Lundin Gold Inc. (OTCQX:LUGDF) Q2 2022 Earnings Conference Call August 10, 2022 10:00 AM ET
Company Participants
Ron Hochstein – President and Chief Executive Officer
Alessandro Bitelli – Executive Vice President and Chief Financial Officer
Conference Call Participants
Bryce Adams – CIBC Capital Markets
Don DeMarco – National Bank
Kerry Smith – Haywood Securities
Trevor Turnbull – Scotia Bank
Operator
Good morning. My name is Michelle, and I’ll be your conference call operator today. At this time, I would like to welcome everyone to Lundin Gold Second Quarter’s of 2022 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.
Mr. Hochstein, you may begin your conference.
Ron Hochstein
Thank you, Michelle, and good morning everyone. I hope you’re all doing well and I’ve been enjoying the summer so far. Thank you for joining us on this conference call today where Alessandro Bitelli, Executive Vice President and Chief Financial Officer, and I are going to take you through our results for the second quarter of 2022. To begin with, I will go through some key highlights from the second quarter, provide an update on operations at Fruta del Norte and walk you through our updated 2022 guidance. I will then provide some color regarding our ongoing near mine and regional exploration programs. After which Alessandro will discuss our financial results in more detail. I will finish things off with my concluding remarks before opening the call for questions.
Please note Lundin Gold’s disclaimers on this slide. This discussion includes forward-looking information. Actual future results may differ from expected results for variety of reasons described in the caution regarding forward-looking information and statements section of our press release. Lundin Gold is a U.S. dollar reporting entity and all amounts in this presentation refer to U.S. dollars unless otherwise indicated.
Fruta del Norte has once again delivered strong production and operation results in the second quarter of 2022, highlighted by production of 111,890 ounces of gold and the sale of 96,291 ounces at a cash operating cost and all-in sustaining cost of $702 and $864 per ounce sold respectively. For the first half of 2022, Lundin Gold produced 233,555 ounces and sold 215,573 ounces of gold at an AISC of $771 per ounce sold. Based on continuing strong operating results for the first half of 2022 and confidence that our team can continue to deliver excellent performance, I’m very pleased to announce that we are increasing production guidance to between 430,000 and 460,000 ounces and decreasing AISC guidance between $820 and $870 per ounce sold, calculated on a basis consistent with prior periods.
During the second quarter, the company generated cash from operating activities of $60.7 million and free cash flow of $21.2 million resulting in a cash balance of $301 million at quarter end. Our cash balance remains very strong, notwithstanding significant senior debt repayments of $48.5 million and reduced free cash flow in Q2 as a result of the payment in April of annual income taxes of $29.2 million and profit sharing of $31.5 million for 2021. Following the approval of Lundin Gold’s dividend policy in May 2022, the company has declared an inaugural dividend of $0.20 per share. Under this newly established policy, the company anticipates paying dividends semi-annually following the release of second quarter and year end results respectively and with the objective of ultimately moving to paying dividends on a quarterly basis.
Even after the payment of dividends, we still retain a healthy treasury for other value generating initiatives. For example, we are investing in expanded exploration programs with the medium and long term objective of extending the life of our operations at Fruta del Norte and along the Suarez basin. In 2022 alone, we expect to spend nearly $20 million in target driven initiatives underground at FDN near the mine and non-regional programs. We are also aggressively reducing our debt through accelerated cash sweep payments under the senior debt and are planning for and funding potential future capital projects as well as pursuing other growth opportunities.
As always our operational and financial achievements would not be attainable without a strong social license. I would be remiss if I did not highlight that during the second quarter of 2022 Lundin Gold published its inaugural Climate Change report presented in accordance with recommendations of Task Force on climate related financial disclosures and its sixth annual sustainability report. We remain firmly committed to our social programs and high environmental standards and have now added climate change as a key focus for our operations.
Lundin Gold’s inaugural climate change report represents the company’s phased approach to aligning with TCFD. The report details Lundin Gold’s governance, climate strategy around climate change risks and opportunities, risk management and metrics and how the company is working towards establishing targets. In the report, Lundin Gold also established a greenhouse gas or GHG emissions intensity baseline of 0.12 tons CO2 equivalent per ounce of gold produced, making the company one of the lowest greenhouse gas emitters worldwide per ounce of gold produced. Having completed this foundational works, Lundin Gold is advancing the implementation of a TCFD framework and expects to announce a GHG emissions reduction target for scopes one and two emissions later this year.
Coincident with its inaugural climate change report, Lundin Gold is also pleased to announce the publication of its 2021 Sustainability Report. This report highlights accomplishments and progress achieved by the company on a number of initiatives and programs during its first full year of operations, including opening and intensive care unit at the Yantzaza hospital and partnership with Newcrest Mining and SolGold, establishing the Estamos Conectados program.
Constructing one and providing necessary funding for another bridge in Fruta del Norte’s area of influence: the Los Encuentros bridge and Zamora River bridge. Progressing on community and development and environmental programs that were established prior to the pandemic and implementing the company’s five-year sustainability strategy, aligning with business along eight strategic pillars to make measurable, positive impacts in local communities, the environment and Ecuador more broadly.
Our inaugural Climate Change Report and the 2021 Sustainability Report clearly illustrate Lundin Gold’s commitment to responsible mining and how this permeates every aspect of our activities. In line with our Five-Year Sustainability Strategy, we have placed greater emphasis on several emerging themes including climate change. We recognize the importance of being transparent regarding the implications of climate change for the Company, and I am proud that Lundin Gold is addressing this important subject aligned with the recommendations of TCFD.
During the second quarter of 2022, Lundin Gold also continued to advance many other projects aligned with our sustainability strategy. Various community business projects supported by the Company are under way, including sponsoring the establishment of micro businesses providing ancillary services to Fruta del Norte and the community, such as a textile manufacturer and fire extinguisher maintenance provider. These are in addition to the continuation and restart of many other community initiatives.
Lundin Gold also saw some changes to its leadership team in the second quarter and shortly after the end of it. On the back of Lucas Lundin and Paul McRae’s retirement from the Board, Jack Lundin was appointed as Chairman. Jack knows Lundin and Fruta del Norte well, having worked as Project Superintendent during its construction. His drive and enthusiasm will push us all. And I look forward to working with him for many years to come.
I would also like to thank Dave Dicaire, Lundin Gold’s Vice President of Projects, who departed Lundin Gold in July after the effective conclusion of the FDN construction and expansion projects to oversee construction and development of the Josemaria project in Argentina’s San Juan province. Dave was an instrumental component of the and Fruta del Norte construction team. And I’m sure will do a fantastic job for Lundin mining in this new role.
Operating results were strong in Q2 and are highlighted by quarterly gold production totaling, 111,890 ounces comprise of 75,730 ounces of concentrate and 36,160 ounces as doré. The company sold 96,291 ounces during the quarter consisting of 68,598 ounces as concentrate and 27,693 ounces is doré.
Sales were impacted by the national strike in Ecuador in the latter part of June. Although our production at FDM was not impacted by this protest, certain national highways were blockaded impeding the regular transport of concentrate and doré from site. With the protests ending on June 30, all of these shipments have since been made.
These operational results were achieved at a cash operating cost of $702 per ounce sold and AISC of $864 per ounce sold. Unlike many operations around the world, we are not seeing the inflationary impacts in Ecuador like others.
Labor represents about 30% of our total cost and there is currently very little wage inflation in Ecuador. Our energy cost are stable at less than $0.07 per kilowatt hour. Since 87% of Ecuador’s energy is from hydropower. In addition, our teams at site continue to look for cost reductions wherever possible.
The mine continues to perform well with 369,430 tonnes of ore mined, or 4,238 tonne per day at an average grade of 11.4 grams per tonne. Mine production was reduced slightly near the end of the quarter in order to allow the mill to process more tonnes and reduce the run of mine stockpiles in order to manage the oxidation of ore which has been and is impacting recoveries.
Underground, mine development continues as planned with 2,190 meters completed at development rates averaging 24 meters per day during the quarter.
During the second quarter the mill processed 385,675 tonnes of ore at an average throughput rate of 4,238 tonne per day, just above design capacity. The average grade of ore milled was 10.3 grams per tonne with average recovery was 87.6%.
In the first half of 2022, Lundin Gold has produced 233,555 ounces of gold at an average head grade of 10.8 grams per tonne, an average recovery was 89%. Company’s processing throughput is in line with design capacity of 4,200 tonnes per day. Year-to-date, the company’s average all-in sustaining costs is $771 per ounce of gold sold.
Grade, throughput, production and ASIC were all strong in the first half, providing robust foundation for the rest of the year. On the back of continuing strong operating results in the second quarter of 2022, Lundin Gold is increasing its production guidance to between 430,000 and 460,000 ounces of gold from 405,000 to 445,000 ounces and decreasing its ASIC guidance to between $820 and $870 per ounce sold from between $860 to $930.
For some time now, we have discussed our free cash flow is fundamental for the Lundin Gold story. Lundin Gold generated significant free cash flow in 2021 and is continuing to do so in 2022. This cash flow has helped to build a sizeable cash balance of over $300 million, which supports aggressive debt repayments, regional exploration, our near new mine exploration, underground expansion drilling at FDN, planned capital expenditures, other growth initiatives, and now dividends.
I can’t talk about cash flow without touch upon Lundin Gold’s inaugural dividend. Lundin Gold is now declared a dividend of $0.20 per share, dividends per share is trading on the TSX and the OTCQX will be paid in Canadian dollars on September 13, 2022. Based on the prevailing exchange rate at the record date of August 24, dividends per shares trading on NASDAQ Stockholm will be paid in Swedish krona on September 15. A total of approximately 100 million is currently forecast to be paid out annually. Based on the current share price and exchange rate, this suggests a dividend yield of over 5%, which is materially higher than yield generally seeing in the precious metal space.
Now I’d like to focus on some of our projects at FDN. Within the scope of the original construction plan, the south ventilation raise or SVR is the last remaining item. Early in the second quarter, progress of the SVR was interrupted due to a blockage that stopped slashing lining activities. This plug contained a tightly compacted concrete layer that proved particularly difficult on block. I’m very happy to announce the issue is resolved in July.
As a result of this blockage, completion is now expected early in the fourth quarter. Slash of mine activities are now back up and running. And 52% of the liner is in place. There has not been and there is no impacted product impact on 2022 production as a result of this delay. Sustaining capital expenditures, a figure included in the ASIC calculation accounted for $96 per ounce sold in the second quarter and are expected to increase for the remainder of the year, as activities continue to ramp up.
These activities include construction of the third tailings dam raise. Most significant cost in 2022, for which construction began in the second quarter and completion is expected in Q4. Resource expansion and conversion drilling continues at Fruta del Norte with 4,096 meters completed during the second quarter. This program focuses on expansion or conversion of the inferred resource at the south end of the deposit. Other projects include construction of a new warehouse, as well as technology improvements and other activities.
Now let’s discuss our two exploration programs that are underway. Lundin Gold’s new near mine program focuses on targets within and around the existing operation and is exploring sectors in the continuities of the FDN deposit that along the extension of major structures. Historical exploration activities had concentrated on the delineation of FDN in the area where most of the underground development and drilling has occurred today.
However, a recent exploration data review demonstrated a much wider mineralization footprint around and nearby the deposit itself. Several targets of interest are essentially untested with similar geological conditions to those at FDN and present significant new exploration opportunities. Of these targets located in the south extension of the FDN structural corridor, Lundin Gold is currently drilling at Bonza West, intends to drill at Castillo later this year. The program will also test extension of the FDN deposit to the west and the east, as well as at depth.
The 2022 program, which is expected to cost $4 million is planned to include over 6,000 meters of drilling from both underground and surface. New geophysical surveys, geological mapping, and geochemical sampling, one underground radius drilling to test the west of the significant west fault, which currently amendments to deposit. And as I mentioned earlier, a second radius drilling from service testing the Bonza West target. The inception of this near new near mine expiration program, which is running in parallel to the regional program is in line with Lundin Gold’s commitment to expand and replace resources and reserves at FDA. And in turn expands FDNs life of mine.
Drilling within the scope of the 16,500 meter 2022 regional exploration program on the Suarez Basin is ongoing. Until now the drilling is focused on two high priority targets, Barbasco and Puente-Princesa. During the first half of the year, a total of 4,723 meters were drilled across six holes at Puente-Princesa. Drilling intersected a major structure around 50 meters in width, initial results returned narrow low-grade gold intervals and suggest further exploration potential toward the north extension, at the new Quebrada La Negra target.
1,845 metres were completed with two holes at Barbasco. Drilling intersected zones containing anomalous values of gold and the epithermal pathfinder elements arsenic and antimony and intercepted a thick sequence of finely laminated silica on top of the volcanic rocks in the Santiago Formation, a proximal indicator of epithermal systems. Additional drilling is underway to test underneath this silica layer.
Through a detailed geological interpretation of expiration data and additional surface works for additional targets of interest have been identified Barbasco Norte, Capullo, Puma and Quebrada La Negra. And a third rig has now been added test with new targets of interest.
While expiration in the Southern area that basin is challenging mainly due to topography thickness of the cover rocks and post mineral [indiscernible] Our program continues to successfully advance in return evidence of important indicators pointing toward the presence of varied epithermal deposits similar Fruta del Norte. The work done to date on a regional program continues to support and further strengthen our understanding of this highly prospective geological environment.
Now, I’d like to turn the call over to Alessandro for more detailed look at the financial results. Alessandro?
Alessandro Bitelli
Thank you, Ron, and hello, everyone. In the second quarter of 2022, the company recognize revenues of $178 million from the sale of 96,300 ounces of gold at an average realized gold price of $1,907 per ounce. This is offset by cost of goods sold of $95.3 million, which is comprised of operating expenses of $57.5 million, royalties of $10.1 million and depletion and depreciation of $27.7 million, resulting in $82.5 million of income from mining operations in the quarter.
This is lower than the same quarter in 2021, driven by a slight increase in production costs and fewer ounces sold, but partially offset by higher gold prices. During the same period in 2021 revenues of $216 million were recognized from the sale of 125,400 ounce of gold, which were offset by cost of goods sold of $106 million.
Over the first half of the year, Lundin Gold has recognized revenues of $394 million and income from mining operations of $194 million from sales of [indiscernible] ounces of gold. Lundin Gold generated net income of $56 million during the second quarter of 2022, bringing the first half of the year total to $79 million.
Net income this quarter includes a derivative gain of $40 million as a result of the decrease in forward gold price in the quarter, offsetting the derivative loss from the previous quarter. This non-cash item is the result of the fair value accounting of our gold prepay and stream debt facilities, and should now be factored in the assessment of our operating performance.
The MD&A provides a detail explanation of the impact of fair value accounting of these two credit facilities and the determination of derivative gains or losses. Other costs deducted in arriving on net income for the quarter finance expense of $28.5 million, income tax expense of $32.6 million and other expenses totaling $5.4 million.
During the second quarter of 2021, net income of $50 million was generated from income from mining operations of $111 million. This was offset by a derivative loss of $25.6 million, finance expense of $11.7 million, income tax expense of $17.2 million and other expenses totaling $6.1 million. Increased debt servicing cost between the two quarters finance expense of $28.5 million, compared to $11.7 million a year ago is the result of incurring a finance charge under the gold prepay and stream facilities.
The long-term debt note in the financial statement describe in detail the way this cost arises. Debt servicing under these two facilities is start to fix a variable gold volumes than gold prices. Because it’s higher when gold prices are high. As gold prices are forecast to remain high, we currently expect this cost to also remain high. Just as we expect our revenues to continue to benefit from these high gold prices.
Income taxes of $32.6 million were accrued during the second quarter of 2022, which is comprised of current and deferred income tax expenses of $17.2 million and $15.4 million, respectively, compared to $17.2 million during the same period in 2021.
Current income tax expense is generated from net income for tax purposes in Ecuador relating to operations at Fruta del Norte. In addition to corporate income taxes in Ecuador which is levied at a rate of 22%, current income tax expense includes an accrual for the portion of profit sharing payable to the Government of Ecuador which is calculated at the rate of 12% of the net estimated income for tax purposes for the quarter.
The employee portion of profit sharing payable, calculated at the rate of 3% of net income for tax purposes is considered an employee benefit and is included in operating expenses. The income taxes of $29.2 million and profit sharing of $31.5 million payable to the Government of Ecuador and employees for the fiscal year ended December 31, 2021 were remitted in early Q2, affecting cash flow and free cash flow in the quarter.
Corporate income taxes accrued to the end of June 30, 2022 are partially offset by tax credits available for use by the Company. Lundin Gold generated income before interest taxes, depreciation and amortization and adjusted EBITDA of $144.7 million and $104.7 million respectively this quarter. The EBITDA and adjusted EBITDA generated in the second quarter of 2021 were $109.7 million and $135.3 million respectively.
For the first half of the year, the company generated EBITDA and adjusted EBITDA of $243 million and $238 million respectively. Excluding derivative gains of $40 million, and also adjusted for the offset of the deferred income tax expense of $2.5 million in other comprehensive income, adjusted earnings of $13.5 million or $0.06 per share realized in the second quarter of 2022. On the same basis, adjusted earnings achieved in the second quarter of 2021 were $74.8 million and or $0.32 per share.
A key reason for this difference is the delay of gold shipments and sales, which occurred during the last two weeks of June as a result of a national strike in Ecuador. Net sales remain in line with our production, we could have expected additional sales of approximately 16,000 per ounces of gold before the end of Q2.
At a gold price of $1,800, Q2 cash operating costs of $702 per oz of gold and including the additional estimated effect of depreciation and depletion. This would’ve changed earnings by approximately $16 million or $0.07 per share. We will realize these operating profits in Q3 of this year. On the same basis, our first half of the year adjusted earnings amounted to $71 million or $0.30 per share.
Cash operating cost in AISC for the second quarter were $702 and $864 per oz of gold sold, respectively. Basic was impacted by lower gold sales, as well as during the second quarter, as it is calculated based on oz of gold sold, thereby absorbing a large amount of the sustaining capital costs occurred in the quarter on a unit basis. You should be known as sustaining capital expenditures are expecting to increase in the second half of the year as a number of key projects continue.
For the first half of the year, cash operating costs and AISC total $656 and $771 per oz of gold sold, putting Lundin Gold in the enviable position of being able to lower its 2022 AISC guidance.
Ron has already – as Ron has already discussed Lundin Gold’s free cash flow this quarter of $21.1 million or $0.09 per share is lower than in previous quarters. As a result of the annual payment of 2021 income taxes of $29 million and profit sharing of $31.5 million, which would you enable. Free cash flow remains a fundamental element of Lundin Gold’s value proposition, and the company expects to continue to generate substantial free cash flow for the remainder of the year based on its production in AISC guidance.
As of June 30, 2022, Lundin Gold had cash of $301 million and working capital balance of $254 million compared to cash of $263 million and a working capital balance of $217 million at the end of last year. The changing cash flow in the first half of the year was primarily due to cash generated from operating activities of $188 million, which includes not only operating costs, but also corporate and exploration costs and proceeds from the exercise of stock option, warrant and anti-dilution rights of $9.4 million. This is offset by principle interest and finance treasury payments, including associated taxes under the gold prepay and stream credit facilities totalling $67.6 million, interest and principal repayments under the senior debt of $65.8 million, and cash outflows of $25.3 million for capital expenditures, which include costs for the SVR and sustaining capital.
Going forward monthly payments under the stream facility, we continue based 7 3/4% and 100% of gold and silver ounces sold respectively calculated at the current gold price and silver prices at the end of each month, less $404 per ounce, respectively. Quarterly payments under the gold prepay facility are expected to be based on the 9,775 ounces of gold at the end of each quarter. The current portion of the long-term debt includes an estimate of the total quarterly principal repayments during the 12 months, following the reporting period under our debt facility.
In summary, another strong quarter for Lundin Gold. We are quickly repaying our senior debt and have declared our inaugural dividend. The company is performing well, both operationally and financially, and is well positioned to continue beating expectations during the second half of the year. For a more detailed discussion of our financial result, I encourage you to turn to the MD&A.
Now I’d like to turn the call back over to Ron.
Ron Hochstein
Thank you, Alessandro. Lundin Gold performance in the first six months of 2022 provides a robust foundation for the rest of the year. And as a result, the company is increasing its production guidance and decreasing cost guidance. Fruta del Norte continues to operate excellently beating expectations across the board to enable increased gold production. Lundin Gold is also in the position of operating in a country where to date inflation has remained low. We are confident that this new guidance now better represents Lundin Gold’s full year outlook.
Looking to the rest of 2022, Lundin Gold is working on numerous projects for which we will expect results – see results during the year. First of all completion of the SVR is now targeted for early in Q4. We’re also continuing to advance our resource expansion, near mine and regional exploration programs, and we continue to evaluate other potential growth opportunities.
In closing, I would like to offer my sincere condolences to the Lundin family after the passing of Lukas Lundin on July 26, following a courageous two year battle with brain cancer. It’s a new world today without Lukas, but with his legacy if they held Lundin Gold will continue to grow. Fruta del Norte is a result of a vision he had and is a perfect example of how through foresight and perseverance that vision has changed the lives of several thousand people in Zamora Chinchipe in Ecuador. I believe Lundin Gold is poised to continue the legacy and will continue to generate shareholder value and value for the citizens of Ecuador for many years to come. Thank you for your continued support.
With that, I will now open the call to questions. Michelle?
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Your first question comes from Bryce Adams, CIBC Capital Markets. Please go ahead.
Bryce Adams
Good morning, Ron and team. Thanks for taking my questions. I wanted to start on the safety statistics if we can. In the press release, there was a comment about one LTI and four medical aid for a total recordable rate of 0.57. Just wanted to ask how that compares to industry standards and maybe how it compares to your 2021 results?
Ron Hochstein
Yes. Thanks, Bryce. As last time was in our exploration activities and the four medical we’re at site. On the operation side, we’re doing very well. We continue to do well, it’s our new – our exploration programs as they ramp up. We’ve had to – we’ve increased some staffing and exploration and also getting some help from the site operations team to as a search [indiscernible] I would say overall though we’re still doing very well from an industry standpoint and we just got to get focused on this higher risk exploration activity and get better safety performance there.
Bryce Adams
Okay, thanks. Moving to South Vent Raise, now expected early Q4 that blockage and extra time to completion. Are there CapEx implications for this project or that they’re mostly immaterial?
Ron Hochstein
Well, this is still part of the original construction, Bryce. So it’s, if you look at it in terms of the overall construction budget, it’s immaterial. We estimate the additional costs are about $6 million. There’s a couple factors there. We’re always encouraged that we would break that blockage sooner. So, we kept the decent [ph] the contractors doing the splashing line on site in hopes that we would break through, but they were also invaluable and provide a lot of expertise in helping us as we work through that blockage. But yes, we estimate the cost of the SVR slashing line has gone from about just around $10 million to about $16 million.
Bryce Adams
Okay. And then once the SVR is completed, can you talk through the benefits? The underground will realize once it’s all tied in. I can think of a few, but does this make underground life a lot easier?
Ron Hochstein
It makes life a lot easier. We’ve been really focusing, Bryce, on essentially mining from about primarily three different levels. We have been doing some a little bit deeper when we can – when we work with the air in that, but it essentially opens up the whole, our body then. And so, yes, it makes life a lot easier for mine planning and everything. And it just, yes, we continue to evaluate. We have assumed, that this will open up many different areas, I think. And also we are starting to pull secondary strokes now, Bryce. We’ve pulled two so far, that’s gone well. And but this will give us open up many areas, which we go back to primary mining, and starting to pull some secondary scopes in 2023.
Bryce Adams
Yes. Okay. So a lot more flexibility.
Ron Hochstein
Absolutely. Yes.
Bryce Adams
My last question is on the recoveries that were impacted by oxidization of ore, you touched on it, but I imagine it’s still being evaluated. Can you talk through, what you know, now, such as how long, how many months before oxidization impacts the expected recovery and maybe what processes you have done or are considering to mitigate this issue?
Ron Hochstein
It’s great question. There’s a couple things, Bryce. One is, first of all, stockpile management, as you’ve been following us for a while, you normally originally built this place. We really focused on minimizing the footprint. Unfortunately, in hindsight, our stockpile, our run of mine stockpile was too small, and well, and also we learned about the variability in your body with regards to metallurgy. So, we’ve expanded our run of mine stockpile by making some changes on the site plan, that’s helped significantly. Part of what we were doing was the stockpile was so small, and it was essentially the first ore arm was the – last ore arm was the first ore out because something on top pushing it. And we’re into parts of the stockpile. Now that some of that ores been there six months close to a year.
So obviously oxidized. So, what we’ve done is, as I mentioned, we’ve cut back on mining a bit, and actually upped the mill throughput to each through some of that to oxidized stockpile through blending. And we’ve expanded the stockpile. So now it’s, we can manage it better. So again, we, I think about 8,000 tons to 9,000 tons left of that oxidized ore to through. There is some ore though Bryce, that oxidizes actually starts oxidized right at site at the pace. And so we’re just really, again, as part of our overall geo metallurgy program to identify those areas so that we can run that or through pretty quickly, essentially right from the mine straight in. And – but we’re – and we’re also looking at some changes in our flotation recovery when we hit that oxidation maybe be able to improve recoveries, even though we have some oxidation.
Bryce Adams
Okay. Thank you very much. That’s all for me. Good luck and talk to you guys again.
Ron Hochstein
Thanks, Bryce.
Operator
Thank you. Your next question comes from Don DeMarco, National Bank. Please go ahead.
Don DeMarco
Well, hi, thank you, operator. And Ron, Alessandro and team, congratulations on a strong first half. Couple questions on exploration. First off, I see you’re spending $4 million near mine – the near mine program, looking at drilling on some untested targets, geophysics, mapping and so on. When would you expect to have first results from this? And are you testing areas that’s near existing infrastructure with near-term catalyst potential?
Ron Hochstein
Yes. Thanks, Don. Good morning. The results obviously will depend on that as we get assays in and what the interpretation is, if we do see something this material will announce it quickly. The answer to your second question is like one of the holes we’re drilling right now is from underground. It’s testing an area to the Southwest at depth, which has never been tested.
And if we were to hit something in this area, these are the types of things that could be added to the resources, obviously one drill hole is going to do it, but if hit it a few more – but a few more, they could be added resources and could be access with existing infrastructure.
And obviously Bonza West, Castillo, you’ve got the mill there. So it’s essentially can – what can we do to increase the capacity at the mill? It’s all very close to the mine. So yes, the near mine expiration program is very exciting and yes, could create opportunities for the real near-term.
Don DeMarco
Okay. Okay. That’s encouraging. And shifting to the regional program, I see this is where the bulk of your expiration spend is going to be, you’ve named four new targets. And with this do Puenta Princesa and Barbasco still remains the priority targets or is the priority now shifting to the new targets?
Ron Hochstein
I would say for the rest of this year, the priority’s going to be shifting to the new targets where we’ve learned a lot from Puenta Princesa and Barbasco. There’s still opportunities there. But for the rest of the year, we’ll probably focus on well, and some of what we learned at Barbasco and Puenta Princesa has pushed us to some of these new targets, Puma and Quebrada La Negra. And so yes, we’ll – I’d say for the rest of the year, Don, we’ll focus on the new targets.
Don DeMarco
Okay. Okay, great. And just shifting to a different topic, I heard you mention that Lundin is distinguished as having one of the lowest greenhouse gas emissions per ounce of gold produce and globally. So I presume this is a function of operating an underground mine versus open pit, but is Fruta del Norte differentiated from underground mines in any other way that contributes to this low emission?
Ron Hochstein
I think it’s partly the fact that the ore body itself done is a pretty compact ore body. Obviously, our grade helps us on a pronounced basis too. It would be very transparent for our grade obviously helps, but it’s a compact ore body, where total strike plate from one end to the other. It’s just 600 meters and depth is around 300 meters total depth from top to the bottom of the deposit. But then also too, on the mill, on the – we’re connected to the grid and 87% of Ecuador’s power is hydro. So that has a big impact on it. We still think there’s opportunities to even reduce further. If we look at per ounce we’re world leading, if we look at it relative to underground gold mines, just very narrow space. Don, we’re just slightly below average.
Don DeMarco
Okay. Okay. Thanks for that, Ron. Good luck with Q3 and the rest of the year.
Ron Hochstein
Great. Thanks, Don.
Operator
Thank you. Your next question comes from Kerry Smith, Haywood Securities. Please go ahead.
Kerry Smith
Thanks, operator. Ron, after the blockade by in June there, what did the government do to address the issues that results in that blockade and is it likely that we might have more blockades or have they kind of resolved these issues?
Ron Hochstein
Hi, Kerry. That’s a great question. The blockades were primarily, again, no blockades that were directly focused on FDN or Mirador for that matter on the mining industry; they were just on the national highways. The government in Conaie, which is the indigenous group, which led to protest, have agreed to negotiations. And so there’s this – there’s what we call popular term round tables. And they started; they broke off learning that they’re planning to start again today. Restart they’ve given themselves Kerry a 90-day period to resolve the, I think they were 10 or between 10 and 13 issues that they had on the table that they would said they would discuss. And so they’re – that’s the whole thing. We are all kind of sort of a truce, let’s put it that way for 90 days and we will see what happens at the end of the 90-day period and hopefully they will come to some resolutions and there is – again there is a number of different topics. The biggest one is in field subsidies, which I understand that discussions are restarted today.
Kerry Smith
And instead of that 90 days Ron from this restart now so that would be...
Ron Hochstein
No. That’s from the end of, so first of July Kerry. So we are looking at 1st of October would be roughly the end of September, early October as to whether they’ve some agreement or whether they’re going to say we’re going to protest again. Obviously it’s not going to be sort of lights on lights off type thing we’ll know through September as to how things are going. So we’ll have some indication. The team did a great job as the blockades were 18 days total, never impacted operations. We were able to move personnel within range one and two, or within the Canton and everything.
Obviously people could not go back home or people couldn’t come to site for shift change. But essentially we kept operating and kept all the projects going to TSF raise everything and so we’re prepared and – but Kerry this is purely my opinion. I don’t think the citizens of Ecuador are ready for another, since we tried to shut the country down for that period of time. So I’m hopeful that we’ll see resolution and we won’t see anything further later in September, October.
Kerry Smith
Okay. And outside of the fuel subsidy or the removal of the fuel subsidy, I guess, is there any other bigger issues that they – that they have not been able to come to terms on?
Ron Hochstein
Well, they really haven’t, we’ve talked about a number of things. So the number of things that actually hit the people of Ecuador agree with like more further spending from the government on education, infrastructure reduction in some of the other spend where there’s a lot of factors that do this. There is some things with regards to mining and oil and gas, which the government wants to, continue to negotiate on. But today I don’t think there’s resolution on any of the issues.
Kerry Smith
All right. Okay. And I think you’ve said in the past that there wouldn’t be any impact on your 2023 plans with the delays in the event raise. Is that still the case Ron?
Ron Hochstein
There’s not, we’ve been saying no impacts on 2022, Kerry. We essentially assumed that we were conservative in our assumptions and that we would not – we assumed when we did our mind plan that we wouldn’t have the back raise for the year, even though we originally was supposed to be done at end of Q2. It just gave us more flexibility and everything, as if we said, we talking about price. 2023, Kerry, if it – did get pushed at past year end, say, let’s say past Q1 of year end, it could impact our 2023 production. And we’ll be announcing our guidance in for 2023, 2024 and 2025 probably later this year. And we’ll be able to give more color on that. I’m very hopeful, Kerry, obviously the SVR will be done before we announce that.
Kerry Smith
All right. Okay. Okay. And you didn’t give in your updated guidance, Ron; you didn’t give cash cost guidance. It was 7.10 to 7.80 before. What is that number now, then?
Alessandro Bitelli
It’s going to be, I would say it’s going to be down on the similar percentages Kerry, as to what we reduced the ASIC.
Kerry Smith
Okay, so just – okay.
Ron Hochstein
Our sustaining capital is roughly, I can say our sustaining capital is roughly on budget with where we are. So a lot of the reduction is in our operating costs.
Kerry Smith
Right. Okay. So for the year you expect about a $100 an ounce of sustaining CapEx.
Ron Hochstein
I believe that’s about right. Yes.
Kerry Smith
Okay. And the great expectation in the second half, I think, I guess it’s still a bit lower just to hit the sort of annual grade guidance you’d given. Is that correct?
Ron Hochstein
Yes, it is.
Kerry Smith
Okay.
Ron Hochstein
Which were at – ore body.
Kerry Smith
Right. Okay. That’s really great. Thanks very much, Ron.
Ron Hochstein
You’re welcome Kerry.
Operator
[Operator Instructions] Your next question comes from Trevor Turnbull, Scotia Bank. Please go ahead.
Trevor Turnbull
Yes. Thanks Ron. I know you spoke to Bryce at length about the stockpiles and oxidation issues. And I was just kind of wondering, are you – is it to such a point that, that you’re actually worried about being able to maintain the size of stockpiles that you would like from an operational perspective because you have to worry about potentially them oxidizing and sitting there too long?
Ron Hochstein
Well, that’s a great question, Trevor in the morning. Quite frankly, Trevor we’ve built up quite a significant stockpile at site and we’ll maintain, I would say we’ll continue to have a couple months on the run of mine stockpile on surface, what the key is just managing it, not leaving stuff sitting there for six, 12 months. We’re doing a lot of testing right now to see what our, what’s the timing is for the various different ore types. Some bottle roll tests things like that to and some other tests to look at oxidation, measuring and oxidation.
And it really, it’s just better management of the, ore Trevor but I would still say we’ll, we’ve got a lot of – power in front of us now it’s the key is you probably just keep it between one and two months on the surface and then just manage it better, reduce the time it’s sitting there.
Trevor Turnbull
Right. And what is the mining capacity now? If you wanted to push it from underground, I assume it’s still quite ahead of the mill?
Ron Hochstein
I would say so. Yes, it’s probably 44; they were consistently doing 4400 between 4400 and 4500 tons per day before we pulled back. And the SVR as we talked with Bryce gives a lot more flexibility and probably, we think we could probably push a bit more.
Trevor Turnbull
Okay. And then the very last question, just a quick one about the profit sharing in Q2 is that something that’s essentially going to be an annual event around the Q2 results that we should start kind of trying to remember that each Q2, that’s when profit sharing comes due?
Ron Hochstein
Yes. Its part of a, it’s essentially part of our tax. Its called profit sharing, but it’s essentially a government program that’s legislated. And it’s 15% Alessandro maybe you can help me with what the basis of that is, but it’s 15%, 12% payable to the government right now, 3% to our employees. And yes, that’s essentially similar payment at the same time as taxes are paid.
Alessandro Bitelli
Income taxes and profit sharing are paid annually once a year for the previous year and the taxes that you enable [ph].
Trevor Turnbull
Okay, perfect. Thank you, guys.
Ron Hochstein
Thanks Trevor.
Operator
There are no further questions at this time. I will turn it back to Mr. Hochstein. Please go ahead.
Ron Hochstein
Thanks Michelle. And thank you everybody for taking the time this morning to hear about Q2 and yes, we’re looking forward to the second half of the year and definitely looking forward to completion of this SVR and thanks everybody and have a great day.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
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