature to make that call right now. We're still working through the engineering. I think that's where our focus is right now. We have a pretty solid relationship with a lot of different counterparties. So it's natural for us to keep those conversations going. But when we get to that stage, we'll see what some of the suggestions are. I would imagine some bigger companies may want to have a control position, but we'll have to address that as we move into 2023.
Lawson Winder
Okay. No, that's totally fair. Okay. Thanks very much. That's it for me. I appreciate you addressing my questions.
Peter Rockandel
No problem.
Operator
Thank you. Next question will be from at Fahad Tariq at Credit Suisse. Please go ahead.
Fahad Tariq
Hi, thanks for taking my question. Just switching gears to the sinkhole. Has there been any communication on potential fines that you've received from regulators? There are some numbers that were speculated in the media, but I just want to know from you if you've heard anything.
Juan Andres Morel
Fahad, this is Juan Andres. I'll take the question. We have been informed by the SMA of potential fines. This is a process that will take some time. So our legal team is working on that and gathering all the information. So for now, it's probably too early to put a number around the potential fines around the sinkhole.
Fahad Tariq
Okay. Fair enough. And then on the underground expansion at Candelaria, I know you mentioned that you're looking for taxation royalty clarity and maybe some of that came yesterday. But are there any concerns that potentially from a regulatory perspective or permitting perspective, there could be pushback given what happened with the sinkhole? Any color there would be helpful.
Juan Andres Morel
We have not seen any impact between the sinkhole and the 2040 EIA. We keep working with government agencies with the EIA. And we remain optimistic that once we finalize the questions -- the last questions that we receive, we will be filing the third agenda by early next year and the process will continue. And again, we have not seen any impact -- negative impact on the EIA.
Fahad Tariq
Okay. That's clear. And then just maybe finally for Teitur, just a housekeeping item. There was a pretty significant working capital build in Q3. Is that expected to release in Q4?
Teitur Poulsen
Yes. I mean we would expect that to reverse over time and potentially during Q4. It's -- obviously, we have booked around about $80 million of mark-to-market adjustments for pricing adjustment going forward, but that's based on the forward curve. So depending on what the action prices are due in June Q4 and potentially on that, that should reverse the number of capital position is.
Fahad Tariq
Okay. Great. That’s it for me. Thank you very much.
Operator
Thank you. Next question will be from Sandeep Puvvadi at Morgan Stanley. Please go ahead.
Sandeep Puvvadi
Good morning, gentlemen. A couple of questions from my side. Firstly, on Josemaria. So you have alluded to the fact that there will be one year delay in the technical report. But can you also maybe provide some guidance? Is there any delayed to the development time lines or the CapEx that we should expect? And secondly, on Neves-Corvo, for the company to achieve the lower end of the guidance, it needs to increase the production by 43% quarter-on-quarter. How realistic is this number? Thank you.
Peter Rockandel
Maybe I'll start with the Jose question. Yes, I think initially, we were trying to maybe get a technical report out by the end of the year. So from our perspective, unless a misquoted earlier, I don't see it as a one-year delay, regardless if it does get pushed out, say, six months in order to get the engineering up to the level that we're more comfortable with, we'll have to wait to see what the report delivers. So if you pick the number, 65%, 70% engineering, then we can figure out the path forward from there. So perhaps it pushes it out by 6 months, but it's really too early to say until we see the completion of that study.
And Juan Andres, maybe I'll let you go for the Neves-Corvo question.
Juan Andres Morel
Yes. We -- as I said before, bringing the ZEP project into the name plate capacity has been challenging. So we're definitely seeing difficulties in achieving the annual guidance for zinc. And as Peter mentioned before, we are working on our 2023 budget and the five-year plan. So once that process is finalized, we'll have a better line of sight to the progression on ZEP with guidance.
Sandeep Puvvadi
Great. Thank you.
Operator
Thank you. Next question will be from Stefan Ioannou at Cormark. Please go ahead.
Stefan Ioannou
Yes, thanks for taking my question. Just further on the ZEP, it sort of sounds like you're going to push the expansion as hard as you can through the year-end. And then wherever you're at, at year-end, that will kind of dictate the run rate going through 2023, does that suggest -- I guess the question would be, would that be sort of the -- would you be happy with that study at that point? Or would you consider allocating additional capital to get it up to its original design nameplate to get it to where you originally wanted it to be?
Juan Andres Morel
As I said before, there are some items that we're adding as an operational improvement -- and once those items are finalized, we should be in a good position to continue at our nameplate capacity for ZEP.
Stefan Ioannou
Okay. Do you have any idea what the incremental cost will be to get there then?
Juan Andres Morel
No, we don't have a final number yet. We are working on it.
Stefan Ioannou
Okay. Thanks very much guys.
Operator
Thank you. Next question will be from Daniel Major at UBS. Please go ahead.
Daniel Major
Hi, there. Can you hear me, okay?
Peter Rockandel
Yes.
Daniel Major
Great, thanks. Yes, a couple of questions. Just want to clarify on the previous question on the CapEx or overall expenditure outlook at Josemaria into 2023 is $300 million this year. I didn't quite catch. Is that expected to be lower than 300 million or obviously lower than you previously expected? How should we think about that?
Peter Rockandel
Yes. We didn't state a number yet for 2023. But when we come out with our 2023 guidance, we'll probably give better clarity on what that number will be.
Daniel Major
Okay. All right. Thanks a lot. And then just thinking about the time lines for technical reports and updates on Chapada versus Josemaria. I mean I think you previously indicated Josemaria would probably become before Chapada that seems I guess, less likely now, but how should we be thinking about as you see it now the time line for the update at Chapada following what seems to be good drilling results at Sauva?
Peter Rockandel
Yes. I think in Q1, when we have the new mineral resource estimate out for Sauva, we'll start to get a better grip on the path forward there. And I think I mentioned earlier in the call that one of the items that we are looking at in addition to the expansion studies is something that would be more along the lines of just some debottlenecking and optimization, which could get the -- or should get the production up. And then maybe you can tie into Sauva. If we do that, it will be a significantly lower CapEx number. And therefore, you could be doing both at the same time.
Daniel Major
Okay. So is it still more likely to be second half of next year when we get a definitive update on Chapada expansion. Is that the right way of thinking about it?
Peter Rockandel
It could be earlier, quite frankly. I'm hoping that it will be in the first half.
Daniel Major
Okay. Very clear. Thanks. And then just final one, just on the cost progression. Obviously, there's quite a few moving parts in the unit costs. If we look at it on a sort of broader either sort of regional basis or a company-wide basis, what sort of levels of sort of currency-adjusted inflation are you seeing coming through now? And what's your expectations into 2023 around sort of broader levels of inflation you expect in some of these pressures to ease?
Teitur Poulsen
Maybe I can take that. I mean if you look at the total costs for the group for the first 9 months is around about $1.2 billion, and that's up roughly 20% compared to the same period last year results. So that gives you an indication of the overall inflationary pressures you've seen.
Obviously, most of that increase, I think, came through in the first half of the year. And looking at numbers now, it seems certainly to be flattening out and potentially even dropping down a bit in certain jurisdictions. And really the flip side of this is, of course, we've had a weakening currency across the board. The dollar has been strong against all currencies. And as we have disclosed now in this report, this will be entered into certain hedges to really capitalize up.
We see this as an opportune time and we've locked in [indiscernible] euros and [Czech], and we've done colors on Chilean pesos and Brazilian real in the event that those currencies weaken further we still benefits somewhat from that. And I think that's a program we will continue to monitor as we move forward and potentially do more of these hedges as we look out in time.
Daniel Major
Great. Thanks a lot.
Operator
Thank you. [Operator Instructions] And next question will be from Ralph Profiti at Eight Capital. Please go ahead.
RalphProfiti
Thanks, operator. Peter, I wanted to come back to Josemaria. And where exactly is this $300 million being spent? And I guess my concern is how are you going to manage potentially some of the preconditions for sanctioning that you talked about earlier, kind of running into a queue for Argentina that could get pretty thick, thinking Taca Taca, Agua Rica just went through an ownership change funnel mining Rio Tinto lithium strategy. All these things, sort of in that 2024, 2026 period. Just wondering how that's going to be managed from a procurement, construction and construction management standpoint.
Peter Rockandel
Well, I think we're, quite frankly, not just anything to arbitrate other companies. I think we're quite a bit ahead of the queue on those other assets that you mentioned. So I don't think we're going to run to the problem from that perspective. And on the $300 million, again, most of it has been spent on engineering, setting up the camp, the roads some of the infrastructure, early earthworks, a few long lead items. But I do think our process is ahead of some of these other companies -- and I do speak to them. A lot of us at our projects in Argentina, we have a pretty good open line of communication. So we know where each other sits.
Ralph Profiti
Okay. Okay. Thanks. Juan Andres, I wanted to ask you about coming to the sinkhole. Can you talk a little bit about the dewatering infrastructure that's in place? Could we potentially see more required investment in that, which is a separate issue apart from some of the sanctions and fines that potentially we could see and get the close when the time is right.
Juan Andres Morel
Yes, that's a good point. We've been working very collaboratively with the authorities, and we're doing all the studies and engineering to conduct a remediation program for the area affected by the sinkhole. And that plan will definitely involve some dewatering and some additional works. So as we continue making progress on that, we will also know better the permits that will be required to implement that remediation. And there will definitely be some capital expenditure involved in that program.
Ralph Profiti
Okay. That's very helpful. Thank you. Thanks Peter.
Peter Rockandel
No problem.
Operator
Thank you. Next question will be from Lawson Winder at Bank of America. Please go ahead.
Lawson Winder
Hi, thank you for taking the follow-up. I just hadn't heard the question yet, but just on your dividend and return of capital philosophy going forward. And clearly, with a $42 million buyback and maintaining the dividend in Q3, I mean I think that remains very attractive. You highlighted the attractive dividend yield and the return of capital yield is even higher. But in balancing that with the CapEx needs of Josemaria potentially Chapada going forward, I mean, does this level of buyback activity and the current dividend remain a core strategy? Or is that something that you think you'll need to remain flexible on?
Peter Rockandel
Yes. I think the base dividend is something that we look to keep intact. I think it's attractive to investors to see a return to capital throughout the cycle. So we're going to keep the base dividend there. And we've always been kind of opportunistic, if you will, on the buyback. And as we have a better line of sight on our cash outlay for 2023, we'll determine whether we can continue to be opportunistic on that buyback.
Lawson Winder
Okay. So you remain flexible, I guess, would be a fair summary?
Peter Rockandel
Yes, we remain flexible, but I definitely think the base dividend is going to remain intact.
Lawson Winder
Okay. Perfect. Thanks very much Peter.
Operator
Thank you. And at this time, gentlemen, we have no further questions. Please proceed.
Peter Rockandel
Well, thank you, operator, and thank you, everyone, for joining the call today. It's been a hectic quarter for us, but I think our sites are doing a fantastic job in light of a lot of the challenges that are going on globally. And I always just want to thank my two colleagues who have joined the call today as their first call. So Juan Andres and Teitur, thank you. And thank you, everyone, for taking the call from an investor and analyst perspective.
Operator
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.
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Lundin Mining Corporation (LUNMF) Q3 2022 Earnings Call Transcript