Lundin Gold Inc

TSX:LUG

Earnings Call Transcript 2023-Q2

[Operator]

Good morning. My name is Chris, and I will be your conference call operator today. At this time, I would like to welcome everyone to Lundin Gold’s Second Quarter 2023 Results Call. [Operator Instructions]

Mr. Hochstein, you may begin your conference.

[Ronald Hochstein, President and CEO]

Thank you, Chris, and good morning, everyone. Thank you all for joining us on this conference call today. With, Terry Smith, Chief Operating Officer; and Chris Kololian, Chief Financial Officer and I are going to take you through our results for the second quarter of 2023.

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.

Lundin Gold achieved another quarter with excellent operating performance at FDN with gold production of 129,731 ounces and gold sales of nearly 129,000 ounces at a cash operating cost of $644 per ounce sold and an all-in sustaining cost of $802 per ounce sold. For the first half of 2023, Lundin Gold has produced over 269,700 ounces and sold 263,649 ounces of gold at an industry leading AISC of $765 per ounce sold.

Performance in the second quarter highlights Lundin Gold’s ability to generate significant free cash flow. With $132 million generated over the 3-month period, the highest achieved to date. As at June 30, the company maintained a strong cash balance of $275 million compared to $363 million as at December 31, 2022, especially taking into account the $208 million repayment of the gold prepaid in January. Based on very strong performance during the first half of 2023 and projections for the remainder of the year, the company has made the decision to increase its 2023 production guidance to 450,000 to 485,000 ounces.

In addition, the company has reduced its 2023 cash operating cost guidance to $650 to $700 per ounce sold and AISC to $820 to $870 per ounce sold. This is compared to previous production guidance of 425,000 to 475,000 ounces cash operating cost guidance of $700 to $760 per ounce sold and AISC guidance of $870 to $940 per ounce sold.

Expected strong out-performance on costs is the result of low inflationary pressures in Ecuador and continued operational excellence achievements and initiatives. During the quarter, Lundin Gold also published its second climate change and seventh annual sustainability reports. In our climate change report, the company reported a greenhouse gas emissions intensity for Scopes 1 and 2, of 0.06 tonne CO2 equivalent per ounce of gold produced in 2022.

Based on publicly available data from 152 gold mines that reported their Scopes 1 and 2 GHG emissions in 2021. Lundin Gold’s 2022 emissions performance is among the lowest in the industry. By comparison, the average GHG emissions intensity of reporting underground mines was 0.42 tonnes CO2 equivalent per ounce of gold produced in 2021, 7x higher than Lundin Gold’s emissions.

In the report, Lundin Gold also set a target to be carbon neutral by 2030 with respect to its Scope 1 and 2 emissions based on its current life of mine plan. The establishment of this target is supported by a detailed analysis of the company’s emissions and the identification, evaluation and prioritization of direct decarbonization opportunities. Through this exercise, Lundin Gold has developed an initial road map to carbon neutrality, which is set out in the Climate Change Report. We are firmly committed to achieving carbon neutrality by 2030 and I’m excited to share our progress over the next few years. With that, I’d like to turn the call over to Terry for a more detailed look at the operating results.

[Terry Smith, COO]

Thanks, Ron, and hello, all. Another great quarter in the books for Lundin Gold. I’d like to first congratulate the operations team for completing a year without a recordable incident, meaning we’ve had no medical incidence and no lost time incidents. It’s a remarkable achievement certainly worthy of some celebration, but we won’t rest on our laurels. The team continues to drive towards the next milestone.

Our strong operating results in Q1 continued during Q2, highlighted by quarterly gold production totaling 129,731 ounces, comprised of 85,395 ounces of concentrate and 44,336 ounces of dore. Gold sales totaled 128,958 ounces. In the same period last year, gold production and sales totaled 111,890 and 96,291 ounces, respectively. Gold production during the second quarter was higher than planned due to high grade mined in Q1 that was stockpiled and milled through Q1 into Q2. We also benefited from higher mill throughput, offset by lower recoveries compared to recent periods. Mine production totaled 404,408 tons of ore at an average grade of 9 grams per tonne versus 369,430 tonnes in Q2 at an average throughput. The mill was running at 4,598 tonnes per day.

Inclusive of the relining of the SAG and ball mills during the first quarter, the mill averaged at a throughput of 4,479 tonnes per day during the first half of 2023. The average grade of ore milled during the second quarter was 11 grams per tonne with average recovery at 88%. Recoveries were affected by processing ore from sectors that contain higher levels of finely disseminated sulfide minerals. We’re working on a few fronts to improve recovery and plan to report back next quarter with more details on this. For the first half of the year, we produced and sold 269,702 ounces and 263,649 ounces, respectively. The average grade of ore milled was 11.6 grams per tonne with an average recovery of 89.3%.

This is great production performance, setting us up for a solid 2023. Sustaining capital expenditures accounted for $103 per ounce sold in the second quarter, a significant increase compared to the last quarter.

A large portion of this is attributable to the construction of the fourth tailings dam raise which advanced on schedule through Q2 and is still anticipated to be completed in Q4. During the second quarter, our conversion drilling program focused on the southern extension of FDN’s inferred resource with approximately 3,211 meters drilled across 20 drill holes. Most of the drill holes confirmed continuity of the mineralization, but results have also identified higher-grade veins within the larger resource envelope. 7,600 meters of conversion drilling is planned in 2023 and since January, a total of 4,612 meters across 30 drill holes have been completed.

A complete table of results received to date can be found on Lundin Gold’s recently published press release dated August 3, 2023. I’m also happy to announce that the new warehouse was completed during Q2 and is now operational, and the new underground mine maintenance facility is expected to be completed during Q3, which will provide further efficiencies. Other sustaining capitals -- sustaining capital projects will continue to ramp up during the remainder of the year. Operating costs were relatively consistent quarter-over-quarter. We achieved cash operating costs of $644 and all-in sustaining costs or AISC of $802 per ounce sold in the second quarter.

While for the first half of the year, we achieved cash operating costs of $644 and AISC of $765 per ounce sold.

At these levels, Lundin Gold continues to be in the first quartile on the industry cost curve. I’ll turn the call back to Ron now to discuss our exploration programs.

[Ronald Hochstein, President and CEO]

Thanks, Terry. Lundin Gold’s near mine exploration program commenced in the third quarter of last year and is focused on expanding the FDN mineral resource envelope and testing several unexplored targets near the mine. As at the end of Q2 approximately 12,636 meters across 24 holes from surface and underground have been completed, with assay results received to date set out in the last week’s press news release. Results are still pending for a number of the reported drill holes. The near-mine drilling program continues to explore extensions of major controlling structures surrounding the FDN deposit.

In the second quarter, a total of 8,609 meters across 60 drill holes from surface and underground were completed on several targets near FDN. The surface drilling program continues along the south extension of the East fault with the FDN South or FDNS and Bonza Sur targets were identified in Q1. At FDNS, fixed surface drill holes were completed, confirming continuity and mineralization and defining a new geometry for the main system on this target. Drilling results indicate a series of subparallel epithermal veins in the Northeastern to Southwestern direction that remain open for expansion along strike and at depth. At Bonza Sur located 1 kilometer from FDN. 5 surface drill holes were completed and continued to confirm mineralization.

Drilling results recorded multiple positive intersections and demonstrated the occurrence of 3 distinct mineralized zones, represented by veins/veinlets of quartz and minor chalcedony and manganoan-carbonate. Mineralization currently extends 500 meters along strike from the north to the south and 300 meters along the down dip and remains open in all directions. Drilling to test new near mine sectors of interest was also initiated in Q2.

This drilling aims to explore the extensions of major structures at FDN. With the first drill hole completed along the northern extension of FDN. Or surface rigs are currently drilling with 2 rigs at Bonza Sur, one at FDNS and the fourth testing new near-mine targets. The underground drill program continues to explore the continuity of the FDN deposit at depth and beyond the major faults. 4 drill holes were completed in Q2 and intercepted structures and hydrothermal alteration beyond the current FDN resource limits at depth and to the east of the East Fault.

The 2023 regional exploration program continues to advance in the southern region of the Suarez Basin with a total of 2,796 meters completed to date. Targets of interest such as Quebrada La Negra and Crisbel located along the basin’s Western border have been the primary focus.

The 2023 regional drilling program comprises 12,500 meters of drilling. And a second rate was recently added to the program to advance exploration at additional targets. Funding gold exploration programs are continuing to demonstrate the significant untapped exploration potential near the current FDN deposit. Nine rigs are currently turning on our exploration programs in a minimum of 43,000 meters of drilling across the conversion, near mine and regional programs are planned for -- are currently planned in 2023. This represents the largest drill program in the district since 2007.

Also, based on results to date, we are looking at adding additional rigs. I’d like to formally welcome Chris Kololian to Lundin Gold as Chief Financial Officer. Chris or CK, as many of you know, has joined Lundin Gold on July 1. I also want to take this opportunity to thank Chester See for stepping in as interim during the handover. Chester will continue with Lundin Gold in the role of Senior Vice President, Finance.

Now I’ll turn the call over to CK for his inaugural call and to provide a more detailed look at the financial results.

[Chris Kololian, CFO]

Thanks, Ron, and hello, everyone. I’m delighted to attend my first call at Lundin Gold at such an exciting time in the business. Jumping into it on Slide 16. In the second quarter of 2023, Lundin Gold recognized revenues of $244 million from the sale of approximately 129,000 ounces of gold at an average realized gold price of $1,942 per ounce.

Income from mining operations increased to $125 million compared to $82 million a year earlier. Primarily as a result of the increase in ounces sold and higher gold prices from this, Lundin Gold generated adjusted earnings, which exclude the derivative gain and deferred income Tax expense included net income of $59 million or $0.25 per share this quarter compared to $13 million or $0.06 per share a year earlier. For the first half of the year, Lundin Gold recognized revenues of $501 million and income from mining operations of $258 million.

The company generated adjusted earnings of $126 million or $0.53 per share. Income taxes of $34 million were accrued during the second quarter of 2023, in line with the same quarter last year at $33 million, which is comprised of current and deferred income tax expenses of $28 million and $6 million, respectively. Adjusted EBITDA was $150 million in the second quarter. For the first half of this year, Lundin Gold achieved adjusted EBITDA of $309 million.

Turning to Slide 17. Performance during the second quarter of 2023 highlights Lundin Gold’s ability to generate very significant free cash flow. The company generated very healthy net cash from operating activities in the second quarter of $162 million and free cash flow totaled $132 million or $0.56 per share compared to $21 million or $0.09 per share in the second quarter of 2022. For the first half of the year, the company has generated free cash flow of $120 million which factors in the full repayment of the gold prepaid facility in January. We expect to continue generating significant free cash flow in the future based on our production and all-in sustaining cost guidance, especially given the increased exposure to strong gold prices with the benefit of the full repayment of the gold prepay.

Turning to Slide 18. Lundin Gold ended the second quarter with a very strong cash balance. As of June 30, 2023, the company had cash of $275 million and a working capital balance of $268 million compared to cash of $363 million and a working capital balance of $195 million as at December 31, 2022, the change in cash during the first half of the year was primarily due to the full repayment of the gold prepaid facility of $208 million, principal repayments, interest and finance charges, including associated taxes under the stream credit facility totaling $39 million, interest and principal repayments under the senior debt of $91 million dividends of $47 million and cash outflows of $20 million relating to sustaining capital expenditures. This is offset by the substantial cash generated from operating activities of $307 million and proceeds from the exercise of stock options and antidilution rates of $10 million.

Turning to Slide 19. Free cash flow is fundamental to Lundin Gold’s growth story, and we have generated a lot of it in the second quarter. The company’s capital strategy ensures that we utilize our treasury as and when needed, while maintaining optionality. By fully repaying the gold prepay in the first quarter, we have benefited from the cash flow generated from an additional 11,500 ounces of production in the second quarter. Further, as per the terms of the agreement, the company continues to evaluate the option of buying back half of the stream credit facility in June 2024 for $150 million, and less gold prices fall materially between now and then, doing this makes both financial and strategic sets.

The remaining component of our outstanding debt is the senior debt facility, which had a remaining principal outstanding of $98 million at the end of the second quarter and is repayable in quarterly variable installments and through a cash suite mechanism. We are looking at the options around the senior debt but based on our current free cash flow generation unless repaid early, this debt facility is expected to be repaid in the first half of next year, approximately 2 years ahead of its scheduled maturity in 2026. Now again talked about cash flow as I was mentioning Lundin Gold’s dividend policy of $0.10 per share declared on a quarterly basis, which positions us as one of the highest-yielding gold equities globally.

The second quarter dividend of 2023 was paid at the end of the second quarter. While the third quarter -- the third is payable on September 26 for shares trading on the TSX and OTCQX and September 29 for shares trading on Nasdaq Stockholm based on a record date of September 11, 2023. Even after the payments of dividends, we still retain a healthy treasury and continue to generate significant operating cash flow for other value-generating initiatives, such as our near mine and regional exploration programs, future throughput expansions, further debt reduction and other strategic opportunities.

A great first half of the year for Lundin Gold and an exciting first few weeks from my end. The company is in a very strong financial position, and I’m looking forward to helping build the business going forward. For a more detailed discussion of our financial results, I encourage you to turn to our MD&A. We are also happy to answer questions during the Q&A, along with my partner, Chester See, who is on the line. Now I’d like to turn the call back over to Ron for his concluding remarks.

[Ronald Hochstein, President and CEO]

Thank you, CK. Another strong operating and financial quarter for Lundin Gold. Achievements during the first half of the year provide the company with a positive outlook for the remainder of the year. And as a result, production guidance has increased to 450,000 to 485,000 ounces while cost guidance is decreased for both cash operating costs and AISC to $650 to $700 per ounce sold and $820 to $870 per ounce sold, respectively. Production for the second half of 2023 is expected to decrease relative to the first half of the year, primarily driven by lower grades, while AISC is expected to increase slightly, driven by completion of the fourth raise of the tailings dam, as well as several other capital projects.

In addition, the conversion drilling program aiming to convert inferred to indicated mineral resources is planned to continue. Plus 400 meters of development to better drill the southern extension of our resources is underway for the 2024 conversion program. The near-mine drilling program will continue with 3 rigs dedicated to the expansion of mineralized zones at depth and along strike.

Another surface rig and underground rig will continue to explore 4 major discoveries in the near mine district. Targeting the extension of major controlling structures in FDN and new targets and sectors. The near mine program is currently expected to comprise the total of 23,000 meters of drilling for 2023. The regional drilling program continues to focus on the Southern Suarez Basin advancing along the Eastern and Western borders of the basin. A second rate has been added to advance numerous target areas identified during the previous quarters.

The regional drilling program currently is expected to comprise 12,500 meters for the year. The combined near mine and regional exploration budget for 2023 currently remains at $24.6 million.

Thank you all once again for your continued support. And with that, I will now open the call to questions. Back to you, Chris.

[Operator]

[Operator Instructions] Your first question comes from Kerry Smith, Haywood Securities.

[Kerry Smith, Haywood Securities]

Terry, just on the quarter, on the mill throughput and the grades, do you expect to maintain just shy of 4,500 tonnes a day through the back half of the year? Or are there any big planned maintenance shutdowns that are required that might lower that number? I’m just thinking about the back half of the year in terms of throughput.

[Terry Smith, COO]

We have -- Kerry thanks for the question. We have a seg mill liner change happening here in the third quarter, which will affect our throughput -- but I don’t see why we wouldn’t be able to maintain the averages that we’ve been seeing through the first half of the year.

[Kerry Smith, Haywood Securities]

Okay. So even with the reline, with the [indiscernible] we expect to kind of be in that 4,400, 4,500 tonne a day rate. Okay. And then just on the grade, Terry, how was the grade reconciliation in Q2 model grade versus what you actually mined?

[Terry Smith, COO]

Yes. Kerry, the reconciliation is tight. The reason that we had such a high mill grade compared to the mine grade in the quarter was because of stockpiled material from mining in Q1 that was spread through Q2. And so we’ve really absorbed all of that high grade through the mill now. And we have more of a match between the mill and the mine from a grade perspective. So from a reconciliation perspective, that didn’t really play into that disconnect between the mine and the mill from a grade perspective.

[Kerry Smith, Haywood Securities]

Okay. And then for the back half then you are guiding lower grades. Is it going to be below 10 grams or kind of similar to the grade you mined in Q2? Or how should we think about that?

[Terry Smith, COO]

Yes. I think the grades that we mined in Q2 are representative of what we’ll continue to see through the rest of the year and the mill grades will follow.

[Kerry Smith, Haywood Securities]

Okay. Okay. And just maybe a broader comment from Ron, if you don’t mind, with the [indiscernible] last night of the presidential candidate and then last you now announced a 60-day state of emergency, Will that favor emergency have any impact on the operation? And maybe if you could just make some comments on the election, which is coming up later this month?

[Ronald Hochstein, President and CEO]

Yes, Kerry. First of all, the whole Lundin Gold team thought a [indiscernible] is portable what happened -- with regards to the -- I’ll start with the broader topic with regards to the election, yes, this could have an impact on the election and that it’s going to really push, I think, the whole focus around security, which has been the key platform for a number of the candidates. There is talk right now, Kerry. It hasn’t been confirmed, but there is some discussion in the state of emergency may be to this of postponing the election, which was already scheduled for August 20. That may happen. This could have an impact on the election again in terms of just the way people are looking at security and could change people’s views on candidates. With regards to us at site down in Southeast Ecuador, we’re not seeing the criminal element or that aspect there at all. It’s -- it’s kind of the quiet part of the country. That said, we’re not letting our guard down.

We continue to have a strong security -- there’s a strong -- because we’re on the border, there’s already a strong military presence in[indiscernible] because we’re right on the border with Peru. But as you’ve been there, Kerry, it’s pretty remote, and it is pretty quiet relative to what’s going on in this was [indiscernible], but most of the issues and a lot of the issues that we’ve been seeing over the last little while in continue are along the coast. So we’re quite away from the coast, and it’s Yes, security at site, we’re not too -- we’re not too worried.

[Kerry Smith, Haywood Securities]

And Ron, I mean, I know you have to ship concentrate out through [indiscernible] and you bring one of your consumables and fuel in that way. Like would there be any impact on that side from the state of emergency in because that is on the coast?

[Ronald Hochstein, President and CEO]

No. No. Our movements will continue as planned, Kerry. A lot of the state of emergency deals with not having movements at night and everything like that, but that’s been our policies from the very start is that we don’t have transportation trucks or anything moving at night for a health and safety standpoint. So yes, it doesn’t really affect us.

[Operator]

Your next question comes from Martin Pradier, Veritas.

[Unidentified Analyst]

I have 2 questions. Can you comment on the 2024 respected grades? Will be [indiscernible] of 2023? Or what are we looking?

[Ronald Hochstein, President and CEO]

We haven’t -- we’re in the process of preparing our 2024 budget life of mine plans and everything like that. So I can’t really comment on 2024. We have published our guidance prior with regards to gold production in that, and we will be reevaluating that as we go through the 2024 budget cycle, but I can’t really comment on that at this point in time.

[Unidentified Analyst]

Okay. And in terms of the mill in 2024, are you going to be closer to the 5,000 tonnes per day? Or you’re already sort of maxing out at 4,500 or 4,600?

[Ronald Hochstein, President and CEO]

We’re doing the engineering and everything. We’ve actually just completed the basic engineering and moving into detailed engineering on the 5,000 tonne per day expansion -- so again, that will be part of our 2024 budgeting exercise everything, and we’ll have more information on that later this year. But yes, we are -- we are progressing on expansion to the 5,000 tonnes per day.

[Unidentified Analyst]

But when will you be there? I mean, do you expect to be there by the end of 2024 or is the beginning or?

[Ronald Hochstein, President and CEO]

Yes, we’re still -- again, it’s a bit too early to say on that because part of -- large part of it is going to be dependent upon we’re not talking about a large amount of capital, but there’s still equipment delivery issues and things like that, and we’re in the detailed engineering now and working with suppliers, that’s going to really kind of dictate as to how quickly we’ll get to 5,000 tonnes a day will be equipment delivery issues, scheduling up downtime, that sort of thing. So again, we’ll have a lot more information on this in a few months.

[Unidentified Analyst]

If you were to discover some new deposit and you say, well, I would like to have, I don’t know, 7,000 tonne per day or something like that. Will that mean that you have to do a new mill? Or is there a possibility that through modest investment, you can continue increasing the throughput of that mill?

[Ronald Hochstein, President and CEO]

That’s things certainly we’re starting to do, I would say, those blue sky type studies, and we’re looking at things. But again, a large part would depend on the if we discovered a new is an FDN look like? Or is it different metallurgy, that sort of thing. There’s a number of factors that would enter into that analysis. Again, it’s too early to say, but it’s something we’re looking at.

[Operator]

[Operator Instructions] Your next question comes from Don DeMarco National Bank.

[Don DeMarco, National Bank]

Just a follow-up on the tragic events last night. Well, first, I heard your response and it’s encouraging to hear that the mine is in a peaceful area. Very secure. But you mentioned the security is a topic in the election. Can you comment a little bit on why it’s a topic in the election? And how maybe security in the country has trended? Under last year or over the last few years?

[Ronald Hochstein, President and CEO]

Yes. Don, it’s become a real topic because actually, it’s very unfortunate having lived there for over 6 years. I’m going to spending a little less time there now but having lived there for 6 years and seen the changes -- it is sad. The crime is higher. The murder rate has climbed recently. Again, most of that is focused on the coast and a large part of it is being driven by trying to control the [indiscernible] hubs. Ecuador has multiple parts. And we are also border on 2 large Colombia and Peru which are large drug manufacturing centers, if you want to say it that way. So that’s what the real issue has, and it’s just -- it’s kind of become a little bit uncontrolled over the last little while. And as a result, a lot of the presidential candidates are trying to put in policies or talking about what they would do to try to bring Ecuador back to what it was a few years ago, which was one of the lower crime rates, lowest murder rates in Latin America. They want to get back to there. So it has been a topic and it has been a platform for many of the candidates.

[Don DeMarco, National Bank]

Okay. Well, it’s certainly appropriate that it is a priority then. On to my next question. Congratulations on strong free cash -- record free cash flow in the quarter. And I saw net debt took a step change lower. Are you expecting to be net cash surplus by year-end there both?

[Chris Kololian, CFO]

Thanks for the question, Don. No, I think we’re certainly trending in that direction, I suppose, in terms of how you factor in the stream. But if you think about cash less senior debt will certainly be in a positive position, and that will continue to grow into next year when, as mentioned, we’ll be looking based on current gold prices, our forecast, we would expect that senior debt to be cleared in the first half of next year.

[Don DeMarco, National Bank]

Okay. Good. And a question then moving away from the financial reporting last night, but to the exploration update that you provided on August 4, -- in particular, I’m looking at the resource to reserve conversion drilling, some of the intercepts here are impressive 11 grams per tonne over 35 meters, 23 grams over 16 meters. What are the implications of this in terms of when these -- we expect they might be converted to reserves. So when would they be added to the mine life? And what does it bode for potential mine life extensions. Is this something you can mine in the next couple of years? Or is this longer dated?

[Ronald Hochstein, President and CEO]

Right now, our current mine plan, which were, as I mentioned just a little while ago, we’re updating, which will include the southern -- the new mine plan will include the Southern extension resources, which were part of the new resource model, which was issued in March of this year. Would they bring these in sooner there’s -- we’ve got so much in front of us right now, Don, in terms of FDN itself. Our current mine plan showed some of that southern stuff coming in probably closer to 2030 and beyond. This new drilling that we’re doing will be brought into a new resource estimate, which we will be -- expect to be completing in Q1 issuing that in Q1. So we’ll look at resources, but we are -- our new -- our mine plans are kind of a little bit delayed offset.

So that whatever we bring into resources at the end of this year would be manufactured into a new mine plan for the 2025 mine plan. There’s a little bit of offset there. We are already bringing in the new life of mine plan, some of that southern extension and some of these conversion results are very exciting. And definitely, we’re -- and that’s partly Don, we’ve accelerated the development -- this 400 meter development that I mentioned wasn’t in our original sustaining capital budget. We’ve added that because we just see some real opportunities, and we need to be able to drill this more from underground.

So that’s why we’re doing the development currently. The operating team, my operating team have done a great job, and we’re actually ahead of development as to what we need underground. So we’ve got the resources to dedicate to this. So that’s underway right now.

[Don DeMarco, National Bank]

Okay. Okay. Well, that’s great to hear. And when we look at near mine and the regional programs, obviously, near mine could probably be trucked to the mill if it was proven successful. But with the regional program, like conceptually, was this -- would it be too far to truck? Is this is a regional program looking at potentially the whole new mine and mill, a separate stand-alone part, if successful?

[Ronald Hochstein, President and CEO]

I think you could truck to -- as you could truck from the regional program, we’re talking to that being that far away.

[Don DeMarco, National Bank]

Okay. Okay.

[Ronald Hochstein, President and CEO]

Don, even near mine, FDNS, that could be accessed to our existing underground works. We’re not even talking about -- that’s what’s really what FDNS and Bonza Sur is only a kilometer away, but we were brainstorming last week for how access Bonza Sur. It’s -- the near mine program is in just such a short period of time. And the success rate that Andre and his team are having the number of holes we’ve put into Bonza Sur and I think we’re pretty close to 100%, if not at 100% of the holes, gold mineralization or grade mineralization which is in a new target. That’s -- the team has done a great job.

[Operator]

Your next question comes from Jeremy Hoy, Canaccord Genuity.

[Jeremy Hoy, Canaccord Genuity]

Most of my questions have been answered. So -- maybe just a quick clarification on some of the exploration results. The results were really exciting. And one thing that stood out to me was a comment about FDNS that the zone was showing similar hydrothermal alteration to that at FDN and that the geological understanding had evolved. Could you elaborate a bit on how this understanding has changed and what this means for the target?

[Ronald Hochstein, President and CEO]

We’re starting to see, as we move to the south [indiscernible] both FDNS and Bonza Sur is that the mineralization tends to be more like the traditional epithermal type mineralization like what you’d see in many other epithermal type operations around the world FDN is unique. And we’re not saying there isn’t another FDN there. But what we’re starting to see is that as we move to the [indiscernible], it’s very strong. But more epithermal vein type systems, which means that it’s going to take more drilling in order to really lay it out in that sense why I made the comment that we’re currently considering maybe adding some more rigs even this year. And I think we’re looking at next year’s program of being significantly larger -- so that’s what we talk about it changing, Jeremy. It’s just going from an FDN type to more traditional epithermal type model.

[Jeremy Hoy, Canaccord Genuity]

Okay. Great. That’s helpful. Looking forward to seeing more results come in there. And I guess just one last one then is not something that you guys have definitely talked about this quite a bit in the past, but could you just refresh us on what your priorities are for potential M&A targets given the free cash flow generation and improvements in the balance sheet that we’re seeing?

[Chris Kololian, CFO]

Thanks, Jeremy. I think it’s early days at the moment. I think what’s clear to us is the sheer scale, the cash flow generation from FDN is throwing up all sorts of optionality in terms of how we consider the next chapter of the business. And so what struck me certainly in my first month on the job is just the best-in-class expertise we have across so many different disciplines within the company, whether it’s project execution, operations, you’re seeing the operational excellence program coming through and then certainly on the exploration side. So I think that gives us a pretty desirable whiteboard to think about when we think about where we could take this business with the expertise we have in-house.

So I think it’s something we’re thinking about. There’s nothing imminent. We’re spending time thinking about it, but really the focus remains on driving value through the exploration programs and certainly the operational excellence for the time being.

[Operator]

There are no further questions at this time. Please proceed.

[Ronald Hochstein, President and CEO]

Thanks, Chris, and thank you, everyone, for taking the time to hear about Lundin Gold and look forward to updating everyone as the quarter progresses and the Q3 results. Thanks, everybody, and have a great day.

[Operator]

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.