Antofagasta PLC (LON:ANTO.L), the Chilean mining giant, has reported a positive financial performance in its 2024 half-year results, with revenue, EBITDA, and cash flow all showing increases. The company, which is focused on copper production, is also looking to ramp up production by approximately 35% to 900,000 tons per year. In a recent earnings call, CEO Ivan Arriagada outlined the company's growth strategy, which includes significant investments in brownfield projects and an interim dividend payout. Antofagasta's plans are backed by a strong balance sheet and a commitment to maintaining attractive returns for shareholders.
Key Takeaways
- Antofagasta's revenue increased by 2%, EBITDA by 5%, and cash flow by 15% in the first half of 2024.
- The company plans to increase copper production by around 35% to 900,000 tons per year.
- Investments to extend the Pelambres mine life until 2050 and increase milling capacity are estimated at $2 billion.
- Antofagasta has achieved 65% of its cost savings target for the year and expects to exceed it.
- The company announced an interim dividend of 30% of earnings.
- CEO Ivan Arriagada discussed the importance of copper in the transition to clean energy and the company's water strategy.
- The growth plan focuses on brownfield projects and the exploration of further opportunities.
Company Outlook
- Antofagasta is investing in increasing production, with a focus on the Centinela second concentrator and Pelambres infrastructure replacement.
- The company is confident in its water strategy, having completed a desalination plant at Los Pelambres with an expanded capacity of 800 liters per second.
- Antofagasta's strong balance sheet and cash flow generation are expected to fund its expansion plans without compromising shareholder returns.
Bearish Highlights
- High levels of clay and fines in ore processed at Centinela have impacted recoveries, although the company has moderated the impact and plans to blend ore to minimize future effects.
Bullish Highlights
- The company's competitiveness program aims to achieve structural savings, targeting $200 million in savings for the year.
- Antofagasta has secured project financing and shareholder funding for the Centinela second concentrator project.
Misses
- Despite the positive financial results, Antofagasta's earnings call did not highlight any major misses for the period.
Q&A Highlights
- In response to questions, CEO Ivan Arriagada provided clarity on the company's 2024 guidance, attributing the increased production in the second half to higher grade ore at Centinela and destocking at Pelambres.
- The company has addressed concerns regarding the drought conditions and water redistribution agreement, assuring they will not impact operations in the second half.
- Arriagada also discussed the Twin Metals Minnesota project, stating that while litigation is ongoing, the company is exploring potential alternatives.
Antofagasta PLC remains focused on its core projects in Chile and Peru, while keeping an eye on opportunities in Argentina and other regions. The company's commitment to sustainability was underscored by the presence of Vice President of Sustainability, Alejandra Vial, during the earnings call. With a clear investment plan and a strategy to enhance efficiency and productivity, Antofagasta is poised to continue its growth trajectory in the copper industry.
InvestingPro Insights
Antofagasta PLC (ANFGF) showcases a robust financial foundation, as evidenced by its ability to comfortably manage its interest payments with existing cash flows. This financial stability is further reinforced by the company's impressive track record of maintaining dividend payments for 31 consecutive years, an attractive feature for income-focused investors. Additionally, the company's liquidity position is strong, with liquid assets surpassing short-term obligations, providing a cushion for operational flexibility.
From an investment perspective, Antofagasta's moderate level of debt and its capability to generate profits over the last twelve months, as confirmed by analysts' predictions for profitability this year, underscore its financial health. The company's performance is not only solid in the short term but also extends over a longer horizon, with a strong return over the last five years.
In terms of valuation, the company's market capitalization stands at $24.16 billion, reflecting its significant presence in the mining sector. The Price/Earnings (P/E) ratio, a key metric for investors, is currently at 28.88, with an adjusted P/E ratio for the last twelve months as of Q4 2023 at 31.6. This suggests a premium valuation, which may be justified by the company's stable earnings track record and future growth prospects.
Investors looking at company growth will note that Antofagasta's revenue growth was 7.89% for the last twelve months as of Q4 2023, indicating a healthy expansion pace. The company's gross profit margin stood at 42.03%, reflecting efficient operations and cost management.
For those considering adding Antofagasta to their portfolio, it's worth noting that the company's fair value, as estimated by InvestingPro, is $20.31, providing a reference point for potential investors. For additional insights, there are 6 more InvestingPro Tips available at https://www.investing.com/pro/ANFGF, which can further guide investment decisions regarding Antofagasta PLC.
Full transcript - Antofagasta PLC (ANFGF) Q2 2024:
Operator: Hello and welcome to Antofagasta's 2024 Half Year Results Call. We will start today's session with a short introduction from Antofagasta to be followed by a question-and-answer session. If you have question, we ask that you please use the raise hand function at the bottom of your Zoom’s screen. [Operator Instructions]. I will now hand you over to Rosario Orchard, Director of Antofagasta's London office, to introduce today's speakers.
Rosario Orchard: Good morning, good afternoon, everybody. Welcome to our half year call for 2024. I'm here today with our Chief Executive, Ivan Arriagada; our CFO, Mauricio Ortiz; and our Vice President of Sustainability, Alejandra Vial. In terms of process today, Ivan will start with a short introduction, and then we'll move straight into Q&A., and we'll aim to wrap up in one hour. Ivan, over to you.
Ivan Arriagada: Thank you, Rosario, and welcome, everybody, who're on the call, and for taking the time to discuss Antofagasta's half year results. I know you will have seen the details that we published this morning, but I would like to highlight as a way of introduction, a few key points. Firstly, I'll say that we have delivered another positive set of segmental results. Revenue is up 2%. EBITDA is up 5%, and most importantly, cash flow is up 15%. We think copper plays a vital role in the transition to clean energy, and with the supply of demand expected to lag pricing demand over the next decade. We have made this year investments, which we will continue to undertake as we go through this investment phase, and which should allow us essentially to increase production by close to 35% or get closer to 900,000 tons per year of production. I would also highlight that out project are advancing well. They remain on track and CapEx is unchanged. These are brownfield expansions, and we know that brownfield expansions carry certain benefits from the point of view of a lower execution risk, lower time to production, and typically lower construction costs. With respect to production, we remain on track to meet our guidance, although as we previously had announced, we expect production to be at the lower end of the range that we had initially shared with you. And you will also note that today, we have announced an interim dividend, which represents 30% of earnings, which is in line with our policy. So having said that as introductory remarks, we will now open up the session for questions and answers. And therefore, I welcome the first question.
Operator: [Operator Instructions] The first question is from Jason Fairclough at Bank of America. Please unmute yourself and begin with your question.
Jason Fairclough: Okay. Thanks, folks. Good to see everybody. Look, two questions from you. First, I just wanted to ask a fairly simple one about water. We've been impacted by water the last couple of years. Now you're ramping up the desalination plant. Where are we with water today? Is your business being impacted at all by water? Or is this completely fixed? So that's the first question. Second question, I did just want to complement you on the bubble chart on Page 21. I feel like it's 2006 again, so that's great. And it's really great to see the growth potential in the business. So, I guess my question Ivan is, when do you start talking even hypothetically about some of these longer-dated growth options and what might be involved in bringing those online?
Ivan Arriagada: Yes. Thank you, Jason. So let me start by water. I think we had displayed a more water strategy for Los Pelambres, which includes the commissioning and ramp-up of the existing desalination plant, which is actually now fully running at operational capacity. So, we were able basically to produce at an instantaneous level the 400 liters per second. And therefore, from that point of view, we are basically independent of the water that accumulates because of rain. And I think that’s the first step in our water strategy. We're also undertaking now the expansion to the diesel plant, which will essentially take our water facility to 800 liters per second when that is finished towards the end of 2026. And that will mean that we will then release the extraction of continental water. And at that stage, almost 90% to 95% of the water that we used to be either a circulated water or sea water. So that's essentially the plan. And at this stage, with the water plant running at design, and I must say that the ramp has been quite successful, and we're very pleased with where we are. We are independent of rain water in Pelambres. So, water has not been a limiting or restrictive factor in the course of this first half as it was, as you pointed out, for the last few years. Now with respect to the growth pipeline. I think we're pleased to see that we've got some opportunities that we were working on. And our strategy is essentially based on us being able to develop in, firstly, our brownfield projects, both the Centinela second concentrator and the Pelambres infrastructure replacement that we're undertaking now. And I think that will essentially allow us to get closer to the 900 tons. And our strategy is very much focused on that. Now beyond that, what we show in the chart, is the extension of the mine life at Pelambres. And I think this is extremely important because it essentially allows us to monetize a very significant resource base that today is limited because of the permit that we have for tailings. So that will essentially allow Pelambres to extend its mine life beyond 2035 and continue operating at current or expanded rates. And, therefore the value impact, for us is quite significant. Now when are we going to be talking more about that project, I think we expect to file the environmental impact assessment to be able to extend the mine life on 2035 towards the end of this year. So actually, we've been working on for quite some time. We're ready with the permit for it to be filed, and we expect that permit will probably take between two and three years to be granted. And after that, then we would be able to start planning what that extension might mean in terms of construction work and other sort of subsidiary activities. So, it's quite imminent and it's quite close. Now with respect to the other projects that you would see there, I think we've got some which are in exploration phases like Cachorro and Encierro. We've talked about them in the past. We've actually included around 1 billion tons of mineral resource when you add those two in our declaration. And actually, what we're moving now in the case of Cachorro is to finish a scoping study when we're now doing actually a more exploration reconnaissance exploration, and we're doing a pre-feasibility starting feasibility. So, I think that's something that you'll also hear more about. And the other one that we have there is the potential to extend the life at Zaldivar, which I would like to mention. And I think that is dependent, obviously, on us being able to get the permit extension now in May, but we've got a long-term plan there which will have us mining until 2050, if that is successful. So, we've got several projects which we control that we can essentially developed to be able to continue to grow our production or sustain our production levels, and I think that's good. And we continue to do exploration. We believe that exploration is important, and we have activities now mostly in Peru and Chile, and we continue to think that, that will provide further opportunities into our pipeline.
Jason Fairclough: And sorry, Ivan, just to be clear, things like Cachorro, Zaldivar primary sulfides, that is not in the near-term growth plan, right? So, near-term growth of 30%, 35%, that's independent of those new projects?
Ivan Arriagada: Right.
Operator: The next question is from Ioannis Masvoulas at Morgan Stanley. Please unmute yourself and begin with your question.
Ioannis Masvoulas: Great. Can you hear me?
Ivan Arriagada: Yes, we can hear.
Ioannis Masvoulas: Perfect. Thank you very much for the presentation. Few questions from my side. The first one on the guidance for 2024, which requires a large step-up in H2 of as much as 25% versus the second quarter production run rate. Can you provide some color on how you get there as recoveries at Centinela concentrates are only expected to improve from Q4 this year and Los Pelambres might see a slow destocking of material given the pipeline capacity bottleneck? The second question is on the Los Pelambres Phase 2 expansion. You indicated a preliminary CapEx figure of $2 billion. I think previously, you were talking something closer to $1 billion. So, what explains the increase? And how much of the $2 billion relates to the increased desalination footprint? And lastly, if I may, there is a comment around the financial results around new declaration of severe drought conditions at the Los Pelambres, impacting the water redistribution agreement that you have in place. How does that impact your operations into the second half of the year, if at all? And I'll stop here.
Ivan Arriagada: Thanks, Ioannis. Okay, for those questions. So, on guidance for 2024, they do include, as you've mentioned, a step-up in production in half two, which is explained essentially by expected higher grade at Centinela. So that's an important drive of the increase in production. During the first half, we did go through a zone of, I would say, a very low grade at Centinela and lower grade at Pelambres, and we expect to see that reverse in the second half. And also in the second half, we do expect to see drawdown from the inventory. And even though we've indicated that, that may take two or three quarters, which is essentially put some of that into next year. We think that will also help to achieve our guidance number for this year. And therefore, those are the factors which are at play. So, essentially high grade at Centinela, destocking of material that we produced and that is essentially accumulated at Pelambres. With respect to your second question regarding the Los Pelambres Phase 2. I would say that the -- yes, we had provided an estimate of capital expenditure for this project back in -- I think it was 2014. So that's 10 years ago. So, this is an updated figure. And I would like, first of all, to point out that the scope of this project involves essentially the life of Pelambres beyond 2035. So capital expenditure for this space is situated around the 2030s, not earlier than that. And we are undertaking several studies with options being looked at and what the $2 billion involved is essentially extending the mine life for another 15 years until 2050. And increasing the milling capacity. So therefore, adding another ball mill, and this is an option being studied today and also an increase in the water footprint. Now desalination water supply footprint and that is important because what we according to the studies that we've made is that, when we extend the mine life, and we're well into that extension in beyond 2035, things like the rate of evaporation of water at the tailing. And also, the fact that we have another or extra milling capacity will require some extra water to what we've planned in this phase with Pelambres extension. So, what's involved in the $2 billion is all that optionality. So, the option to eventually increase milling capacity and also the initial water footprint requirements, which are likely to be back-ended in the life extension of Pelambres. Because as I say, they take account of the added capacity, but also the higher evaporation rates as the tailings footprint increases. So that's basically what's in it. And obviously, because the prior number was provided in 2014, there's inflation element. So, this has been 10 years seen that was provided. So, there's both an inflation element, and second, also the options which are -- the development options, which are included in the scope of the $2 billion are slightly different, as we've also included some expansion to the water footprint. And going on to your third question about the water redistribution agreement. So, we have essentially an agreement with the water authority and the community whereby we have a mechanism operating, which is called the water redistribution agreement. And because there is drought, that requires a special decree, which is now in place. That has been granted. And therefore, there are some administrative permits of, I would say, second level of order of relevance, which need to be in place, and those are being sorted out now. So, because we have in the short term the combination of the water availability through the desalination plant. We expect that any sort of restriction associated to this water redistribution agreement being put in place because of these administrative conditions is short-lived and therefore will not have any impact on water availability for us in the second half.
Operator: The next question is from Daniel Major at UBS. Please unmute yourself and begin with your question.
Daniel Major: Can you hear me, okay?
Ivan Arriagada: Yes.
Daniel Major: So, a couple of questions. First one, just clarifying on from Ioannis' question around the project pipeline to some degree. Page 21, you've got the Centinela Phase 2 and then the Los Pelambres growth enablers and then the Los Pelambres expansion Phase 2. Can you just clarify which ones of those projects are needed to get to the ambition of 900? Is -- do you need the Los Pelambres Phase 2? Or is it just the first two at the front end of the bubble charts?
Ivan Arriagada: It's the frontend. So, what we need basically or are contemplating there is the current expansion of Pelambres, which has now been completed, plus the replacement of the sort of infrastructure, which has been built now to the project that we -- or the projects that we have in construction, both the replacement of the concentrate pipeline and the expansion of the water system. So that's in construction now. And in the case of Centinela, the second concentrate. So, the -- what's behind the 900,000 is completing those phases of growth at the Pelambres, not the life extension, and in the case of Centinela, doing the second concentrator, and also it assumes the continuity in the operation of Zaldivar.
Daniel Major: Okay. Yes. So, the $2 billion you referenced and discussed in the previous question, so long dated CapEx is not needed to be deployed to get to the 900?
Ivan Arriagada: That’s right.
Daniel Major: Yes. Okay, thanks.
Ivan Arriagada: And the $2 billion -- as I said, the $2 billion, it's enrolled really in the sort of extension of the mine life of Pelambres, which is beyond 2035. Now obviously, we will need to do some work around the 2030s, but it's associated to that project, which is outside the sort of 900,000 number.
Daniel Major: Very clear. And then the second question is on the cost guidance that you provided an update with the production release last month because I think when you set the guidance earlier in the year, it was with quite conservative FX and gold price assumptions yet. It's still increase somewhat. I understand the volume aspect because you expect to be to the low end of guidance. But can you give us some commentary on the inflationary impacts, clearly, if you're using spot parameters now there's some underlying inflation still in there? So, any sort of moving parts there? And if you can, at this stage, any indication on how the trajectory of unit costs should look into 2025.
Ivan Arriagada: Yes. So, I'll pass it on to Mauricio, but maybe just a couple of things. One is, yes, we do expect the second half costs to come down as a result of higher production. So, there's a fixed cost dilution associated to the higher production figure. And the fact that we've guided to 170 is associated to the fact that we expect to be in the lower range. So, production has a very significant element in play here. What we've seen in terms of local inflation, just to give some color to that is that local inflation is running slightly higher than we've sort of had anticipated or the macro consensus was at the time. Expectations is that it's probably going to end up close to 4%, and we had assumed a rate of around 3%. So, that's also a factor in costs. But Mauricio, you may want to expand further on this point.
Mauricio Ortiz: Well, maybe just to start on building on what you just said on local inflation. That is something that we have seen offset a weaker Chilean peso and that is also an important factor in our projection of 170 going forward. And along with the higher production in the second half, a weaker Chilean peso than what we forecast at the beginning of the year and a stronger gold price. I believe with these three elements. We can build and be confident in 170 as a full year guidance in terms of net cash cost.
Daniel Major: Okay. And can you at this stage given directional sort of view on costs into 2025 unit costs?
Mauricio Ortiz: Well, Dan, that we just provide guidance later in the year regarding our figures for next year. But I would say that with Pelambres running at full capacity, it's additional milling capacity and diesel plant. So, leaving out of the table, any water restriction and with Centinela entering a in a high or grade phases, we have a positive driver for next year.
Operator: Next question is from Ephrem Ravi with Citigroup. Please unmute yourself and begin with your question.
Ephrem Ravi: Can you hear me?
Ivan Arriagada: Yes, we can hear well.
Ephrem Ravi: Firstly, I was trying to reconcile the year-on-year cost move of those about $0.45 per pound lower or higher cost due to throughput, and then the efficiency improvement, the competitiveness program, which had a $34 million dollar improvement. I just want to know of the competitiveness program, the throughput above design capacity. How much of that is structural? And how much of that is generally that your throughput levels are going to be higher versus a very base from last year? And secondly, just a quick sort of update, if you can give on what your initial discussion with Buenaventura now that you've got seats on the borders in terms of cooperation prospects and should we expect anything big in the next one or two years from that?
Ivan Arriagada: Okay. So, on the throughput, I think essentially, what you see there when you compare year-on-year, yes, it's the -- it's moving Pelambres to essentially run at design capacity because there's been no limitation on the water availability in the first half, and there was some of that in the prior half in 2023. Having said that, the good news is that we have recovered that. And secondly, that our plans are running well. I mean if you look at Centinela, we had lower throughput because the ore was harder. But in fact, it's been running with a good run time. And when the ore has been -- as it was in 2023, we were hitting rates above 105,000 tons a day. And in the case of Pelambres, we now have another milling line and therefore, we're able to get as high as 210,000 ton a day, and those plants are running very, very well. So, we're happy with where throughput is. And we think that, that will provide some extra upside as we look into the future production. But when you look at the bars, as you were pointing out, it's mostly, comparing that performance against a lower performance than design, because of the water limitations in the prior year. Now with respect to Buenaventura. So, we've as we discussed before, I think this has been Peru's jurisdiction like. We've got an exploration team there and the move to acquire close to 19% or 20% of Buenaventura's ownership has been in line with that strategy in line in that plan. We saw this as an opportunity from a valuation point of view. If you look at the portfolio, it includes a share in Cerro Verde and other assets, which are mostly producing gold, which is good news today because of the gold price, but which have the potential to convert to copper. And since then, essentially, we've got two seats in the Board. We are working, I would say, very cooperatively with other Board members and the management of Buenaventura to understand the portfolio and the potential of the plans that they have, and therefore, are in that phase. So very pleased where things are heading and going in terms of the level of collaboration that we're seeing. And I'm sure that will lead to some a better understanding of what the opportunities in the portfolio of Buenaventura might be to continue to develop that. But at this stage, we're glad with where we are collaborating and understanding the potential.
Operator: The next question is from Marina Calero at RBC Capital Markets. Please unmute yourself and begin with your question.
Marina Calero: Hi. Good afternoon. Can you hear me?
Ivan Arriagada: Yes. We can hear you well, Marina.
Marina Calero: Perfect. I have two questions. The first one is on your cost savings program. It looks like you have already achieved 65% of your target year-to-date. Do you see potential to exceed that target? And then the second one on your Phase 2 expansion of Los Pelambres. Will that $2 billion investment meet your internal hurdle rates at current copper prices?
Ivan Arriagada: Yes. So, I will start with the second, and I'll let Mauricio pick up one on the cost. I mean I think it's probably one of the best investments that we may have at hand because it essentially allows us to extend the mine life at Pelambres against the case of stopping production in 2035. So, we essentially get the full benefit of being able to continue producing from an ore body, which is phenomenal and which is world-class. So, we think that the Phase 2 Pelambres is a very key project in the sense that they will drive significant increase to the group. As I said, because otherwise, we're based with stopping production at Pelambres in 2035, which would be the sort of mine life today based on the permit availability. So, this is a very key project for the Company and for the group. It will allow us to monetize those very significant existing reserves that we have at Pelambres beyond the current permits. And the investments involved. As I said before, some of them are optional. We've included the $2 billion, the option to expand the milling capacity. So that will only be undertaking. If we think at that stage, it's a good opportunity for the Company to increase throughput and therefore, production. And in the case of the increased water footprint that's essentially during the life of the extended Pelambres, so that will happen between 2035 and 2050 and therefore, progressively and it essentially allows operations to continue throughout that extended period. So, we think it are expected to be very high return and high yield investments for the Company. and provide a great opportunity to be able to monetize the rich base of resources that we have at Pelambres, which are amongst the best in the world. So having said that, I'll pass on to Mauricio to address your question on the cost saving programs and what we have achieved and the potential for that.
Mauricio Ortiz: Thank you, Ivan. Well, first of all, Marina, let me say a few words about the competitiveness program, which is main target is to look for structural improvement in savings. So, the basis of this program are combining innovation and operational excellence. So, as Ivan described, we are, for example running beyond our design capacity, some of the facilities. I would like to expand a bit, for example, what we are doing in Antucoya. In Antucoya, the design capacity was in the space of 30 million tons per year. And now, we are running in the space of 32 million tons per year. So that is part of the thing that we are doing. Particularly this year, we fronted loaded the program. That's explained why we are slightly ahead of 50% of the total figure. I will expect that in the second half, we are going to keep running Antucoya, for example, beyond the design capacity and keep collecting the savings associated to lower unit consumption, for example, the ones that we obtained with explosive and optimizing diesel consumption in our operations. But the bulk of the savings from the second half will come from an initiative that we call productivity improvements related to our contractor workforce. So, to wrap up, I will expect that we are very well placed to achieve our 200 million saving target for this year on the basis of structural savings and improvement. And we are focusing finishing this year and entering the next one and optimize the time on tools and the productivity of our contractors at the mine sites.
Operator: The next question is from Ioannis Masvoulas at Morgan Stanley. Please unmute yourself and begin with your question.
Ioannis Masvoulas: Hello. Can you hear me okay?
Ivan Arriagada: Yes. We can, Ioannis.
Ioannis Masvoulas: Excellent. Just a couple on my side. The first, going back to Centinela concentrates. So, you experienced high levels of clay and fines in ore processed, which impacted recoveries. What I was hoping to clarify is, whether this is a one-off in nature or whether it could be a recurring theme in the coming years for this operation. In other words, is a historical average recovery of 85% a good guide for the years to come, or shall we make in something a bit lower? And then the second question on depreciation, which saw a fairly big step-up of 27% year-over-year. You clearly articulated the reasons on the results today. What shall we expect for the full year because that's going to be relevant for EPS and dividend expectations?
Ivan Arriagada: Yes. Okay. So, on the first one, as you pointed out, and we did sort of highlight that in the production report, yes, we have extracted ore and are mining in a zone that's got more clay and fine content than average for that so in a face of the pit that we would expect. And therefore, that has impacted recoveries. I think we had initially of an impact, which has now been moderated. As you know, time has passed and we continue to feed the ore, we're able to optimize the plant. So, we're probably in levels of recovery today, which are hitting the sort of close to 80% again. Now, going forward, I would say that we are essentially expecting that in some areas, we may well find this type of clay and fine, but that we are able to essentially update and recalibrate our geometallurgical model in a way that we will be able to blend that ore, and therefore, have a minimum impact or no impact on our recoveries. So, I would say that assuming a recovery is in the range of sort of the 85% as has been in the past, is -- would be appropriate on the basis, as I say, that anticipating this condition or this attribute, we're able to blend the ore so it doesn't have the same impact in the performance of the plant. And with respect to depreciation, I'll pass it on to Mauricio.
Mauricio Ortiz: Thank you, Ivan. As you know, depreciation is a function of our asset base of our operational asset base. And in comparison, with the first half of last year, we have a different asset base as we already ramp up, and we have fully operational the desalinization plant and the additional milling capacity at Los Pelambres. So that explains basically the additional depreciation in comparison with the first half of last year. Tackling your question regarding the how we can expect for the full year, I would expect that -- I mean, that this new facility is fully operational during the first half, especially the diesel plant and most of the first half with the additional milling capacity depreciation, we are going to have roughly a flat depreciation in the second half in comparison in the first half.
Operator: [Operator Instructions] I will now hand over to Rob Simmons for the written questions. Rob, please go ahead.
Rob Simmons: Thank you, Kindle. We have two written questions so far. The first one is from Wood Mackenzie. And the question is relating to the water sale at Centinela that we announced earlier in the year. Question is as follows. How will this deal affect your cash costs? And what are the terms for the transfer stage of the deal? We assume Antofagasta will have to buy back water infrastructure at some point in the future.
Ivan Arriagada: Okay. So, I will -- on the costs and cash flow, I will pass it on to Mauricio, but this -- we think this is an important transaction as part of the funding for the Centinela second concentrator because in line with what we had planned, this essentially allows us to release cash from -- and recycled capital that can help us to or assist in the financing plan for the expansion. And I think it's been a transaction that has been successfully completed according to what we had planned and in turns, which are creative for the Company. Now, the scheme involves essentially something similar to a lease arrangement. And therefore, there is a provision for a buyback at the end of the contract period as has been implied in the question. And also, we have several provisions in the contract that allow us to derisk the water supply, both in terms of how we monitor maintenance and the potential rights that we have also to action the what is required for the pipeline to operate in a reliable way. We are happy with where things are heading with the consortium, and they are tasked not only to run the existing system, which is now being transferred to them, and we are in the period of transitioning that with a joint operation for a short period of time. But also, they've been tasked with expanding the system. So, the structure, the purpose, the strategic intent behind this transaction has been accomplished. And I'll ask Mauricio to be more specific about the cost and cash. Mauricio?
Mauricio Ortiz: Thank you, Ivan. And as you said, this is a transaction that involves the existing infrastructure, which is basically a cash inflow of $600 million. And also offload some CapEx related to the Centinela second concentrator project in the space of 380 million. So that is the cash inflow. In terms of the competitiveness of the water supply, I would say that we have reached a good agreement with the acquiring consortium. We will maintain a competitive unit price for water supply in the space of $4 per cubic meter. That is a competitive amount in the order area of Chile. And that will translate essentially in terms of net cash cost in the space of $0.03 to $0.05 per pound. So, for a company that will be operating fully on seawater. And once, we have the second concentrator operator aiming and moving toward the first quartile. The increase is reasonable related to secure the water supply for Centinela requirements, for its expansion and existing operations.
Operator: Thank you, Mauricio. Rob, we're back to you with the second question.
Rob Simmons: We have the second question, which relates to our investments and how these might affect our debt going forward? Thank you.
Ivan Arriagada: Okay. I assume is it general? I think we've laid out clearly what our investments plan are and how they're centered around the expansion of the second concentrator at Centinela and the sort of replacement and expansion infrastructure at Pelambres. And we think that we have and are planned accordingly that we have the balance sheet to be able to fund those expansions. We -- in the case of the Centinela second concentrator have secured a combination of project financing for $2.5 billion with shareholder funding for the balance, including the recycling of capital associated to the BOT or the water system. Therefore, the project is, from that point of view, funded at the asset level, at Centinela level with that combination. And that is already in place. And in the case of the expansions at Pelambres, we've done the early first phase, which involved the diesel plant that's already built, are undertaking this replacement infrastructure. And essentially, Pelambres has a strong balance sheet and cash flow generation to be able to fund these investments. We undertake these investments just as a reminder, following our capital allocation. And therefore, one of the conditions in the capital allocation is to retain our strong balance sheet even through these phases of growth, and therefore the funding and the financing associated is based on that premise as well. So, we think that we have the strength in our balance sheet to be able to undertake these investments. And as I say, in the case of Centinela, which is the biggest one, the financing plan is already in place with commitments being -- I mean, having been closed, and we're now actually going down from the funding as we continue to invest and progress construction. So, within the capabilities of the Company. I don't know, Mauricio, if you want to add anything to that?
Mauricio Ortiz: Well, just to wrap up to say that -- additional debt is part of the options, as you said, but we have a strong cash generation in our operating companies, especially in those that are growing, Centinela and Pelambres and through the capital allocation framework, we are fully committed to maintain a strong balance sheet and attractive returns to our shareholders even during this growth period. And just to wrap that is an option that we are proud of being open our access to DCM markets few years ago and we are very pleased with the reaction and the feedback that we received from the debt investor every time that we tap the market. So, it's an alternative, but we have the benefit of having strong generation units within our portfolio. And as you said, we may use the balance sheet, but always maintaining our commitment with a strong balance sheet translated as an investment credit rating.
Operator: The next is from Edward Goldsmith at Deutsche Bank. Please unmute yourself and begin with your question.
Edward Goldsmith: Hi, Ivan and Mauricio. Thank you for taking the questions. Two from my side. Firstly, just going back to costs, we've seen cash costs at Antucoya and Zaldivar increased significantly in recent years, particularly compared to Los Pelambres and Centinela. How entrenched are the cost increases at the smaller scale operations? And then the second question is on the Twin Metals Minnesota project. Where does this stand currently? And what's the potential alternatives that you could advance whilst the litigation takes place?
Ivan Arriagada: Okay. On the cost of Antucoya and Zaldivar, I mean these are smaller operations, and they're also hydro and therefore, they're typically higher in the cost curve by the very nature of the activities that involved in producing copper there compared to Centinela concentrates and Pelambres. And therefore, I think the cost reality reflects that. Now we are achieving, I would say, very good operational results at Antucoya. And now also, we've seen improvements in the use of the plant at Zaldivar. And therefore, I think we're achieving higher levels of efficiency there. So, we expect that, that, combined with the cost improvement program should see us enhance the cost position and achieve higher productivity. These operations, especially in Antucoya, as Mauricio mentioned, is running quite well. But there is obviously the limitation that these are higher cost operations in some of the increase in the past had to do with high prices for acid. They use acid in leaching and therefore, some of that as first -- and that's why we've seen some cost improvements there. But I think there -- the scope for efficiency continues to the extent that we're able to run. These plants more efficiently and some of that we’re very clearly at Antucoya, and we will continue to move in that direction. There's no reason to expect, therefore, any structural cost deterioration in both Antucoya and Zaldivar, but on the other hand, to the contrary, we expect that we will continue to make improvements there in how we run these facilities, and that should translate into better costs. Regarding Twin Metals, I mean there, we've got basically two situations. I mean one of -- some of the leases are being litigated. And therefore, we have a process in the courts in the U.S. to get them back at least we're not renewed as we think we have an automatic right for renewal, and therefore, we are expecting, therefore, to progress the case in the tribunals. Now some other leases, which are essentially private and state owned. And these are what we call the sort of Birch Lake properties, which are south of Maturi, which is the property that's been litigated. And we think that we can sequence a project starting with this mineralization. And that would be, therefore, the sequence that we think that we can accommodate to be able to expedite the development of Twin Metals. I mean we're still it's a long-dated option in the sense that this will take time to fully permit. But we think that this sequence provides an advantage by means having federal leases involved. So that's the situation in Twin Metals.
Operator: The next question is from Jason Fairclough from Bank of America. Please unmute yourself and begin with your question.
Jason Fairclough: Folks just back with a follow-up. I guess two related questions here, Ivan. I guess first question is, any thoughts on Argentina as a potential destination to invest. And then the other thing is with all the M&A going on in the sector, there's lots of discussion about, I think, Duncan's word for it is adjacencies i.e., when you have one ore body, which is next to another ore body, there's an opportunity for synergies. So, I'm just showing you a little picture here. I'm sure you've seen this one before. So, if you look in the top left, you can see here, Los Pelambres. And if I look in the bottom right, and it's really not that far, there's something called El Pachon, which has been around for quite a while. What do you think?
Ivan Arriagada: Look, I think, let me take first Argentina. I think, great place, and there's a lot of good changes to be happening from a business environment point of view in Argentina. So, we look with a lot of interest and monitor what's happening there. I think, obviously, for big mining investments, these changes need to settle and be considered permanent to be able to undertake investments which carry more risks. And therefore, our focus regionally tends to be more in Chile and in Peru. So, but we work on that with interest. Now you've got the picture there of Pachon. Yes, we certainly known about this site and mineralization for a long time. We are focused on developing Pelambres, I would say, and its infrastructure to be able to achieve this extended mine life, and we think there's huge value to be obtained by doing that. Now obviously, we would look at opportunities if they exist, but we are basing our strategy of developing Pelambres on the basis of what we own and have today. So, that's the plan now. And obviously, if the opportunities arise, you know, we will continue to look into those, but nothing concrete at this stage.
Jason Fairclough: Sorry, go ahead.
Ivan Arriagada: No, no, go ahead.
Jason Fairclough: I was going to say just as a follow-up. How do we think about this idea of accessing Argentine resource through Chile? Because it just seems like the logistics are a lot better to go than then all the way over to the other coast. But I think historically, there just hasn't been so much of a relationship to allow that to happen.
Ivan Arriagada: Yes. And I think that's what we're seeing improving. So, I would say, certainly, that seems to be, in a better foot today. I agree. I mean, some of these ore bodies, which are in the Andes in the Argentinian Andes, will find it much more optimal to be able to undertake its logistics through the Chilean side. And I would say in some of them that will be probably more of an even existential issue from an economic point of view. And therefore, the site that you mentioned, for example, I think it's got that very issue. And therefore, there is a bilateral treaty between Chile and Argentina to be able to regulate how this would operate, but it has not been put in practice before. And therefore, it's a good framework. We know it and it does provide some opportunities. So, I think the legal setup seems to be there. And if the political will from the governments, remains present, I think this may mean that that may be possible to use. But I agree with you that for many of these deposits, the logistics are much more optimal if things are moved through Chile and that would have to be part of the plan. No question.
Operator: Thank you. There are no further questions. I'll therefore, hand back to Ivan for closing comments.
Ivan Arriagada: Okay. Well, thank you very much to everybody, and I hope this has been informative. I would also like to say again that we've got Alejandra Vial here with us, she's the Vice President of Sustainability. And I'm sure you'll have a chance to meet with her directly as we sort of progress in other meetings, either in person or via the deal. So welcome to Alejandra. Thank you all, and we'll see you soon. Goodbye.
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