Lundin Gold Inc

TSX:LUG

Earnings Call Transcript 2021-Q3

[Operator]

Good morning. My name is Michelle, and I will be your conference call operator today. At this time, I would like to welcome everyone into Lundin Gold's Third Quarter 2021 Results Conference Call. [Operator Instructions] Thank you.Mr. Hochstein, you may begin with your conference.

[Ronald F. Hochstein, President, CEO & Director]

Thank you, Michelle, and good morning, everyone from Quito. Thank you for joining us on Lundin Gold's 2021 third quarter conference call. Alessandro Bitelli, Executive Vice President and Chief Financial Officer; and myself are going to take you through our results for the third quarter and year-to-date.To begin with, I will provide an overview of several key milestones achieved in the third quarter and give an update our issues at Fruta del Norte and our exploration programs. I'll also discuss several important value-driving catalysts to keep an eye on for as we enter 2021 and move into 2022. After that, Alessandro will discuss our financial results in more detail before I finish things off with my concluding remarks. We will then open 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.I'd like to kick off this conference call today by focusing on the vaccination campaigns at by Ecuador's Ministry of Public Health. Vaccinations began in late June and ramped up quickly. As of today, over 99% of Lundin Gold's employees and on-site contractors are vaccinated and only 7 employees are unvaccinated out of a total of 2,856. Of these 7 employees, the majority are unable to get vaccinated as a result of underlying health issues.Since Guillermo Lasso was sworn Ecuador's President in May of this year. This vaccination plan has been efficient and successful, reaching its goal of vaccinating over 50% of the country in its first 100 days in office. As of today, 68% Ecuadorians are partially vaccinated and 58% are fully vaccinated. The health and safety of personnel at site will always be paramount. And as such, stringent procedures remain in place to minimize the impact of COVID-19 on the workforce.I'm pleased to announce that in the past month, Lundin Gold was recognized by IESS, the Ecuadorian Social Security Institute for the development and implementation of strict COVID protocols, which provided excellent protection for our workforce during the height of the pandemic.As an integral part of its sustainability program, Lundin Gold has long prioritized actions to improve the quality of local education, particularly in Fruta del Norte's area of influence. As such, I'm pleased to report that our initiative to provide critical access to online education for students and rural communities, close to Fruta del Norte was completed in October.With this milestone achieved, teachers now have high-speed Internet connection in the school, students and local communities are equipped with the tablet. And interconnection -- Internet connection in 21 communities has been established or upgraded using fiberoptic infrastructure.Now let's turn our attention to Lundin Gold's results for the third quarter. Operating results continue to be strong, highlighted by production of 107,663 ounces of gold, consisting of 76,837 ounces in concentrate and 30,826 ounces as doré. Sales were 111,605 ounces during the quarter, consisting of 78,251 ounces in concentrate and 33,354 ounces as doré. These robust operational results were achieved and a cash operating costs of $650 per ounce sold and all-in sustaining cost of $804 per ounce sold.In the third quarter, the mine up maintained its strong operating performance, mining a total of 382,667 tonnes. Underground mine development also continued as planned with a total of 2,148 meters of development completed with development rates between 23.3 meters per day during the quarter.On the processing side, Fruta del Norte advanced construction and mill expansion and progressively increase our throughput to an average of 3,971 tonnes per day during the third quarter. 365,316 tonnes of ore were processed in total. The average grade of ore mill was 10.3 grams per tonne, and average recovery was 88.8%. We continue to fine-tune the processing plant to improve recoveries as we mine and process different types of ore.Year-to-date, Lundin Gold has produced 320,599 ounces of gold at an average head grade of 10.9 grams per tonne, an average recovery of 88.2%. The company's year-to-date average all-in sustaining costs to $778 per ounce sold. With the completion of the mill expansion early in the fourth quarter, the company remains on track to end the year at the upper end of its stated 2021 guidance of 380,000 to 420,000 ounces of gold produced and the lower end of the ASIC guidance of between $770 and $830 per ounce of gold sold.Within the scope of our original construction plan, the South Ventilation Raise or SVR, is the last remaining item. As previous disclosed, we decided early in the third quarter to revise the approach for the SVR. While the original plan evolved the 5.1-meter raise, the new plan involves a smaller 2.1-meter raise followed by slashing to 5.1 meters than concrete mining of the raise.The risk of continuing 5.1-meter approach were too great, and this alternative plan will reduce construction risk and longer-term maintenance of the raise. During the third quarter, the SVR progressed in accordance with the revised work plan and expected completion remains in the second quarter of 2022.The raised borrowing of the 2.1-meter raise is completed near the end of the quarter and Shaw Creek mining was completed shortly thereafter. The contractor has been selected, and mobilization is underway.Importantly, there's no anticipated impact on production forecasts for the remainder of 2021 or 2022 as a result of the revised work plan. Operational excellence is only 1 of our 4 pillars of value creation. And as such, during the third quarter, we continued to advance the throughput expansion project, the resource expansion and our regional exploration programs.The throughput expansion project to increase the mill throughput from 3,500 to 4,200 tonne per day, continued on schedule and on budget during the quarter. During the third quarter, the mine generally operated at the higher 4,200 tonne per day, while the mill expansion events and was substantially completed early in the fourth quarter.Sustaining capital during the third quarter of 2021, mainly focused on the second raise of the Fruta del Norte tailings dam and the resource expansion drilling program. The second raise of the dam was completed shortly after quarter end. The planned 10,000-meter resource expansion drilling program continued to progress during the quarter, targeting conversion of a portion of the inferred resource at the south end of the deposit.The company's regional exploration drilling program began at the end of March of this year. This program focused on 2 high-priority targets, Barbasco and Puente-Princesa to test for barrier mineralization in a geological setting similar to that of Fruta del Norte.Drilling in the Barbasco target ended during the third quarter with the 6 holes plan completed, totaling 5,387 meters. An initial interpretation results suggest that the drill holes intersected the late Fruta del Norte andesites, Suarez basin field sediments and the Santiago Formation andesites and sediments, which are all the host rock for Fruta del Norte.Zones of epithermal related alteration were intersected in all three rock types and multiple narrow widely spaced epithermal quartz-carbonate-sulphide veins and some broader intervals of epithermal crackle brecciation were intersected.Most of the veins are mildly anomalous of gold, silver and epithermal pathfinder elements arsenic and antimony. The frequency of the veining and the intensity of the epithermal alteration increases to the south into an area completely covered by post-mineralization rocks.Drilling of Barbasco will continue in 2022 once new access tracks are to treat some more remote and steep southern area of the target. In line with our original plan, the regional exploration program is now focused on the Puente-Princesa target. Two drill holes have been completed on this target and a further 2 are currently in progress.At Puente-Princesa, a significant share structure has been intersected at depth along the Santiago Formation and the Zamora batholith. This structure contains epithermal silica-illite alteration and some quartz-carbonate-sulphide veining within mixed sediment and andesite. As a result of the initial findings from the drilling obtained at Puente-Princesa, a decision is made to expand the 9,000-meter exploration program to 11,000 meters and drill an additional 2 holes at Puente-Princesa. Assay results for these holes are expected in the first quarter of 2022.Now I'd like to turn the call over to Alessandro for a more detailed look at the financial results. Alessandro?

[Alessandro Bitelli, Executive VP & CFO]

Thank you, Ron, and hello, everyone. I want to begin by referring to a couple of additions to our quarterly financial reporting. As our result of Lundin Gold's in our well-established operations, we are beginning to report 2 additional non-IFRS measures, earnings before interest, taxes, depreciation and amortization or EBITDA and free cash flow.Not only will the company start paying taxes, but Lundin Gold is also generating significant amount of free cash flow. And we believe that these metrics allow for more insight into both our earnings and cash flow. I will comment on these 2 [ metrics ] a bit later.And now to our results. We achieved strong financial results in this third quarter, and it is the result of sustained strong production and efficient operations. In the third quarter of 2021, the company recognized revenues of $191 million from the sale of 111,000 ounces of gold, consisting of over 78,000 ounces of concentrate and over 33,000 ounces of doré at an average realized gold price of $1,759 per ounce.This is offset by cost of goods sold of $101 million, which is comprised of operating expenses of $61 million, royalties of $11 million and depletion and depreciation of almost $29 million, resulting in $89 million of income from mining operations.During the same period in 2020 following the restart of activities from the temporary suspension due to COVID, revenues of $119 million were recognized from the sale of 62,000 ounces of gold and we were offset by cost of goods sold of $56 million.Lundin Gold generated net income of $57 million during the third quarter of 2021 compared to a net income of $28 million during the third quarter of 2020.Net income this quarter includes derivative losses of $600,000 as a result of an increase in the fair value of our gold prepay and stream loan facilities, driven by higher forward gold prices compared to June -- June 30, 2021.This is a noncash item, and the volatile nature of these derivative gains and losses, also seen in prior quarters, is expected to continue given the volatility of forward gold prices. The MD&A provides a detailed explanation of the impact of fair value accounting on these 2 credit facilities and the determination of derivative gains or losses.Deducted in our EBITDA net income for the quarter, our finance expense of $11 million, income tax expense of $16 million and other expenses of $4.7 million. During the third quarter of 2020, net income was generated from income from mining operations of $63 million, offset by derivative losses of $18 million, finance expenses of $13 million and other expenses totaling $3.6 million.Income taxes of $16 million were accrued during the period, which is comprised of current income tax expense of $14.5 million and deferred income tax expense of $1.5 million. Deferred income tax expense relates to the derivative loss in other comprehensive income, as explained -- an explanation of which can be found in the MD&A.Current income tax expense is generated from the net income from -- for tax purposes in Ecuador, relating to the operations at Fruta del Norte. In addition to corporate income taxes in Ecuador, which are levied at a rate of 22%, current income tax expense includes an accrual for the portion of profit sharing payable to the government of Ecuador, which is calculated at the rate of 12% of the estimated net income for tax purposes for the quarter.The employee portion of profit sharing payable calculated at 3% of net income for tax purposes is considered an employee benefit and is included in operating expenses. Together with the results for the first half of the year, the third quarter results confirmed the company's strong financial performance on a year-to-date basis and can be seen on this slide showing key financial [ metrics ], including revenues income and all-in sustaining costs.During the third quarter, Lundin Gold generated EBITDA and adjusted EBITDA of $112.8 million and $113.5 million, respectively. EBITDA is a non-IFRS metric used to better understand the financial performance of the company by computing earnings from business operations without including the effects of its capital structure, taxes or depreciation.Adjusted EBITDA is -- EBITDA excluding items which are considered not indicative underlying business operations and its adjustments are consistent with the adjustment made for adjusted earnings. The EBITDA and adjusted EBITDA generated in the first 9 months of the year was $352.5 million and $327.2 million, respectively.Adjusted earnings exclude specific items that are significant but not relative -- but not reflective of the underlying operating activities of the company. Presently, not need for Lundin Gold, these include derivative gains and losses and related income tax effects. As a result, excluding the derivative loss of $600,000 and related income tax recovery of $1.5 million, adjusted earnings of $58.8 million were realized in the third quarter or $0.25 per share.On the same basis, adjusted earnings achieved in the third quarter of 2020 were $45 million or $0.20 per share.Of note, during the first 9 months of this year, adjusted earnings amounted to $171 million or $0.74 per share. Cash operating costs for the quarter were $650 per ounce of gold sold. Cash operating costs were slightly higher than the previous quarter, mainly due to a decrease in grade process, which is in line with plan. That said, we are also starting to see some pressure on costs due to the persisting worldwide supply disruptions and inflationary pressure in general.To date, this has had little overall impact on our results, but we are monitoring this carefully as time progresses. The higher cash operating costs, together with an increase in sustaining capital expenditures mainly due to the tailings dam second raise, resulting in a higher ASIC in the third quarter compared to the second quarter of 2021.All-in sustaining costs achieved in the third quarter totaled $804 per ounce of gold sold, resulting in an ASIC of $778 per ounce of gold sold for the first 9 months of the year. We calculate these non-IFRS measures based on gold ounces sold. For reference, all-in sustaining cost include operating costs, royalties, corporate social responsibility costs, treatment and refining charges, accretion of restoration provision and sustaining capital, net of silver revenue.We believe that cash flow is now one of the key basis of Lundin Gold's value proposition. Free cash flow is indicative of the company's ability to generate cash from operation. We define free cash flow as cash flow provided by operating activities, less cash used for investment activities and interest paid.During the third quarter, Lundin Gold generated free cash flow of $47 million or $0.20 per share. The total free cash flow generate in the first 9 months of the year was $194 million or $0.84 per share. The company has generated strong free cash flow during 2021, and we expect to continue to do so for the remainder of the year and further into the future based on our production and its guidance and current gold prices.The strong free cash flow will support debt repayments, regional exploration and underground expansion drilling at Fruta del Norte, as well as planned catalog expenditures and future growth. At September 30, 2021, Lundin Gold had cash of $222 million and a working capital balance of $136 million compared to cash of $192 million and a working capital balance of $109 million at the beginning of the quarter.The change in cash during the third quarter of 2021 was primarily due to the cash generated from operating activities of $92 million and proceeds from the exercise of option and anti-dilution right of $2.6 million. This is offset by principal and interest repayments under the loan facilities totaling $40 million and cash outflow of $24.7 million for capital expenditures, including costs for the remaining initial construction activities, the expansion project and sustaining capital.Monthly payments under the stream facility are based on the 7.75% and 100% of gold and silver ounces sold, respectively. Calculated recurrent gold and silver prices at the end of each month, less $404 per ounce, respectively. Stream payments are calculated in new based on final assets from smelters and refinery. Therefore, there is not necessarily a direct correlation between stream repayments and ounces -- and gold ounces produced or sold in a given period, which are based on mine site assays.Quarterly payments under the gold prepay facility are based on current value of 9,775 ounces of gold at the end of each quarter. Scheduled variable quarterly principal repayments of the senior debt facilities will total $24.5 million during the fourth quarter of 2021.The company is working towards achieving construction completion as defined under senior debt facility before the end of 2021. Upon achieving this milestone, additional quarterly principal repayments based on 30% of Fruta del Norte's excess cash flow will commence. The current portion of long-term debt includes an estimate of additional quarterly principal repayments during the next 12 months as a result of reaching completion in 2021.In summary, yet another quarter of strong production, further underpins our expectation of our financial results for the full year. We are generating significant free cash flow and expect to continue to do so in the fourth quarter and for many years to come. A more detailed discussion of our financial results can be found in the MD&A, and I refer you to this document for more information.Now I'd like to turn the call back over to Ron.

[Ronald F. Hochstein, President, CEO & Director]

Thank you, Alessandro. Fruta del Norte continues to perform well, and I'm especially delighted that the throughput expansion project has now been substantially completed safely, on time and on budget. I'd like to take this opportunity to recognize the very significant efforts by all involved in this expansion project, enabling the achievement of this milestone, a vital component of our growth strategy.This high throughput will help to ensure our production profile remains strong for many years to come. I'm also particularly pleased about our continued strong free cash flow generation. In the first 9 months of 2021, we generated $194 million of free cash flow and ended the quarter with a cash balance of $222 million, which supports debt repayments, exploration and planned capital expenditures.The resulting strong treasury will also provide the opportunity to evaluate increased exploration activities, future potential expansion and other growth opportunities. As we move into the fourth quarter, we are already looking ahead to 2022 with a focus on continuous improvement in our operations, increased exploration activity and evaluation of future growth opportunities.As Alessandro alluded to earlier, we believe that one of the elements of Lundin Gold's investment proposition is its free cash flow potential. This free cash flow gives the company flexibility from a capital allocation standpoint and will be used to generate continued shareholder returns, be that in the form of dividends, M&A or organic growth.For quite some time now, I've highlighted that we at Lundin Gold had identified 4 key pillars to drive shareholder value in 2021. One of those is throughput expansion project has now been substantially completed and now we will begin evaluating the merits to increase throughput further.The next pillar is operational excellence. Our guidance for 2021 remains unchanged. And with that, we continue to anticipate achieving gold production in the upper range of our 2021 guidance, while also expecting our 2021 all-in sustaining costs at the low end of guidance of $770 to $830 per ounce sold.We do continue to target areas that can be improved and continue pushing and striving to be better. The company is also continuing with its planned 10,000-meter underground resource expansion program. This program began in the first quarter, and the second rig and started drilling in May. Initial results for this program are expected during the first quarter of next year.And finally, drilling for this year ended at the Barbasco target in the third quarter. In our regional exploration program, which we have increased to 11,000 meters is now focused on the Puente-Princesa target. Initial interpretation of results obtained for Barbasco suggests broad propylitic alteration and narrower zones proximal epithermal alteration intersected. Multiple and narrow low-grade epithermal relating to intersected in the southern part of [indiscernible], and our team will now further analyze results before deciding on our next steps on this target.Drilling continues at Puente-Princesa, and we expect assay results in the first quarter of next year. Fruta del Norte continues to show what a remarkable and world-class asset it is. At current gold prices, we expect to generate significant amounts of free cash flow for years to come. And I'm confident that our strategy is the right one to continue growing, long-term value to all of our stakeholders. Thank you for your continued support.With that, operator, I'll now open the call to questions.

[Operator]

[Operator Instructions] Your first question comes from [ Banu Nadarajah ], CIBC.

[Unknown Analyst]

Congrats on the results for the quarter. So to start off with the sales that raised on track to be completed in Q2 '22. What's the next critical step to push that forward? Is it the contractors being mobilized? And do you guys see any risk in the remaining project time line that to push this further?

[Ronald F. Hochstein, President, CEO & Director]

Yes. Thanks for the question. Yes, you're right. The key thing right now is mobilization of a contractor. We -- they essentially are already stacking and stuffing containers. We have started putting in plants. A lot of the material is being fabricated in Canada that's needed or pulled together.So we are booking or already have some containers moving by land to Houston or Miami versus kind of using both parts so that they're -- we don't have worry about transshipments and we already have sailing spots booked.So we're doing everything we can. But yes, we all know what's going on in the global shipping industry today. And so that is the risk of stabilization, but both teams are doing everything they can to stay on track for that.

[Unknown Analyst]

Okay, perfect. That sounds good. And then the second question is on annual guidance. So you guide to be on the top end of guidance for the year, while FDN output should these guidance by about 10,000 ounces as Q4 would have delivered flat growth quarter-over-quarter, despite average throughput increasing.So we note that grades are supposed to decrease towards reserve levels a 9.5 gram per tonne assumption gets us to the top end of your guidance. Is that aligned with like the step down in grades that you're seeing to date in Q4? Or is there a bit of conservatism for that guidance?

[Ronald F. Hochstein, President, CEO & Director]

No, we always have -- Q4 was always going to be a bit closer to resource reserve grades. And we're a good chunk of the way through the quarter, and that's what we are seeing. So we always knew that Q4 where it's going to be in some different areas with closer to reserve grade. So yes, there's no conservatism in the guidance. We push ourselves, but this is what we expected for Q4.

[Operator]

Your next question comes from David Horton, Global Mining.

[Unknown Analyst]

I've noticed that your mining rates have been above the 4,200 tonnes a day kind of level for the last couple of quarters and in fact, for the last 4 quarters your mining has exceeded your processing rates. So you have a stockpile build there. When you do get to the 4,200 tonnes per day of the mill capacity, would you expect to see the mining rates still to exceed the -- mining rates to exceed the milling rates?

[Alessandro Bitelli, Executive VP & CFO]

Yes. No, yes, the mine has done really well, David. Yes, we do anticipate -- the key is for us to get to self debt raise done. It's -- once we get that self debt rates that opens up a number of areas at depth for us. And as I mentioned a little bit earlier, over the next -- we are -- we already are looking at debottlenecking to see whether we can push a little bit more, both in the plant and the mine. But the key for us is getting that help that raise down to really see what the mine potentially could do.

[Unknown Analyst]

Yes, that's kind of where my thinking was going because with the SVR, I would have imagined that your mining rates could step up even from where we are today. So the whole process would be mill constrained rub and mine constrained. Is that a fair way to look at it?

[Ronald F. Hochstein, President, CEO & Director]

Yes. But even with the expansion when we've seen and what the guys have done in the mill prior to getting the last few pieces of equipment, and we still think we have room to push in the mill as well.

[Unknown Analyst]

Okay. So in our modeling, we're assuming, for instance, without any additional disclosure from you guys, but your mining rates -- mining grades are similar to your milling grades. And that -- given that we have had excess of mining over milling, we're kind of looking at a stockpile that would be over 120,000 tonnes at the moment and 10 to 11 grams. Is that sort of in the right ballpark for where you see the stockpile?

[Ronald F. Hochstein, President, CEO & Director]

Yes, that's pretty well in the right ballpark, yes.

[Operator]

Your next question comes from Don DeMarco, National Bank.

[Don DeMarco, Analyst]

Well, I just wanted to follow up with regard to the mining rates and the potential opportunities for rather the throughput rates and any further optimization opportunities. Do you see visibility to now go beyond 4,200 tonnes per day in the future? And if so, what adjustments or spending might be needed for that? Or are there other optimization opportunities in the processing?

[Ronald F. Hochstein, President, CEO & Director]

Yes. Don, no, that's a good question. We are looking to debottlenecking and based on some of the things we're seeing in the plants and in the mine. Yes, we do think we can further increase tonnage. We're just finishing up the 4,200 the last tie-ins are actually happening today as we speak.But yes, there's opportunity. But let's not forget recovery. We still are not happy. We -- as you've seen, we've seen continued improvement in recovery, but we also think now with the expansion done, and I was at site last week and the team did a very thorough presentation on a number of areas we're looking at to further improve recovery.And so I think there's a double whammy in the process potential -- but also, we still have many things we're working on to improve recovery and continue to keep pushing to get closer to that 90% level, which obviously had increased throughput to quite a few additional ounces to be produced.

[Operator]

Your next question comes from Terrence Ortslan, TSO & Associates.

[Terrence Ortslan]

Quick question. On the vent raise remind me, Ron, is that -- how many years is good enough for the volume and the debt that you're doing before you worry about to going expanding it again the vent raise?

[Ronald F. Hochstein, President, CEO & Director]

This is a onetime thing, Terry. This will give us enough ventilation for the current estimated mine life. And so it's -- right now, we're using in Puente-Princesa. We did put twin line they made the decision for the twin declines. And -- but yes, we're not going to need to expand or deepen this or anything else. We'll handle less of it through internal raises and not what you're all in our budgets.

[Terrence Ortslan]

Okay. Okay. Got it. Second question is that coming back to recoveries, your tails are still running about around the gram, which is some of the mines that are mining somewhere else. Is that chemicals still at the grinding? What exactly do you think the fine tuning going to happen on the recoveries?

[Ronald F. Hochstein, President, CEO & Director]

There's a couple of areas we're really focusing on. Terry -- and you're right, it pains me when I see our daily assays. And where our sales are sometimes much higher than what others are mining. But in this number as we're really focusing on flotation and CIL. And it's a balance of the two. The GFL has turned out to be a little bit more complex to operate. And also, we're seeing a lot more variation in ore types than what we'd anticipated. So it's really focusing on flotation and CIL are the next steps.

[Terrence Ortslan]

They have a target, Ron, I know you talked about it before, but would we target that you think it's feasible, possible, probable? Is that 92%, 94% with the recovery eventually?

[Ronald F. Hochstein, President, CEO & Director]

No, what we have based on the original feasibility study was just right around 92%. So that's what we're obviously continuing to push for. Realistically, I think what we should be targeting based on what we're seeing in the variability in the ore now that we see that was not anticipated is, I would say, we continue to push to 90%, 91%.

[Terrence Ortslan]

Okay. Just going back to the exploration, Ron. The -- a few years ago, there was also epithermal discovery and the Emperador, if my memory is correct, what happened to that in the exploration budget and the sequence?

[Ronald F. Hochstein, President, CEO & Director]

I'm not sure the discovery because -- did you say [indiscernible] discovery?

[Terrence Ortslan]

Emperador, Emperador.

[Ronald F. Hochstein, President, CEO & Director]

Yes. No, we're the only ones who have done drilling there. We're the only ones that have done drilling other than out of Fruta del Norte, really in our Kinross, Kinross are getting ready to do some drilling, but then they pulled out. And so we have done surface work and everything. And essentially, Barbasco and Puente-Princesa are on sort of the Emperador concessions now, Terry. So it's all the same area we're working on, and we're very encouraged by both Barbasco but even more so on what we're seeing at Puente-Princesa.

[Terrence Ortslan]

Okay. And that was -- you remember jackpot, we talked about a few years ago as well. What's the update on that on the exploration presentation a couple of years ago on Newcrest?

[Ronald F. Hochstein, President, CEO & Director]

Sorry, which? With Newcrest?

[Terrence Ortslan]

Yes.

[Ronald F. Hochstein, President, CEO & Director]

Yes, that's -- yes, we're -- Newcrest is farming in on 8 concessions. This was part of the original agreement back in 2018. And actually, they are mobilizing to start drilling on 2 concessions, which are north of the Mirador mining, about 30-plus kilometers north of Fruta del Norte. They're mobilizing and anticipate start to drilling this quarter.

[Terrence Ortslan]

Okay. A lot of activity here. That's good. I think my notes here. Yes, treatment and refining charges, any changes we should expect to CRC for next year?

[Ronald F. Hochstein, President, CEO & Director]

No. We -- the majority it's under a long-term contract, Terry. The issue we are seeing is freight, particularly to Europe. We're not seeing any increase in freight to Asia. So yes, it's transport issues not to treatment refining charges just transport.

[Operator]

Your next question comes from Kerry Smith, Haywood.

[Kerry Smith, VP, Director & Senior Mining Analyst]

Ron, if I got this correct, you got -- you've added a couple of thousand meters to the drill program at Puente-Princesa. So that's another couple of holes. And then is there also another couple of holes that you'll plan to drill at Barbasco in the New Year, I guess, to get you up to that 12,000 meters?

[Ronald F. Hochstein, President, CEO & Director]

Well, the original was 9,000 meters, Kerry. And yes, we've added a couple of holes at Puente-Princesa, which we anticipate getting done this year. The 2022 program, we're just that's all been put together. We're presenting that to the Board in a couple of weeks. And we are looking at a larger program, and it will be on focusing on Puente-Princesa and Barbasco further plus some other targets that we're looking at. So yes, we'll keep -- essentially, what we're doing to Kerry is keeping the 2 rigs going and then we're going to -- we're looking at expanding the program for next year.

[Kerry Smith, VP, Director & Senior Mining Analyst]

Okay. Okay. And Alessandro talked a little bit about the cost inflation. Are you seeing that across the board for all your consumables, I guess, diesel and all the reagents and your steel consumption? Or is it in any one particular area that you're starting to see a bit of pressure?

[Alessandro Bitelli, Executive VP & CFO]

It's really across the board, steel, drill strings, all that sort of thing and some reagents, not to -- not a little bit on fuel, but not a lot. Nothing on wages. Wages still -- our inflation rate here in Ecuador is less than 1%. So wage inflation and things like that, we're not seeing anything. So we won't see on the imports. And then the other area we're seeing significant increases, which we just -- I mentioned to Terry is transport cost tariff for concentrate to Europe and Canada.

[Kerry Smith, VP, Director & Senior Mining Analyst]

And to Canada, okay. Okay. And then just on the realized gold price, the $17.69 at least a help a little bit lower on the average. I guess that was just timing of sales, was it?

[Ronald F. Hochstein, President, CEO & Director]

Alessandro, do you want to take that one?

[Alessandro Bitelli, Executive VP & CFO]

The average gold price is really driven by our offtake agreements and as well as the final settlement under the long-term contract for concentrate and the variation in the gold price between time of sale and the final settlement sometimes 4 to 5 months and variation gold price will affect the average gold price in a given quarter.Under the offtake, we are subject to a quotational period, and that sometimes depending on the volatility of the gold price doing that -- the quotational period might affect a little bit the gold price some. And so we see those elements coming into the statistic.

[Kerry Smith, VP, Director & Senior Mining Analyst]

Okay. So the QP is sort of 4 to 5 month's and that's -- really just the impact of the timing of that provisional pricing versus fund settlement then? Okay. Got you.

[Ronald F. Hochstein, President, CEO & Director]

Right. Correct.

[Operator]

[Operator Instructions] Your next question comes from Arun Lamba, TD Securities.

[Arun Lamba, Associate]

Ron, just following up on Terry, it sounds like you guys are going to increase your exploration program, and that could be another significant catalyst for you guys. But just want to hear kind of your thoughts on how much you're thinking about M&A? And obviously, you can't talk about you being acquired, but how active are you on trying to diversify from -- being a single asset previously given you fully ramped up, you've pretty much done the expansion? Are you thinking about doing more M&A? Or are you focused on the exploration and kind of pushing the mill further?

[Ronald F. Hochstein, President, CEO & Director]

Good question, answer all of the above. We talked about our pillars of shareholder value. So organic growth is one of them. So yes, we might keep pushing the mine and mill further. And again, I can't focus enough recovery. A 1% recovery, especially in our all-in sustaining costs, I guess the significant add to our cash flow generation.What we're seeing at Puente-Princesa here and Barbasco just make us more excited now that we've actually got drill holes into this regional exploration. So that's there. M&A, it's something that we hadn't really been focused on. We are focusing more on it now. We've got to be selective though. We can't go for the sake of just adding ounces that I think a lot of CEOs talk about that in this industry now. We have to be selective. And yes, we are looking at it, and we're looking for opportunities for sure.

[Arun Lamba, Associate]

Great. And just, this is an accounting question. I know [indiscernible] don't ask, but just with the amount of free cash flow you're generating taxes are starting to become some payments now. should we expect tax payment quarterly? Or is it going to be kind of the accrued and then they get kind of all paid in Q1? What's the way to think about kind of the majority of the tax? I know some of it spread out, but thinking does it get accrued pay, call in Q1 in the next year or every quarter should we expect something?

[Alessandro Bitelli, Executive VP & CFO]

The -- if I can answer that question, in Ecuador, taxes are paid once a year. They are paid around the end of the first quarter of the year for the previous year upon filing of tax return. And therefore, we accrued throughout the year, both the income taxes as well as the profit sharing and they get settled that one time of the year.

[Operator]

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

[Ronald F. Hochstein, President, CEO & Director]

Thank you, Michelle, and thank you, everyone, for attending the call. And we look forward to announcing further catalysts on exploration potential and obviously, our 2022 guidance and some longer-term guidance, which we will be starting to issue here soon. So thank you, everybody, again, and have a great day. Be safe. Thank you.

[Operator]

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