Lundin Gold Inc

TSX:LUG

Earnings Call Transcript 2022-Q2

[Operator]

Good morning. My name is Michelle, and I will be your conference call operator today. At this time, I'd like to welcome everyone to Lundin Gold Second Quarter of 2022 Results Conference Call. [Operator Instructions] Thank you. Mr. Hochstein, you may begin your conference.

[Ronald Hochstein, executive]

Thank you, Michelle, and good morning, everyone. I hope you're all doing well and have 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 a 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 operational 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 and 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 to 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 semiannually 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're 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 drilling initiatives underground at FDN near the mine and on regional programs. We are also aggressively reducing our debt through accelerated cash repayments 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 with our 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 the recommendations of the 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 align 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 tonnes CO2 equivalent per ounce of gold produced, making the company one of the lowest greenhouse gas emitters worldwide for ounce of gold produced. Having completed this foundational work, Lundin Gold is advancing the implementation of the TCFD framework and expects to announce a GHG emissions reduction target for Scope 1 and 2 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 an intensive care unit at Yantzaza Hospital in partnership with Newcrest Mining in SolGold, establishing the Estamos Conectados program.

Constructing one and providing necessary fund raising for another bridge in Fruta del Norte's area of influence, the Los Encuentros Bridge and the Zamora River bridge progressing on community and development and environmental programs that were established prior to the pandemic and implementing the company's 5-year sustainability strategy, aligned with business along 8 strategic pillars to make measurable positive impacts on local communities, the environment and acted 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 5-year sustainability strategy, we have placed greater emphasis on several emerging themes, including climate change.

We recognized the importance of being transparent regarding the implications of climate change for the company. And I'm proud that Lundin Gold is addressing this important subject to align with 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 projects supported by the company are underway, including sponsoring establishment and micro businesses, providing ancillary services for Fruta del Norte and the community, such as the textile manufacturer and the fire extinguisher maintenance service 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 Lukas Lundin and Paul McRae's retirement from the Board, Jack Lundin was appointed as Chairman.

Jack knows Lundin and Fruta del Norte well, have been worked as project superintended during its construction. His strive 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 San Juan province. Dave was an instrumental component of Fruta del Norte construction team. And I'm sure will do a fantastic job for lending and mining in his new role.

Operating results were strong in Q2 and are highlighted by quarterly gold production totaling 111,890 ounces, comprises 75,730 ounces of concentrate and 36,160 ounces as dore. The company sold 96,291 ounces during the quarter, consisting of 68,598 ounces as concentrate and 27,693 ounces is dore.

Sales were impacted by the national strike -- in the latter part of June. Although our production at FDN was not impacted by these protests, several national highways were located impeding the regulated transport at concentrate and dore from site.

With the protest 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 ope0rations around the world, we are not seeing the inflationary impacts in Ecuador like others.

Labor represents about 30% of our total cost and there's currently very little wage inflation in Ecuador. Our energy costs 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 tonnes 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 tenants 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, mill processed 385,675 tonnes of ore at an average fee, 4,238 tonnes per day, just above designed capacity.

The average grade of ore mill was 10.3 grams per tonne and 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 and 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 cost is $771 per ounce of gold sold. Grade, throughput, production in AISC were all strong in the first half, providing a 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 AISC's guidance to between $820 and $870 per ounce sold from between $860 to $930.

For some time now, we have discussed how free cash flow is fundamental for the Lundin Gold's story. Lundin Gold generates significant free cash from 2021 and just continuing to do so in 2022.

This cash flow has helped to build a sizable cash balance of over $300 million, which supports aggressive debt repayments, regional exploration, or 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 has now declared a dividend of $0.20 per share. Dividends for shares 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 for shares trading on NASDAQ's 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 the yield generally seen in the personnel 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 blockades that stopped slash and lining activities. This plug continued to tightly compact the concrete layer that proved particularly difficult on-block.

I'm very happy to announce the issue was resolved in July. As a result of this blockade, completion is now expected early in the fourth quarter. Slash and lining activities are now back up and running and 52% of the liner is in place. There has not been and there is no impact on 2022 production as a result of this delay.

Sustaining capital expenditures, a figure included in the AISC 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 rates, most significant costs 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 2 exploration programs that are underway. Lundin Gold's new near-mine program focused on targets within and around existing operation and is exploring sectors and the continuities of the FDN deposit and along the extension of major structures.

Historical exploration activities are concentrated on the delineation of FDN, an area where most of the underground development and drilling has occurred to date. However, our recent exploration data review demonstrated a much wider mineralization footprint around and nearby deposit at South.

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 south extension of the FDN structural corridor, Lundin Gold is currently drilling at Bonza West and tends to drill a 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 rig drilling to test the west of a significant west fault, which currently remains deposit. And as I mentioned earlier, a sector rate of drilling from service, testing the Bonza West target.

The inception of this new near-mine exploration program, which is running in parallel to the regional let program, is a mine with Lundin Gold's commitment to expand and replace resources and reserves at FDN and in turn extend FDN's life of mine.

Drilling within the scope of the 16,500 meter 2022 regional exploration program in the Suarez Basin is ongoing. Until now, the drilling has focused on 2 high priority targets, Barbasco and Puente-Princesa.

During the first half of the year, a total of 4,723 meters were drilled across 6 holes of Puente-Princesa drilling intersecting 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 meters were completed with the 2 holes at Barbasco. Drilling intersected zones containing anomalous values of gold and the epithermal pathfinder elements arsenic and antimony. And intersected a thick sequence of finding 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 detailed geological interpretation of exploration data and additional surface works, 4 additional targets of interest have been identified: Barbasco Norte, Capullo, Puma and Quebrada La Negra and a third rig has now been added to test these new targets of interest.

While exploration in the southern area of the basin is challenging, mainly due to topography, thickness of the cover rocks and post mineral of serologies, lithologies our program continues to successfully advance and returned evidence of the important indicators pointing toward the presence of varied epithermal deposits, similar Fruta del Norte. The work done to date on our 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 a more detailed look at the financial results. Alessandro?

[Alessandro Bitelli, executive]

Thank you, Ron, and hello, everyone. In the second quarter of 2022, the company recognized 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 cost 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 ounces 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 216,600 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 decrease in forward gold price in the quarter, offsetting the derivative loss from the previous quarter. This noncash item is the result of the fair value accounting of our gold prepay and stream debt facilities and should not be factored in the assessment of our operating performance.

The MD&A provides a detailed explanation of the impact of fair value accounting of these 2 credit facilities and the determination of deliveries gains or losses. Other costs deducted in arriving at net income for the quarter are 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 mine 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 costs between the 2 quarters, final 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 now in the financial statements described in detail the way discussed arises.

Debt servicing under these 2 facilities is start to fix our variable gold volumes and gold prices. This cost is 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 the rate of 22%, turn 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 tax income for tax purposes for the quarter. The employee portion of profit sharing payable calculated at a 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 in 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 credit available to use by the company. Lundin Gold generated income before interest taxes, depreciation and amortization and adjusted EBITDA of $144.7 million and $104 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 adjusting for the offset of the deferred income tax expense of $2.5 million in other comparing to income, adjusted earnings of $13.5 million or $0.06 per share was realized in the second quarter of 2022.

On the same basis, adjusted earnings achieved in the second quarter of 2021 were $74.8 million or $0.32 per share. A key reason for this difference is the delay of gold shipments and sales, which occurred during the last 2 weeks of June as a result of a national strike in Ecuador. Net sales remained in line with our production. We could have expected additional sales of approximately 16,000 ounces of gold before the end of Q2 at a gold price of $1,800.

Q2 cash operating cost of $702 per ounce of gold and including the additional estimated effect of depreciation and depletion, this would have changed our earnings by approximately $16 million or $0.07 per share. We will realize this operating profit 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 costs in AISC for the second quarter were $702 and $864 per ounce of gold sold, respectively. AISC was impacted by lower gold sales as well as during the second quarter as it is calculated based on ounces of gold sold, thereby absorbing a larger amount of the sustaining capital costs incurred in the quarter on a unit basis.

We should be note our sustaining capital expenditures are expected 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 totaled $656 and $771 per ounce 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 -- as a result of the annual payment of 2021 income taxes of $29 million and profit sharing of $31.5 million, which were due in April.

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 change in cash during the first half of the year was primarily due to cash generated from operating activities of $180 million, which includes not only operating costs, but also corporate and exploration costs and proceeds from the exercise of stock option warrants an anti-dilution right of $9.4 million.

This is offset by principal interest and finance treasury payments, including associated taxes under the gold prepay and string credit facilities, $267.6 million, interest and principal repayments under the senior debt of $65.9 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 string facility, we continue based on -- quarters and 100% of gold in silver ounces sold, respectively, concrete of recurring gold and silver prices at the end of this month, less $404 per ounce, respectively.

Gold repayments under the gold prepay facilities, facility are expected to be based on the 9,725 ounces of gold at the end of this 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 that facility.

In summary, another strong quarter for Lundin Gold. We are quickly retaining our senior debt and have declared our inaugural dividend. The company is performing well, both operationally and financially and is well positioned to continue building expectations during the second half of the year.

For a more detailed discussion of our financial results, I encourage you to turn to the MD&A.

Now, I'd like to turn the call back over to Ron.

[Ronald Hochstein, executive]

Thank you, Alessandro. Lundin Gold's strong performance in the first 6 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 amiable 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 also continue 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 sincerest condolences to the Lundin family after the passing of Lukas Lundin on July 26, following a courageous 2-year battle with brain cancer. It's a new world today without Lukas. But with his legacy to helm 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 and 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?

[Operator]

Your first question comes from Bryce Adams CIBC Capital Markets.

[Bryce Adams, analyst]

I wanted to start on the sales if we can. In the press release, there was a comment about on 1 LPI and 4 medical add 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?

[Ronald Hochstein, executive]

Yes. Thanks, Bryce. The last time was in our exploration activities and before Medical we're at site. On the operations 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 giving some help from the site operations team to -- there.

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, analyst]

Okay. Moving to the South Ventilation Raise, now expected early Q4, that blockade and extra time to completion. Are there CapEx implications for this project? Or they're mostly immaterial?

[Ronald Hochstein, executive]

Well, this is still part of the original construction price. 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 of factors there.

We're always encouraged that we would break that blockade sooner. So we kept the TS, the contractor is doing the slash and lining on site and hope that we will breakthrough. But they were also invaluable and provide a lot of expertise in helping us as we work through that blockade.

But yes, we estimate the cost of the -- the SVRs slashing line has gone from about just around $10 million to about $16 million.

[Bryce Adams, analyst]

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?

[Ronald Hochstein, executive]

It may take a lot here. We've been really focusing on -- Bryce, on essentially mining from about primarily 3 different levels. We have been doing some a little bit deeper when we can -- when we work with the air and that.

But it essentially opens up the whole ore body then. And so, yes, it makes life a lot easier for mine planning and everything. And it's just -- yes, we're continuing 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 2 so far, and that's gone well. But this is going to open up in many areas, which we go back primary mining and starting to pull some secondary course to '23.

[Bryce Adams, analyst]

Yes. Okay. So a lot more flexibility?

[Ronald Hochstein, executive]

Absolutely, yes.

[Bryce Adams, analyst]

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?

[Ronald Hochstein, executive]

It's a great question. There's, a couple of things, Bryce. One is, first of all, Stockholm management. Our -- as you've been following us for a while, you noted when we 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 the arm 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 -- or last or arm was the first ore out, because there's something on top pushing it. And we're in good parts of the stockpile now that some of that -- has been the 6 months close a year, so obviously, oxidized.

So what we've done is, as I mentioned, we cut back on mining a bit and actually up the mills throughput to eat through some of that oxidized stockpile through blending. And we've expanded the stockpiles, so we can manage it better.

So again, we've got to think about 8,000 tonnes -- 8,000 to 9,000 tonnes left of that oxidized ore to eat through. There is some oil Bryce that oxidizes actually, we can start to oxidize right at site at the case. 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.

But -- and we're also looking at some changes in our location recovery when we hit that oxidation to maybe be able to improve recoveries even though we have some oxidation.

[Operator]

Your next question comes from Don DeMarco, National Bank.

[Don DeMarco, analyst]

Ron, Alessandro and team, congratulations on a strong first half. A couple of questions on exploration. First off, I see you're spending $4 million on near mine, the near-mine program, looking at drilling on some untested targets, geophysics and 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?

[Ronald Hochstein, executive]

Yes. Thanks, Don. The results, obviously, will depend on -- as we get assays in and what the interpretation is if we do see something in its material, we'll 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, when drill hole is going to do it but hit it a few more but a few more.

There could be added resources. It could be accessed with the existing infrastructure. And obviously, Bonza West, Castillo, you've got the mill there. So it's essentially what can we do to increase the capacity at the mill is all very close to the mine. So yes, the near mine exploration program is very exciting and yes, it could create great opportunities for the real near term.

[Don DeMarco, analyst]

Okay. Okay. That's encouraging. And shifting to the regional program. I see this is where the bulk of your exploration spend is going to be. You've named 4 new targets. And with this, do Puente-Princesa and Barbasco still remains the priority targets? Or is the priority now shifting to the new targets?

[Ronald Hochstein, executive]

I would say for the rest of this year, the priority is going to be shifting to the new targets, where we've learned a lot from Puente-Princesa and Barbasco. There are still opportunities there.

But for the rest of the year, we'll probably focus on -- well, some of what we've learned at Barbasco and Puente-Princesa is pushed us to some of these new targets Puma and Capullo and Quebrada La Negra Yes, we'll take for the rest of the year, Don. We'll focus on the new changes.

[Don DeMarco, analyst]

And just shifting to a different topic. I heard you mention that Lundin has distinguished as having one of the lowest greenhouse gas emissions per ounce of gold produced 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?

[Ronald Hochstein, executive]

I think it's partly the fact that the ore body itself Don is a pretty compact ore body. Obviously, our grade helps us on a per ounce basis to be very transparent for our grade obviously helps. But it's a compact ore body, where the total strike rate from the other 600 meters.

And depth is around 300 meters total death from top to the bottom of the deposit. And then also to the note on -- we're connected to the grade and 87% of -- power hydro, so that hasn't been impact on it. We still think there's, opportunities to reduce further. If we look at per ounce, we're willing, and if you look at it, relative to underground gold mines, just no space downward slightly were just slightly below average.

[Operator]

Your next question comes from Kerry Smith, Haywood Securities.

[Kerry Smith, analyst]

Ron, after the blockade by -- in June there, what did the government do to address the issues that resulted in that blockade? And is it likely that we might have more blockades and they kind of resolve these issues?

[Ronald Hochstein, executive]

Kerry, now, it's a great question. The blockades were primarily, again, no blockades that were directly focused on FDN or Mirador, for that matter in the mining industry, they were just on the national highways.

The government in Kenai, which is the indigenous group, which led the protests, have agreed to negotiations. And so there is what we call a popular terminator roundtables. And they started. They broke off learning that they're planning to start again today restart.

They've given themselves to carry a 90-day period to resolve the -- I think they were 10 or 10 and 13 issues that they have on the table that they were said they would discuss. And so they're -- that's the whole thing. We're all kind of -- it's sort of a truth let's put it that way, for 90 days, and we'll see what happens at the end of that 90-day period.

And hopefully, they will come to some resolutions. And again, there's a number of different topics. And the biggest one is the field subsidies, which I understand that those discussions have restarted today.

[Kerry Smith, analyst]

And so is that 90 days Ron from this restart now, so that would be?

[Ronald Hochstein, executive]

No, it's from the end of -- so 1st of July, Kerry. So we're looking at 1st of October would be roughly the end of September, early October as to whether they've had some agreement or whether they're going to say we're going to protest again.

Obviously, it's not going to be a sort of lights on lights off type. Then we'll know through September as to how things are gone.

So we'll have some indication. The team did a great job to say that the blockades or 18-days total never impacted operations. We were able to move personnel within range 1 and 2, or within the canton and everything.

Obviously, people can see could not go back home or people can come to site 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 prepared for another essentially -- try 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 related in September, October.

[Kerry Smith, analyst]

Okay. And outside of the fuel subsidy or the removal of the fuel subsidy, I guess, is there any other bigger issues that they have not been able to come to terms on?

[Ronald Hochstein, executive]

Well, they really haven't. They have talked about a number of things. There are a number of things that actually the people of Ecuador agree with more further spending from the government on education infrastructure, reduction in some of the other spend, where there's a lot of factors that they will do this.

There are some things with regards to mining and oil and gas, which the government wants, to continue to negotiate on. But to date, I don't think there's a resolution on any of the issues.

[Kerry Smith, analyst]

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 vent raise. Is that still the case Ron?

[Ronald Hochstein, executive]

There's not -- we've been saying no impacts on 2022. Kerry, we essentially assume that we were conservative in our assumptions and that we would not -- we assumed when we did our mine plan that we wouldn't have the vent raise for the year even though it was originally was supposed to be done at the end of Q2.

It just gave us more flexibility and everything, as I said, we're talking about Bryce. 2023 Kerry, if it did get pushed out past year-end, say, let say, passed Q1 of year-end, it could impact our 2023 production.

We will be announcing our guidance in that for 2023, '24 and '25 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, analyst]

Okay. And you didn't give in your updated guidance Ron, you didn't give cash cost guidance, it was $710 to $780 before. What is that number now then?

[Ronald Hochstein, executive]

It's going to be -- I would say it's going to be down in a similar percentages Kerry, as to what we reduced the AISC.

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, analyst]

Okay. So for the year, you expect about $100 an ounce of sustaining CapEx then?

[Ronald Hochstein, executive]

I believe that's about right, yes.

[Kerry Smith, analyst]

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've given. Is that correct?

[Ronald Hochstein, executive]

Yes. Yes, it is.

[Operator]

[Operator Instructions] Your next question comes from Trevor Turnbull, Scotiabank.

[Trevor Turnbull, analyst]

Yes. 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 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?

[Ronald Hochstein, executive]

Well, that's a great question, Trevor. Quite frankly, Trevor, we've built up quite a significant stockpile at site. We'll maintain, I would say, we'll continue to have a couple of months on a run of mine stockpile on surface.

What the key is just managing it, not leaving stuff sitting there for 6, 12 months. We're doing a lot of testing right now to see what our -- what the timing is for the various different ore types and some bottle roll tests, things like that and some other tests to look at oxidation measuring an 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 stockpile in front of us now. It's the keys would probably just keep it between 1 and 2 months on the surplus and then just manage it better -- reduce the time it's sitting there.

[Trevor Turnbull, analyst]

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.

[Ronald Hochstein, executive]

I would say so, yes. It's probably 44 --. They were consistent doing 4,400, between 4,400 and 4,500 tonnes per day before we pull back. And the SVR, as we talked to Bryce, gives a lot more flexibility and probably we think we could probably push a bit more.

[Trevor Turnbull, analyst]

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?

[Ronald Hochstein, executive]

Yes. It's part of it. It's essentially a part of our tax. It's called profit sharing. But it's essentially a government program that's legislative. 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 a similar payment at the same time as taxes are paid.

[Alessandro Bitelli, executive]

Income taxes and profit sharing are paid annually once a year for the previous year and the tax revenue in April.

[Operator]

There are no further questions at this time. I will turn it back to Mr. Hochstein. Please go ahead.

[Ronald Hochstein, executive]

Thanks, Michelle, and thank you, everybody, for taking the time this morning to hear about Q2. And we're looking forward to the second half of the year and definitely look 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.