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Fortuna Silver Mines Inc
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Good day, ladies and gentlemen, and welcome to Fortuna Silver Silver Mines Third Quarter Financial and Operational Results Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Carlos Baca, Director of Investor Relations. Sir, the floor is yours.
Thank you, Kate. Good morning, ladies and gentlemen. I would like to welcome you to Fortuna Silver Mines and to our financial and operations results call for the third quarter of 2021. Hosting the call today on behalf of Fortuna will be Jorge Alberto Ganoza, President and Chief Executive Officer; Luis Dario Ganoza, Chief Financial Officer; Cesar Velasco, Chief Operating Officer, Latin America; and Paul Criddle, Chief Operating Officer, West Africa.Today's earnings call presentation is available on the feature presentation box on our homepage at fortunasilver.com. As a reminder, statements made during this call are subject to the reader advisories included in yesterday's news release and in the earnings call presentation, Financial figures contained in the presentation and discussed in today's call are presented in U.S. dollars, unless otherwise stated. Before I turn over the call to Jorge, I would like to indicate that this earnings call contains forward-looking information that is based on the company's current expectations, estimates and beliefs. This forward-looking information is subject to a number of risks, uncertainties and other factors. Actual results could differ materially from a conclusion, forecast or projection in the forward-looking information. Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information.Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast or projection in the forward-looking information and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information, is contained in the company's annual information form and MD&A, which are publicly available on SEDAR. The company assumes no obligation to update such forward-looking information in the future, except as required by law. I would now like to turn the call over to Jorge Alberto Ganoza, Co-Founder of Fortuna.
Thank you, Carlos. In the quarter, we delivered record sales of $163 million, adjusted net income of $22.5 million, EBITDA of $75 million with a strong consolidated EBITDA margin of 46%. This solid financial performance is on the back of record gold production driven by the Lindero mine, and this being the first quarter where we incorporate results from our West Africa business. As of the end of the quarter, we have liquidity available of $136 million and run the business with a conservative debt-to-EBITDA ratio of 0.2%. Also during the quarter, we announced the start of construction of our Seguela mine in Côte d´Ivoire. We plan for Seguela to start production and continue driving growth for the company by mid-2023. We concluded successfully our 100-day integration plan with Roxgold Integration of our combined business has been a smooth process. And the main reason, of course, is the quality of people and shared values. We always said that in combining our business, we were not only acquiring quality assets, but a team of seasoned professionals with whom we shared a similar view of how you create value in our business.After the end of the quarter, on November 5, we renewed our credit facility and expanded it to $200 million. Out of this amount, $120 million is currently available with the full amount to become available upon the San Jose permit issue being resolved. In the quarter, we also managed to successfully settle for $9.6 million, the disputed royalty claim with the Geological Survey and Secretary of Economics of Mexico on one of our main concessions at the San Jose Mine. This has been a protracted complex negotiation where we achieved an arrangement to the satisfaction of the company and the sale authorities. Now what has painted a good quarter is this new issue where the Mexican Ministry of Environment, SEMARNAT, has on November 10, denied our request for a 10-year extension of the environmental permit of our San Jose Mine. This renewal process is something we started on May of this year.SEMARNAT is exciting 2 main reasons for the denial: one, not receiving requested information from us; and second, that we have an open evaluation for the regularization of 73 ancillary facilities not declared in the original 2009 Environmental Impact Statement. With respect to the first point, we have already provided proof dating back to 2019, we have been submitting and complied with the share information. And second, we are of a strong view that the regularization of ancillary infrastructure, which is a process that we initiated in 2019, and is currently in the hands of SEMARNAT and evaluates the mitigation of impacts for a greenhouse, a soccer field, a weather station, a core check and drill core storage facilities, an office, a 40,000-liter fuel truck, a power transformer and other infrastructure of similar nature cannot provide grounds for a denial. Additionally, our legal team is also of a strong view that the regularization of 73 works does not form part of the request for the extension.The deadline for SEMARNAT to provide a response to our 10-year extension application expired on Saturday, October 23. This was informed on a press release dated October 25. Before the October 23 date and as a precautionary measure, the company, we initiated legal actions in Mexican courts and obtained preliminary protection to continue operations considering a potential delay in obtaining the extension for a questionable denial. Our San Jose Mine is currently operating under the protection of these court actions. And we seek to strengthen this protection from the courts with the recent notification received from SEMARNAT. Our legal team is evaluating and working on this.Our credit agreement, on our senior bank facility requires that we obtain a permanent injunction or similar protection before November 20. We have engaged with our lenders to provide for the flexibility and time that this circumstance requires. Additionally, we have not exhausted the avenue of dialogue with SEMARNAT and Mexican authorities. We have the right to and will file an appeal to this negative resolution and have scheduled meetings with high-ranking SEMARNAT officials trying to entangle this unfortunate situation. SEMARNAT has also informed that they favor a consultation procedure on the environmental impact assessment and the evaluation covering the 73 ancillary facilities. The company is not opposed to any concession procedure that adheres to the mechanisms provided in the environmental impact assessments, which are very clear and supported by jury's prudence in Mexico.Mexico is a country with a long and proud mining tradition, and we view this position for SEMARNAT as on precedent. We are pursuing all avenues available to solve this as soon as we can. Under ESG, our prioritized KPIs show improvement for greenhouse gas emissions, water and energy efficiency over the last year comparable quarter. Our figures are benefiting from the inclusion of measurements from our Lindero mine starting this year. We reported 2 lost time and accidents of minor consequence in the quarter, 1 at the San Jose Mine and 1 at the Lindero mine. Our figures for women in the labor force were impacted by the migration from a contractor-operated underground mine at San Jose to an owner operation, where we incorporated approximately 265 workers to our payroll. At our Caylloma mine in Peru, we successfully closed a 6-year agreement with the community of Caylloma, which provides a solid framework for the relationship with all relevant stakeholders under our area of influence for the coming years. With respect to production, compared to last year's quarter ago production has expanded by 400% to 65,500 ounces. Our largest contributor for gold was the Yaramoko mine in Burkina Faso with 28,750 ounces, followed by Lindero with 26,000 ounces of gold. Of note, is our Caylloma mine, which since last year is contributing small but consistent growth that we estimate to be around around 5,000 ounces a year. A small amount, perhaps on the bigger picture, but a welcome and meaningful contribution to the economy of that mine. Silver production from our San Jose and Caylloma mine stood at 1.7 million ounces in the quarter. The shortfall with respect to the comparable quarter is explained by lower silver production at San Jose impacted by downtime at the mine transition from contractor to owner operations at the underground mine and lower grades compared to Q3 of last year.Precious metals accounted for 88% of our $162 million in sales. Silver accounted for 22% of sales. Our cost struck in line with our guidance range for the year at all our operations. San Jose exceeded cost inflation against the comparable quarter driven by lower silver and gold production stemming from lower grades and slightly higher OpEx of about 7%. I will now have Cesar Velasco, our Chief Operating Officer for LATAM; and Paul Criddle, our Chief Operating Officer for West Africa, provide some highlights from their respective regions. So Cesar, you want to go ahead?
Thank you, Jorge. Yes, our 3 mines in Latin America are performing in line with management's expectations and are on track to meet annual guidance. COVID-19-related restrictions in the 3 countries where we operate have been considerably eased and double dose vaccination rate at all offices are now well above 80%. The Lindero mine is operating within design parameters and delivered record gold production of 26,235 ounces in the third quarter. It is important to highlight the solid performance of the operation, good mechanical availability and an increased gold production trend. As indicated, Lindero is on track to meet annual guidance. and management looks forward to an even stronger performance in the fourth quarter. Back to you, Jorge.
Thank you. Paul, do you want to go ahead?
Thank you, Jorge. Operations in West Africa are progressing well against our plans. In both Seguela and Côte d´Ivoire, COVID impact are largely mitigated now with little or no impact on operations today and over 90% of employees vaccinated in Yaramoko. Production at Yaramoko is in line with the plan for Q3 and similarly, remains the case for the year. I would like to highlight the excellent progress made by the team on the ground at our Seguela project in Côte d´Ivoire. Within the third quarter, which is highlighted by the Board's approval of the construction decision for the project in late September. As per the project execution plan, both the schedule and the costs remain on track with approximately 13% of the project completed. This has allowed us to advance in both the third and now fourth quarters project grubble path items of executing and commencing the process planning agreement with Lycopodium.We've commenced the plan in bold growth works contract. We executed the HV substation supply contract. We continue to expedite the critical part of mechanical items such as SAG mills, crushers and transformers. In concept with the works ongoing in the field, the company's footprint capacity has been grown with the establishment of the West African regional office in Abidjan which will support the Seguela development effort now and ultimately, the operational needs of Seguela and Yaramoko. In addition, dialog is ongoing with the mines and budget ministry in Côte d´Ivoire recessions planned in the coming weeks to advance the conclusion of the project's mining convention. Thank you. Jorge?
Thank you. Paul, Cesar. So now, Carlos, I'll turn it back to you.
We will now like to turn the call over to any questions that you may have.
[Operator Instructions]Our first question today is coming from Dalton Baretto at Canaccord.
Jorge, I'd like to start by saying I'm truly sorry that you continue to face these challenges in Mexico. I mean these things happen in certain parts of the world, and I no doubt you'll get this result, but it's going to take some time. So that said, this temporary injunction that you face, when does it expire? And what do you need to do to make it more [indiscernible]?
Yes. We have a different legal actions in place. And also the workers have initiated actions in local courts in Oaxaca. So right now, we are of the view that these legal actions, now that there is a negative resolution can be moved to a permanent -- more permanent injunction because part of the issue for the granting or the limitation for the granting of a permanent injunction was that we did not know what were the grounds for the delay in some are not to reply to us or what they were arguing, right?So now that we -- their arguments, as I explained them in the call, we are going back to the courts and based on what's being presented, which doesn't make any sense to us our legal counsel. We're seeking a more permanent injunction, right? That's a process that can take several days. The preliminary measures that we have currently are preliminary in nature, and I would be adventurous to me to say exactly what type of coverage we get, but it's measured in weeks probably, no.
Okay. And then as a follow-up, and there's 2 parts to this question here. Should you not be able to turn this into a injunction by November 20? What is the current penalty from your lenders? And then part B of that is, should you not be able to do it at all and you forced to shut San Jose down, how flexible do you think your lenders are going to be?
Luis, you're speaking with the lenders, you want to come in?
Yes, sure. So -- well, in principle, the straight answer is that no noncompliance would -- under a credit agreement would trigger an event of default. It is our expectation, however, that we'll work with our lenders to provide ourselves whatever flexibility is appropriate and warranted given the evolving circumstances. And we are still optimistic that our legal actions have a strong likelihood of progressing and we believe that the lenders will be working with us to, again, provide that flexibility required that to avoid any unnecessary situation with respect to the status of our credit agreement and our covenants.
Okay. Thank you. I have more questions, but I'll jump back in queue.
Our next question today is coming from Justin Stevens at PI Financial.
Just a couple for me here. I was just good to see, obviously, conveyor stacking ramping up in Q3 at Lindero. I was wondering if you could give a bit of color on how leach times are reconciling with the model though?
Yes. sir, do you want to provide an answer there?
Yes, Jorge. So the reconciliation is looking pretty good. It demonstrates a good relationship with the reserve more. Actually, for the Q3, we had a less than 6% difference in the reconciliation. And as of year-to-date, it is even less than 3%. So it's looking pretty good and consistent.
Yes. You were asking not so much about the reserves, but the leaching kinetics, and we have loaded leach columns. And right now, what we're seeing in -- we have unloaded the first columns that we loaded. And we have final tell assays for some of those columns. And what we're seeing is that with a course crush at around 13 millimeters, we're achieving the similar levels of gold extraction as we plan in the engineering phase and design phase with a 6-millimeter crush. And perhaps the explanation there is that the lab work was done with a small HPGR crusher. And with the much larger HPGR that we have in place, probably we are achieving higher combination of the rock. So -- but so far, the metallurgical response is largely consistent with our expectations or better, right?
Yes. It's good to be hear. I just going to add a little following up on that, I guess, about how much of the material stacked has been sort of year-to-date at the end of Q3 would you say you have actively under leach?
How much of the place material is under leach?
Yes. Just a rough percentage in terms of how much is being actively leached.
Everything.
Everything. Okay. So it's falling -- your leeching is following along pretty closely behind your stacking?
Yes, yes. We started irrigating what we allow ourselves for safety, what 20, 40 meters from the retreat phase of the conveyor stacking, and we start irrigating. We started irrigating a couple of months ago. We started with a program to irrigate slopes. We were not irrigating slope. So we initiated slope irrigation No. But basically, everything is under irrigation.
Got it. And then I guess the last thing then is obviously things are trending. Whether at Lindero, do you have an idea of when you might expect to declare commercial production there.
We have the early adoption of, I forget -- Luis, what the accounting term there. But the mine has been operating within -- it consistently achieved design parameters in the third quarter, and it's operating within design parameters. And everything has been flowing through down to cost since we started production in October of last year, a year ago. So we're not declaring commercial operations. You do that when you're capitalizing and then you achieve production design parameters and then you stop capitalizing and start sending things down through to cost. But we've been doing that since October of last year.
Yes. So just to clarify, though, that doesn't have any effect with regards to the -- what you have to do in terms of the Argentinian peso and the export sale for your [ dory ], right?
No, nothing.
Thank you. Our next question today is coming from Don DeMarco at National Bank Financial.
I suppose my first question for Jorge or perhaps Paul, Yaramoko was impacted by unplanned downtime on SAG maintenance and resequencing of production stopes in the 55 Zone. What's the situation? What's the outlook for Q4? And can we expect a rebound perhaps with some higher throughput in grades?
Paul, do you want to?
Yes. Don, yes, we suffered an outage on the SAG mill due to an unplanned downtime on the pin bearing, which saw us have 4 days out. At the same time -- sorry, we did August. We had had a requirement to resequence the stoping, which is very -- which is largely prescribed at Yaramoko, just given the nature of the deposit. We saw some higher grade stopes resequence and pushed out to Q4. So yes, we will see those recovery, if you like, in the fourth quarter. But we don't -- we currently hold in the concerns for Q4 or indeed the guidance numbers and intend to recover those in this current quarter.
Okay. Shifting to Lindero. I see that in Q3 sustaining CapEx was about $10.6 million. Do you expect to spend a similar amount in Q4? Or should we model this start easing?
Cesar?
Jorge, I had an issue with the audio, can you please repeat your question?
Yes. Cesar, I was just asking about the Lindero sustaining CapEx. Should we continue the run rate of about $11 million that we saw in Q3? Or would -- should we model something lower than that?
No, it should be in line with that. So you should be modeling since as we had some delays in the ADR expansion plan that are now scheduled to be commissioned in Q4. So you should be modeling the same number.
Okay. Great. Then finally, Jorge on this, the situation at San Jose. Now what I hear from your comments, I understand there's 2 issues that SEMARNAT put forward. They alleged that they haven't received requests and then they're pointing to some ancillary infrastructure, 73 works. You're going through the proceedings, providing proof and whatnot and defending your position just building on a previous caller's question then, what should we look to next then? I understand that the timing may be uncertain, may take days for the courts to review what you've submitted should we look for a press release or in a week maybe? Or how will you keep the markets updated on this as new information becomes available.
Yes. And I want to go back to something I said. We have not shutdown dialogue with SEMARNAT. We're still trying to solve this administratively which is having SEMARNAT reassess their position based on the fact that we have presented proof that we are in compliance with the issues they raised in the denial or cited in the denial. And there are meetings scheduled with high ranking seminar officials, and there is dialogue ongoing, right? So we have a degree of expectation that something positive can come out of that dialogue. We have to recognize that the Mexican government has made significant budget cuts across all government offices and SEMARNAT is sometimes shorthanded to deal with the complexities of their business. Unfortunately, that's a reality.So because there are some things here that we just failed to understand how can not -- I mean, somebody is not doing their work there. If they cannot identify themselves that we have submitted, on at least 3 occasions dating back to 2019, the documents they are requesting from, right? So dialogue continues. And through dialogue, perhaps we can have a breakthrough with them sooner than -- then later. But parallel to that, we have to continue advancing with our measures in court. This is something similar to what we did when 2 years ago, we had an issue with the royalty claim as you guys might recall, the Mexican government issued a cancellation procedure on one of our main claims citing a royalty dispute. So eventually, we were able to solve this. It has been a protracted process. But there is an administrative path of dialogue with the government and then the legal path in the court. So we're pursuing both. And I believe that, as I explained to the previous caller as well, some of these legal measures, which we are taking now that we have more information. So we're feeding the courts that -- this additional information that we believe strengthens our position in court should lead to responses from the courts that can be measured in days.
Right. And so you're pursuing this on 2 avenues. And the court avenue could lead to an outcome could be a permanent injunction, whereas the administrative avenue perhaps could lead to an extension of the permit perhaps. So -- but my last question then just going to that permit, maybe the preferred outcome here is an extension of the permit. How often is this permit renewed? Is it on an annual basis, every couple of years? And SEMARNAT presumably would have granted it -- when did SEMARNAT last renew it?
No. This is -- this permit was granted for a 12-year period back in 2009 when we were granted or environmental impact statement. So if you -- you might not recall, when we built the mine, the mine had reserves and resources for a 5-year life of mine. So we requested a 12-year environmental permit. I am not sure right now if that is the limit that can be requested. I would have to check with Council. But we requested double -- almost double the loan we had back in 2009. The years have passed, exploration has been successful, and we get to know. And we -- our application was for a 10-year renewal. But again, I would have to double check with you if that is the maximum you can apply for.
Jorge, Good luck pursuing both paths.
Our next question today is coming from Adrian Day at Adrian Day Asset Management.
Thank you, Jorge. Sorry to go back to Mexico again. I had a few questions, and maybe I'll just ask them all in a row, if I may. First, just a quick one. On the on the royalty settlement, I just want to clarify, is that settling what they claim you owed in the past? Or is that actually finalizing it, so there's no future royalty? And then the rest of the questions were all to do with SEMARNAT. I'm just wondering if Seminar had any contact with you prior to their decision saying we're still looking for this, we're still looking for that? Secondly, has the local government got involved in this at all? Do they have a sort of -- do they have any sort of approach to to keep in the mine going into the workers? And then lastly, I don't know, a question you might not actually want to answer, but I've heard from several companies that they're getting decisions from SEMARNAT that -- in the different companies' views simply don't make sense and are unprecedented. And I'm wondering if there is something going on at SEMARNAT. Is there a motive that they have in trying to postpone mining in Mexico? Okay. Those are my questions.
Thank you, Adrian. With respect to the royalty question. By way of background, the Mexican Geological Service claimed that we owed an amount of $30 million plus for unpaid royalties on a concession. We disputed the legality of that claimed royalty and when we went to court, right? But just like now, we went to court to have a court decide if the royalty was legal or not. And at the same time, we continue trying to broker dialogue with the Mexican Geological Survey and the and the Secretary of Mines and the Secretary of Economics. And eventually, we did. So what we have achieved is an arrangement by which we are paying $9.6 million. And with that, we settled any past claim they have on old amounts. Again, they were claiming that the old amounts were plus $30 million, right? And we have agreed to a 3% royalty moving forward, right? Okay. So with that, there is no royalty dispute. There is no claim, and we are actually removing from title, the old royalty that was registered in historic title, which gave rise to their claim. And we are replacing that with the new agreement with the company for a 3% royalty moving forward. So that closes the issue. And I have to say that through the process, we have gained a lot of goodwill with the Secretary of Economics, the Secretary of -- Sub-Secretary of Mines the Mexican Geological Service. Moving forward with your questions, number two, the SEMARNAT at process. The answer is no. Through the process, on the extension of the permit that we initiated in May of this year, they had one request for information shortly after we initiated the process where they requested 3, 4 items of additional information. And those were very immaterial. They were asking who was the contact person in the file and other 3 minor issues of that nature. And since then, we never heard back. We requested meetings we never got a reply. So they were quite nonresponsive to our requests. And based on that fact that they became nonresponsive to us is that we decided to initiate legal actions ahead of the October 23 date because we didn't know what was happening and in -- so in 2 occasions, we managed to speak with a low level official. And he replied to us would be that this is being managed at higher levels and that there are a lot of delayed files and -- so based on that uncertainty is that we placed ourselves in multiple scenarios, and we decided to initiate preemptively some legal actions. Number 3 is local involvement. I have to say that we have had a remarkable support from local authorities. And when I speak about local authorities first, the governor of the state of Oaxaca, Alejandro Murat, I think we could not have asked for more support from the governor of the state. He's been behind us, trying to help broker dialogue he's still playing a pivotal role in our effort to broker dialogue and he's been quite supportive. And more in the town of San Jose, the mayor of the town has also -- and his entire [indiscernible] have also played -- are playing a key role in supporting and they have sent letters to their representatives in Congress. They have gone to Mexico City and speak with representatives of Congress and Senate and they're certainly very active in support of the company.And last is the attitude of SEMARNAT. It is no secret that President López Obrador is not fond of mining and particularly Canadian mining, right? I mean, that's no secret, right? And now he has also said that whether operating mines will continue to operate and he will be supportive of that. that's something that he is on record saying. But at the same time, he has placed a moratorium on new mining claims in the country, right? You cannot apply for new mining concessions in Mexico today. So -- and I think there is a compounded effect of the cut -- budget cuts in different government offices like SEMARNAT. The fact that everything slowed down through the pandemic and certainly, an issue with attitude towards mining that permeates, right? So I believe that, that is compounded. But I have to say that they are also quite sensitive to the risk of loss of jobs, right? I have to say that throughout Mexican government, they are also very sensitive to that, right? Yes. Right.
Okay. And I'm sorry, Jorge, just quickly, -- Are some of that decisions made at the local level, regional level or are they made at the national level?
SEMARNAT is a federal office. So it's a national office and SEMARNAT has local offices, but they depend on central government. It's a national office with different subs in the different states, right? But it's not local -- they are not governed locally. It's -- everything is federal, right? Centralized.
Our next question today is coming from Michael Anthony, private investor. You may begin.
Yes, sir. I didn't catch that earlier. When did you say you were going to get the permit?
We have not provided a date for when we believe we can get the permit because we just don't know that. What we have described is all the actions that we are taking in hope that we can get a permit and the measures -- the legal measures we're taking to protect ourselves in case this is a protracted process, right?
Right. You have like 1,200 people working there at that mine?
We employ directly. Direct employees around 1,200 people. But in addition to that, there is an entire world of service providers that go from a local metal for contractors, tire shops for the contractor trucks and you name it. Our community support agreement at San Jose Progresso is of the amount of about $1 million a year that's invested in infrastructure, sustainable development, education, health. We have, only this year, about 160 scholarships in the town. We support many initiatives on greenhouses for tomato growers, support irrigation programs, or we do all of that through this structured community agreement that every year is in the amount of roughly about $1 million. So all of that investment plus the direct employment and indirect employment has a huge impact on an area that's not industrialized. I mean, as you know, mines are located in remote areas. And this mine is not particularly remote, but there is no other -- there are no other decent jobs opportunities available in the valley where we are located. These towns are full of -- have large female populations because most of the male migrate to the U.S. for work. And what you're left is with single mothers and broken families because of the migration. So I believe that SEMARNAT, as they get more knowledgeable on this particular case, will also become sensible to this issue, right?
Right. And it got the Mexican government, they can't afford to hurt their people like this. So they're probably going to issue a permit later on in the future, that I gather because it's just put too many people out of work. [indiscernible] payments as well to the government.
Yes. And also very important to note is that we have never been signaled for environmental pollution or anything like that. I mean the only thing they are citing is wrongly, we believe the paperwork.
Yes, I've been a shareholder for over 6 months or close to probably 9 months or so because I know you are very undervalued, trade at book value. And I know everything don't get solved because I know the type of person you are. And a matter of fact, I [indiscernible] I hope you in Investor Relations and where you going to return a call later on this afternoon if you get a chance of them all.
We will. Thank you very much.
Thank you and good luck. I know you're going to get things taken care of because I know you're good folks. Thank you.
Our next question is a follow-up from Dalton Baretto.
Follow-up. Jorge, I've got a much simpler question for you, and maybe this one is for Paul, actually. You just started building Seguela. I'm hearing from a lot of your peers that are building projects now that the massive inflation in steel and consumables and labor all that good stuff. I've also heard recently that there's a lot of congestion in the port of Alejandro . I'm just wondering, I mean, you just took your CapEx budget up by $32 million, how much of that is already captured in the budget? What does the contingency look like? And are you seeing any delays as you start to bring stuff in?
Yes. That's a very good question and something we have addressed with the team, and I'll let Paul provide all the details here.
Thanks, Tom. Look, you're right, your contacts are rightly concerned about what's happening as are we. Well, I guess one of the key, I guess, features of how we're executing Seguela well over or closer to 60-odd percent of the $133 million capital budget is fixed cost. It is a fixed cost. And obviously, that comes at a premium to do that with those contractors. And so the ability to approve the project in the third quarter and actually execute those agreements and allow those contracted to make those procurement decisions, to meet those [indiscernible] was crucial. And so at the moment, all of the schedules and costs that you see in front of you there incorporate the current reality that we see in the world. So the current critical path from equipment perspective, sits around the mill, sits around the crushing circuit, sits around transformer. All of those have been awarded and are being expedited as per the schedule. So as we sit today, I don't have any scheduled concerns. But yes, we've increased our allowances in the budget in the schedules for the current level of congestion in Alejandro . So we're close to monitoring that, but we have contemplated these current delays in our thinking. We are moving equipment and people in and around West Africa. We continue to operate the Yaramoko mine, as you know, in Burkina Faso in all of the equipment that is required to operate that project does come through Alejandro . So I think I feel we have a reasonable handle on that. That's not to say that we're not focused on going forward.
Thank you. Our next question today is coming from Jacques Wortman at Laurentian Bank Securities.
Jorge, just so I'm clear, did you indicate earlier in the Q&A that Lindero is now at design capacity? How would you characterize the current step-up stage given the COVID-related issues with travel restrictions. I'm just trying to get a sense of where things sit because I thought from an ore to the stock to leach pad is still behind and there is still some some things to iron out. Go ahead.
Yes. In the third quarter, starting around mid-third quarter, we have been achieving a rate of production within 80% design parameters -- sorry, no. Yes, at 80% less of design parameter, right.All of the equipment in in isolation has been tested or performance criteria and everything has performed. But making the entire train, and bear in mind that here we have -- although Lindero has always been viewed by assets at project with low technical challenge on the mine, we moved 40,000 tonnes per day between ore and waste at a strip ratio of above 1 or under 1, with 5 trucks and 2 loaders, 40,000 tonnes per day with 5 trucks and 2 loaders. And the ore is as with metallurgical qualities, it is quite sweet, or gold leaches quite easily and with a good leaching kinetics. But the issue is that we have a primary crushing system, secondary crushing system, the tertiary crushing, agglomeration, conveyor stacking, of course, ADR and SART plant, right? And that's where the complexity is. And getting that entire train working at or above 80% of design capacity is what has been a protracted challenge through COVID for the last year, right? So I think we're comfortable now seeing the operation steady great that are at or above 80% of design.
So in July, when you gave your updated guidance, you had indicated that you thought you would be at design capacity. I would assume it's 100% of design capacity, early in Q4. And that, I guess, hasn't been achieved, and that's because of these travel restrictions. When would you guess what would be your best guess of when you'll be at design capacity, not not simply 80% of. Do you think that's a quarter away? 2 quarters away? I don't know if you want to get that granular until you have the people on the ground that can help you achieve that with the entire train, but just your best estimate at this point, I guess.
We provided revised guidance and that revised guidance continues to project production rates that increased slowly but steady. I will let Cesar provide, for example, some of the details regarding some of the work that we're doing on Q4. We're still doing some minor adjustments to the system in Q4 and changes. And for example, that generates downtime, right? That's scheduled downtime, if you will, but it's downtime nevertheless. But the system is operating a steady not or very close to design parameters. Cesar, you want to add something to that?
Yes, Jorge, you're correct, the entire process, you did have very accurate remark there. This is a process, an entire process. One stage impacts the other. So it has to be all balanced and aligned and we have been able to achieve, over the past few months, steady growth in delivering tonnage to the leach back by news so far conveyors packing, close to the design capacity. So we are now focusing on doubling -- borrowing some activities, planning to get done by the third steam in the second quarter of 2022, the less of them. And then continues delivering according to the in at full capacity on a permanent basis and steady basis.
There was a little bit rough. Are you saying you believe you'll be at 100% design capacity by the end of Q2? Is that what I heard?
Well, we do have the process. We expect to have the processes very an available 100% capacity, although obviously, we operate at a lower capacity on a permanent basis, but we should be able to debottleneck in these minor or told that we have identified by Q2.
Jorge, if you could just confirm if you heard better than I did, I'll let it go, but I heard Q2.
In that we have some work to do to remove some more or less. For example, we are making changes to the liners in the the liners in the generation ramps and whatnot, that will require some downtime. And all of those works are going to be done by Q2 of next year. But if we talk about run rate, the system is operating steady between 80% of the time.
Our next question today is coming from Trevor Turnbull at Scotiabank.
Jorge, I apologize, this might have got touched on before. But just a really simple question going back to the royalty. Was this royalty now going to cover the entire San Jose property? Or is it still limited to the Progresso concession, which is kind of where this all started.
Progresso alone. Trevor.
So if that's -- and again, I apologize, I missed the first part of the call. But if that's the case, Progresso only represents something on the order of 25% of the production. Or how much of it going forward does Progresso and this new royalty really impact?
I don't have the breakdown of resources and reserves on the Progresso concession on my head right now, but it is a meaningful amount, north of 25%, 30%, right. Bear in mind that all of those concessions belong to -- either to the Mexican Geological Survey. And a lot of those where we've been producing since day 1 do carry royalty commitments, right? But this one. And through this dispute is that we have paid $9.5 million, $9.6 million to settle any historic claim that -- and we have agreed voluntarily to pay on an ongoing basis, a 3% royalty. I would have to double check and, Carlos can provide that to you and a follow-up on the exact amount of reserve resources that are subject to that 3% moving forward. I don't have the number on my head right now.
No, that's fine. Yes. Carlos can send that through, that would be great.
[Operator Instructions] Our next question today is coming from [ Eric Mcfare ], a Private Investor.
I thought the results were basically good. Obviously, the main concern is the San Jose property. A couple -- you touched on it earlier in the call, but I just wanted to get your feel again. Do you feel that the SEMARNAT acting are a personal matter for their wishes? Or is it just the infrastructure that it seems like you're willing to do? I don't know if there was any clarity on that. I had 3 questions, that just one of them. The second one was, is there any thoughts on, obviously, the market cap and the stock has been pummeled over 2 days, 20%, which seems to be a large market capital of [ $350 ] million of loss. But the San Jose only brings in, at least from your numbers about $172 million. So what's your thoughts on the overselling for lack of a better term. And then with this type of price crash, is there a thought of any stock buyback program that could help support some of the momentum shorters that are kind of hurting this company because market cap make a difference.
Yes. Thank you for the 3 questions. With the first one, I would not like to think that this is directed action or attack on the company by any means. No, I wouldn't like to think anything like that. Now we have to admit also that Southern Mexico is not an industrious part of Mexico, right? The more industrious part of Mexico, is -- are the northern states where, for example, you have the congregation of mines in states like Durango, Pachuca, Zacatecas, Guanajuato, Sonora, right? So Southern Mexico is not as industrious in Oaxaca. There are only 2 operating mines. And apart from the wind farms, there are only -- there's only one cement plant and beer, Corona beer bottling factory. And outside of that, there is nothing else, right? That's all the industry that you'll find in the state of Oaxaca. So does that have something to do with us getting a bit more attention? I don't know. I can only speculate, right? But we know that there are many companies and because we speak with them that have their environmental files, stock in that office, right? We know that what's surprising is to us is, in our view, the little care taken in citing the arguments they put forward in order not to extend the permit, right? With respect to the overselling, it's hard for us to comment on market activity. We can say that this is an issue that we take with a high degree of seriousness and consideration. I myself in directly involved in supporting the team in Mexico along with Cesar. We're very involved and this is something we take very seriously. Today, the San Jose mine accounts for roughly 25% of our sales or consolidated sales 25%, 28% of our consolidated sales, right? So it's an important asset, but it's one of the legs that support the chair, right? It's not the only one. And -- but I can say that we are always hopeful that [ Recon ] will prevail here, and we'll be able to sort this one off. As I said during the call, we are in dialogue as we speak with the authorities and a part or the legal actions, right? With respect to the stock buyback. Considerations that go into a stock buyback are many. Of course, valuation being central one, but also use of funds and capital short-term, medium-term capital commitments. And so in assessing your buyback program, we have to bring in all of those considerations and make a decision based on that. It's not only on -- we're undervalued, let's buy stock. Again, we have a large -- well, not large, but $170 million in capital commitments for Seguela, and that's something -- that's a key project for us. We -- Seguela project that once it's a mining operation, we'll be producing 130,000 ounces of gold annually at all-in sustaining costs below $1,000. The internal rate of return of that project at at spot prices is in the high 30s, low 40% internal rate of return. So it's technically very simple. And we have the right team building it. So I think that's a key project and a key -- key place where we want to commit capital, right? So all of those things will weigh a decision to do a stock buyback, right?
Correct. I appreciate that, Jorge. I just -- like I said, just because the mine is still active. And it seems like the market is treating you like them, there's nothing, no production at that at San Jose. And even still, it's only 25%. So I just feel like an opportunity with -- I mean it's a $350 million market cap loss just in the matter of 24 hours. So that was my concern, at least at that point. So -- because...
I think at a personal level, it's certainly -- I might be in the market, certainly. Now that the blackout is removed, I personally considering buying, yes. The company [indiscernible] to those factors.
Thank you. Our next question today is coming from George Froley at Pacific Income.
Jorge, are, you're really dropping the ball on all of us. Number one, you said about 18 months ago, we were doing 100,000 ounces at Lindero, and we're 49 ounces for 9 months. It's not working. Why are you sitting out there in Peru when your miles from all the action, you should be in Mexico dealing with the Mexicans or you should be out there in Lindero getting the property to work. It's not working right. And things don't work like unless the owners there. especially in South America. Number two, you blew it with this merger. You bought a Class C mining company with mines in Timbuktu, the world's worst places. They have one decent mine and the rest of them are junk. You gave away -- our stock was $8, today, it's 4%. It's down 50 f****** percent. Jorge, you really need to tune in your jockstrap and find another team to play for because you have screwed this company horribly.
Thank you for your questions. And we are on a conference call. So the cursing -- I will always address all my shareholders with a lot of respect. And I would expect the same type of respect back, right?With respect to your first question, yes, I am based in Peru, but I live in an airport. So I have spent the last month in Mexico in support of the team. And today, we have our Chief Operating Officer in Mexico for the last 3 weeks, Cesar, right? And with respect to your views on our business in West Africa. The largest gold producer in the world is China. It produces 380 tonnes of gold annually. The second largest gold producer in the world, if we group the countries in West Africa, East West Africa. It's the head of the U.S., Russia, Australia, Canada, so we believe it's a place where if you're a mining company, you need to be there, right? If you're going to produce precious metals, you need to be there. And it is our view that medium, long term, this is an investment that will pay off for the benefit of us, shareholders, very handsome, right? So that is what I can say to you. And as the CEO leader of this company and the 1 who created this company back 15, 16 years ago from an idea to where it is today, I can tell you that I'm very committed to the success of this company long term. I have skin in the game. And I'm putting all of my energy and effort into the success of this company. Now mining is a challenging business and you need stomach for that, right? And Mexico is not for the faint of heart either, right? Oaxaca is not for the faint of heart. It's been a good mine for 10 years, and I expect it will continue to be a good mine for 10 years, and we're doing all of our efforts to ensure that, okay? So thank you for your question. And if you want to continue speaking with me, I'm available at any time.
Our next question today is coming from Sean Bedford at Nomadic Publishing.
First Majestic Silver's quarter 3 reporting. One thing they mentioned was that they were holding back silver inventory due to suppressed silver prices in the third quarter. And here, we have one of the biggest silver miners hourly saying that the Comex silver spot price is a fiction. It's suppressed by the banks, and they're doing something about it by refusing to sell some of their silver. And I'm just wondering if you would be willing to do the same thing.
The short answer is not at this stage. I have to say something. I'm as bullish as anybody else on metal prices. But I've been -- and I do subscribe to some of these ideas with respect to price manipulation. But I've been in the business for, what, 30 years, now over 30 years, probably getting closer to 40. if I count the first time I went to a mine. But I haven't seen yet the the actions taken that you propose serving a purpose of breaking those cartels, right, manipulating the price. So we are, at this stage, not contemplating holding off silver sales. No, we're not. It's something we can consider evaluating, absolutely. That's something we can revisit but not at this stage.
[Operator Instructions] Our next question today is coming from Rick Sherman, a private investor.
I had a question again on the royalty stream that you mentioned was going to now be 3%. Is this a royalty -- was there any previous royalty stream that you were paying to the government entity? Or this is completely brand new after the settlement you made and you have any quantifiable number as to what this will cost the company on a net basis.
Yes. We have a series of concessions in and around the San Jose mine. And on a few of those the 1 that hold the book of our reserves and resources, we have royalties. But we did not have and where we're not paying a royalty on the progress to right. And starting this month of October we are going to be paying the 3% royalty. And in order to settle any past claims, the government had on the royalty, which they quantified in the amount of $30-plus million, we agreed to pay a $9.6 million.
Was that -- I'm sorry to interrupt, was that $9.6 million based on what time frame? Was that for -- was that a settlement that was based -- or even if you were using their $30 million number, was the royalty based on 10 years' worth of payments or 5 years? Or what?
Yes. To derive the $9.6 million figure, we resorted to the time when they registered their claim to the royalty on the public mining registry. They only did that in 2017. Right? So they claim there's been a royalty there forever. And their quantum of $30-plus million came from them, deriving a figure from 2011 onwards, which is when the mine started production. So through the negotiation, we said, well, when did you register the claim, the royalty, in December, 2017 okay, then let's use that as a basis for our negotiation, right? So again, here, it was either get stock in court for years with your host government or -- and I have to say again that the Mexican government today is not so fond of Canadian mining, right? So we decided to settle this.
Totally understand the settlement. I was just trying to figure out like what either going -- looking backwards or going forward, is it a $2 million or $3 million number that is a reduction of operating earnings net after having to pay the new royalty. I was just trying to come up with some general idea to figure out.
Yes. I don't know -- I don't have the numbers, fresh on my head right now. I don't know if Luis does. But if not, we can certainly follow up on a call and provide you more color.
Jorge, let me - this is Luis. The over the life -- over the remaining life of mine considering the tonnage that's coming out of that particular claim the nominal amount of the 3% is approximately $6 million, and that is pretax. So net of taxes, ends up being somewhere in the range of $4 million in terms of the net impact to the bottom line, right? The nominal value of the loan is around $6 million.
Is that $6 million over the life of the remaining life of the mine or on an annual basis?
No. Over the remaining life of the mine.
Okay. And the current projected remaining life of the mine is 10 years.
No. It's over 4.5 years, a bit over 4.5 years.
Okay. 4.5 years. So just the back of the envelope, you would divide the 4.5 years into the $6 million and it's basically costing you $1.5 million quarter or a year or $1.5 million, somewhere in there.
Approximately, yes.
Our next question today is coming from Ron Zieger of Private Investor.
Thank you so much for the answers today. I've got a question on the bank and the bank covenant. I'd like to know which banks are they with how much money are we talking about? And is the problem with the bank more serious than a doggling by the authorities?
Luis? You want to...
Yes. So the new lenders are comprised of a syndicate. That includes BNP, Bank of Nova Scotia, the Bank of Montreal and Societe Generale. So upon closing of the new facility, the total amount of outstanding debt has been restricted to $120 million. That's been the amount drawn on the under the new facility. And as we disclosed in the news release, I mean, the outstanding prior assumed debt from the Roxgold transaction with Societe Generale of $28 million was paid out. So after the closing, the total senior secured debt outstanding is $120 million. And as we've also disclosed the additional $80 million of the committed amount under the facility will become available once this issue is resolved. In terms of the November 20 date, again, we touched on this earlier on the call, but that date really had to do originally with the expected time that the legal process to go from a provisional injunction to a definitive injunction takes. Now things are evolving, not necessarily in the same way that was planned for unexpected. So hence, our expectation that we'll work with the banks to gain additional flexibility around that date. That is what I have on that question.
We have no further questions in queue at this time. I will now turn the floor back over to management for any closing remarks.
If there are no further questions, I would like to thank everyone for listening to today's earnings call. We wish you a great end of the year.
Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time, and have a wonderful day. We thank you for your participation.