Fortuna Mining (Ticker: FM) reported strong financial and operational results in its Q3 2024 earnings call, with record sales reaching $275 million, potentially exceeding $1 billion in annual sales. The company's earnings of $50.5 million, or $0.16 per share, outperformed analyst expectations, supported by an average realized gold price of $2,490 per ounce.
The EBITDA margin stood at 48%, amounting to $131 million, with a robust free cash flow from operations totaling $56 million. Fortuna Mining's strategic capital projects and exploration investments, along with a strong balance sheet, signal continued focus on maximizing shareholder value.
Key Takeaways
- Fortuna Mining's Q3 2024 earnings surpassed expectations with record sales and a strong EBITDA margin.
- The average realized gold price contributed significantly to the company's profitability.
- Operational performance, particularly in West African operations, was robust, with low cash costs.
- Capital projects and exploration investments are on track, with the Lindero leach pad expansion and increased drilling at Seguela's deposits.
- The company plans for mine closure activities at San Jose mine, with an updated closure cost estimate expected by late Q4 2023.
Company Outlook
- Fortuna Mining is on schedule to exceed $1 billion in sales for the year.
- The company maintains a net cash position with a low debt-to-EBITDA ratio of 0.2x.
- Progressive mine closure at the San Jose mine is set to initiate in Q1 2025, with closure costs between $15 million and $20 million.
Bearish Highlights
- VAT recovery delays in Burkina Faso are negatively impacting cash flow, with accumulated amounts expected to reach $40 million to $50 million by year-end.
- Closure costs for the San Jose mine are anticipated to exceed the previously accrued $90 million.
Bullish Highlights
- Lindero leach pad expansion is operational, with remaining CapEx of $10 million to $15 million expected in Q4.
- The company's West African operations, especially Yaramoko and Seguela, showed strong production and low cash costs.
- Exploration budget increased to $44 million to support drilling at Seguela's Kingfisher (LON:KGF) and Sunbird deposits.
Misses
- Cash costs per gold equivalent ounce rose to $1,069 but remained within the annual guidance.
Q&A Highlights
- Discussions are ongoing about accounting for residual mining income at San Jose and its potential inclusion in 2025 guidance.
- Exploration spending is primarily focused on the Diamba project, with $13 million allocated for 2024.
- Management is discretionarily managing share repurchases under the normal course issuer bid (NCIB) based on market opportunities.
Fortuna Mining's Q3 2024 earnings call presented a picture of a company that is not only weathering the challenges of the mining industry but also capitalizing on its operational strengths. With increased exploration budgets and strategic capital investments, the company is positioning itself for sustainable growth. Despite facing headwinds like VAT collection delays, Fortuna Mining's management remains committed to operational excellence and prudent financial management, as reflected in their approach to mine closures and share repurchases. Investors and stakeholders can anticipate further updates on the company's closure plans and financial strategies in the coming quarter.
InvestingPro Insights
Fortuna Mining's strong Q3 2024 performance is further supported by data from InvestingPro. The company's revenue growth of 38.19% over the last twelve months as of Q3 2024 aligns with the record sales reported in the earnings call. This robust growth is complemented by an impressive EBITDA growth of 60.41% over the same period, underscoring the company's operational efficiency.
InvestingPro Tips highlight that Fortuna Mining is trading at a low P/E ratio relative to its near-term earnings growth, with a PEG ratio of 0.49. This suggests that the stock may be undervalued considering its growth prospects. Additionally, the company's valuation implies a strong free cash flow yield, which is consistent with the $56 million free cash flow from operations reported in Q3.
The company's profitability is further emphasized by an InvestingPro Tip indicating that analysts predict Fortuna Mining will be profitable this year. This aligns with the company's strong Q3 earnings and the expectation to exceed $1 billion in annual sales.
It's worth noting that Fortuna Mining operates with a moderate level of debt, as pointed out by another InvestingPro Tip. This is reflected in the low debt-to-EBITDA ratio of 0.2x mentioned in the earnings call, positioning the company well for future growth and capital investments.
For investors seeking more comprehensive insights, InvestingPro offers 11 additional tips for Fortuna Mining, providing a deeper analysis of the company's financial health and market position.
Full transcript - Fortuna Mining Corp (FSM) Q3 2024:
Operator: Greetings. Welcome to Fortuna Mining's Q3 2024 Financial and Operation Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Carlos Baca, Vice President of Investor Relations. Carlos, you may begin.
Carlos Baca: Thank you, Paul. Good morning, ladies and gentlemen. I would like to welcome you to Fortuna Mining's third 2024 financial and operational results conference call. Hosting the call today on behalf of the company will be Jorge Alberto Ganoza, President and Chief Executive Officer; Luis D. Ganoza, Chief Financial Officer; David Whittle; Chief Operating Officer, West Africa. Today's earnings call presentation is available on our website. As a reminder, statements made during this call are subject to the reader advisories included in yesterday's news release, the earnings call webcast presentation, MD&A and the risk factors in our annual information form. Financial figures contained in the presentation and discussed in today's call are presented in U.S. dollars unless otherwise stated. Technical information in the presentation has been reviewed and approved by Eric Chapman, Fortuna Senior Vice President of Technical Services and qualified person. I would now like to turn the call over to Jorge Alberto Ganoza, President, Chief Executive Officer and Co-Founder of Fortuna.
Jorge Alberto Ganoza: Thank you, Carlos. Q3 performance demonstrates the strength of our business. We remain focused on delivering value to our shareholders through our strategic investments, operational excellence, unlocking geologic potential of our properties and responsible mining practices. Fortuna has -- had a record quarter on several key financial metrics starting with record sales of $275 million and we're tracking to generate sales of over $1 billion this year. We benefited from incrementally higher gold prices, selling at an average realized price of $2,490 per ounce compared to $2,330 in the second quarter and $2,080 in the first quarter. We recorded earnings of $50.5 million and earnings per share of $0.16 well ahead of analysts' consensus of $0.11. Our EBITDA was a strong $131 million, representing a 48% margin over sales, which is an increase from 43% in the second quarter 42% in the first quarter. Our free cash flow from ongoing operations was a strong $56 million compared to $38 million in the second quarter. We remain disciplined with our costs, achieving a cash cost of $10.59 per gold equivalent ounce in the quarter and $9.77 for the 9 months. We're well-aligned to meet our guidance for the year of $935 to $1,055 that's our range for guidance. Throughout the mine portfolio, we're not experiencing significant inflationary pressures on labor services or consumables against our annual budget. Our West African operations, Yaramoko and Seguela are driving performance and tracking on the low end of cost guidance. In Argentina, Lindero is about 10% above guidance for the year due to lagging currency evaluation against inflation. Our capital projects are also tracking well against guidance. Under the concept of sustaining capital at our mines, we have a global budget figure for the year of $130 million. For the 9 months, we have executed $98 million or 75% of the annual budget. Currently, all our mines remain within their capital execution plans and are expected to finish the year within budget range with the only exception of the Yaramoko mine, which is accelerating 2025 underground development in the second half of this year with an additional capital budget of $11 million. This unbudgeted development is bringing new mineralized zones identified throughout 2024 into the 2025 mine plan. Additionally, our largest sustaining capital project in 2024 is the Lindero leach pad expansion with a budget of $42 million. The project remains on time and on budget. We started placing ore on the leach pad in mid-October and the project is scheduled for completion with final demobilization of contractors taking place in January February of next year. I remind you that in 2024 this project alone represents approximately $400 in the Lindero AISC and $90 in our consolidated AISC. This project once completed serves the mine for a decade. Our ASIC for the quarter 9 months were $1,695 and $1,618 respectively. AISC is tracking on the upper end of the guidance range for the year driven by the aforementioned increase in underground development to access new resources at the Yaramoko mine and the higher costs at Lindero resulting from the lagging peso devaluation against inflation. Regarding exploration, we have increased our 2024 global budget from the origin of $37 million to the current $44 million in order to expand our drill program at the Seguela Mine's Kingfisher discovery made earlier this year and also continue extending deeper mineralization at the Sunbird deposit in support of an underground mine plan. Our aim remains to produce an updated resource estimate for Seguela before the end of the year, encompassing new mineral deposits and extensions such as Kingfisher, Boulder, and Sunbird. With respect to the San Jose mine, after 13 years of operations, we have made a decision to initiate a progressive mine closure starting in Q1 2025. Our project team is expected to deliver the final closure plan and budget in the fourth quarter of this year, which considers closure and monitoring activities over an 8 year period. Closure activities will be concurrent with continued mining and processing at a reduced rate of under 1,000 tons per day for approximately the initial 18-months starting next year. Management expects cash flow from continued operations during 2025 and half of 2026 will offset closure costs currently provisioned at around $15 million to $20 million but expected to increase as a result of the updated feasibility level closure plan being developed. With respect to our capital allocation priorities, first, we have achieved the set objective of putting together a fortress balance sheet after a capital intensive few years here at the company. We recorded a net cash position this quarter and reduced and restructured our credit lines providing for liquidity of about $350 million, maintaining our debt-to-EBITDA ratio under a low 0.2x and reducing quarter financial costs year-over-year comparison by about $3 million. Second, priority, we continue investing record annual amounts to unlock the geologic potential and value of our properties. We're focused on high value opportunities in our portfolio at the Seguela mine, the Diamba Sud Project in Senegal and the Lindero mine in Argentina. With that, thank you for your continued support. I'll now let David Whittle provide us with an update on West African operations.
David Whittle: Thanks, Jorge. I'm pleased to report on the strong operational performance and significant milestones achieved by our West African operations during the third quarter of 2024. Both mines exceeded their planned production targets and again reported zero lost time injuries for the quarter. Seguela and Yaramoko had a successful Q3 regarding production, combining for 63,004 ounces of gold for the quarter and 189,168 ounces for the first 3 quarters of 2024. The power interruptions experienced by both Yaramoko and Seguela did not extend into the Q3, which enabled both mines to surpass their production targets for the quarter. In the Q3, Seguela mined 484,000 tons of ore at an average gold grade of 2.48 grams per ton and 2.9 million tons of waste, achieving a strip ratio of 6.1:1. The processing plant treated 418,000 tons at an average grade of 2.69 grams per ton, producing 34,998 ounces of gold for the quarter and totaled 102,537 ounces for the first 9 months of 2024. The increased run time due to the additional power availability of the processing plant allowed for the processing of additional lower grade ore when compared to previous quarters. Plant throughput averaged 210 tons per hour for the quarter with a peak of 216 tons per hour averaged in September. Initiatives have started in order to further optimize the processing plants performance. The increased throughput at Seguela has necessitated the advancement of preparations for the next lift of the tailing storage facility. The design for the next lift has been completed, which when constructed will see sufficient tailing storage capacity until mid-2029 at the planned throughput rates. Contract quotations have been received and construction activities are expected to commence in the Q4. In the Q3, Seguela experienced full power availability from the National Grid (LON:NG). Backup power generating capacity is now installed on-site to mitigate any further power supply issues and work is scheduled to commence on the construction of the solar power plant in the Q4. Mining activities at Seguela continue to be focused on the Antenna, Ancien and Koula pits with mining at each of the 3 pits being in line with the mine plan. Continued exploration success combined with the processing plant optimizations providing exciting opportunities for the Seguela mine to surpass previously expected annual production targets and 2025 will see us bring forward a number of capital initiatives to exploit these opportunities. Extensive drilling is continuing at the Kingfisher deposit and Sunbird underground project. It is expected that a maiden resource for the Kingfisher deposit will be produced by year-end. Drilling at the Sunbird underground project is producing good results and mining feasibility work is progressing well. Both deposits have the potential to be core production deposits for a number of years at Seguela. In addition, an initial scoping study is currently being conducted with regards to underground mining opportunities at the Ancien pit, whilst further drilling continues within the lease on some of the many identified exploration targets. The continued strong production performance at Seguela resulted in a cash cost of $6.55 per ounce and an AISC of $11.76 per ounce of gold. Seguela remains ahead of schedule year-to-date and is on track to achieve annual production guidance of between 126,000 and 138,000 ounces. At Yaramoko, 102,000 tons were mined at an average grade of 7.75 grams per ton for 25,589 ounces of gold. The processing plant treated 124,000 tons with an average grade of 6.71 grams per ton producing 28,006 ounces of gold in line with the mine plan and totaling 86,631 ounces for the 3 quarters of 2024. Following the seismic event in the Q2, mining schedules at the Zone 55 orebody were reassessed to mitigate the effects of future seismic events. This review and subsequent re-sequencing of mining activities reduced the availability of the higher grade stopes during the Q3, leading to the slightly lower production when compared to the Q2. As a result of this review, Fortuna has been able to optimize the development layout of the mine and reduce future development requirements. As such, it is now expected that development operations will cease at the Zone 55 orebody late in the Q4 with only stoping activities occurring in 2025 and beyond. Mining operations at QVP orebody continued in line with the mine plan. Recent drilling is indicating the potential for the extension of mining further along strike to the east and development will commence to test those extensions in the Q4. Yaramoko's strong production during the quarter resulted in a cash cost of $9.74 and an AISC of $13.73 per ounce of gold and remains on track to achieve its production guidance of 105,000 to 190,000 ounces of gold. At the Diamba Sud Project in Senegal, drilling will recommence in the Q4 now that the wet season is over. A resource update is currently being prepared based on the drilling to date. Geotechnical, hydrological, environmental and other studies are continuing in order to be able to produce a PEA in 2025. Our West African operations have demonstrated resilience and strong performance. We remain focused on optimizing production, advancing our exploration opportunities, whilst maintaining our commitment to safety and operational excellence. Back to you, Jorge.
Jorge Alberto Ganoza: Thank you, David. Luis will now take us through the highlights of our financials report.
Luis D. Ganoza: Thank you. Attributable net income to Fortuna shareholders for the quarter was $50.5 million or $0.16 per share. This compares to 13% in the prior quarter and $0.09 in Q3 of 2023. Our strong financial performance in the quarter was a result as Jorge emphasized of record high metal prices and cost per ounce aligned with our guidance for the year. Our cash cost per gold equivalent ounce was $1,069 higher than the last 2 quarters, but still within our annual forecast. When compared to the same quarter in 2023, cost per ounce was higher by $2.44 mostly as a result of higher costs at Seguela and Yaramoko and with a lesser impact at San Jose. In the case of Seguela, costs are higher due to the low cost production in Q3 of the previous year related to low stripping ratios and higher initial head rates. A few comments on the income statement. Depreciation and depletion in the quarter was $59 million, which includes $16.8 million in depletion of the purchase price related to the acquisition of Roxgold in 2021. On the general and administration line item, expenses were $16 million and as shown in the breakdown we provide in Page 11 of our MD&A and in the news release, this was comprised of $9.9 million of in country G&A at our mining operations, $3.96 million of corporate G&A and $2.2 million of share-based compensation. We recorded investment gains of $3.2 million for the quarter from cross-border Argentine peso denominated bond rates and $8.3 million year to date. This is a benefit granted to exporters by the Argentine government whereby 20% of export proceeds is allowed to be converted into pesos at a preferential exchange rate. We saw a $2 million reduction in interest and finance cost this quarter contributing to our overall cost efficiency. As shown in Note 21 of the financials, the actual interest expense charge was $3 million below the prior year reflecting lower debt balances and lower cost of financing year-over-year. Our effective tax rate was 21% for the quarter and 22% year to date. The 9 month period is distorted by the $12 million deferred tax recovery related to the convertible note offering closed in Q2. Excluding this effect and quarterly variability from foreign exchange, at current metal prices, we expect our effective tax rate to be in the 28% to 30% range and our current tax rate to be in the 32% to 35% range. Moving on to our cash flow, we generated $92.9 million of net cash provided by operating activities, which includes $26.4 million of negative changes in working capital. The bulk of this negative change is related to timing of accounts receivable. As we have disclosed before, we have been experiencing challenges in the collection of VAT at our Yaramoko operations in Burkina Faso and anticipate this might continue to be a challenge moving forward. VAT receivables at Yaramoko increased $2.6 million in Q3 and $12 million year to date. In the investing section of our casual statement, we recorded $50.2 million under additions to property, plant and equipment consisting of approximately $38 million of sustaining capital including brownfields exploration and $12 million of non-sustaining capital expenses. Year to date, we have recorded additions to property, plant and equipment of $141.9 million consisting of $103 million of sustaining capital and around $39 million of non-sustaining capital. This includes $19 million in exploration, $11.4 million in Diamba Sud and $6.5 million repurchase of the Seguela NSR back at the beginning of the year. For Q4, we expect to see similar levels of CapEx as in Q3 mostly related to leach pad expansion at Lindero. Our free cash flow from ongoing operations was $56.6 million. This is after corporate expenses, interest and all sustaining capital expenditures. Our net free cash flow after all capital expenditures was $44 million. Moving on to the balance sheet, we closed the quarter with a cash position of $181 million and total liquidity of $431 million including the full and run amount of our $250 million revolving credit facility. Subsequent to the end of the quarter, we have amended the credit facility to reflect a stronger balance sheet position coming out of the convertible note offering in the Q2. The amendment includes a resizing of the facility from $250 million to $150 million. Additionally, the prior facility carried an accordion feature of $50 million which has been increased to $75 million. We have also achieved improvements in the pricing REIT and covenant terms. In summary, this has allowed us to reduce our cost of capital and provided us with added financial flexibility. Back to you Jorge.
Jorge Alberto Ganoza: Thank you, Carlos. I would like sorry -- we would now like to open the call to any questions that you may have. Please Paul, if you can prompt the audience.
Operator: [Operator Instructions] And the first question today is coming from Don DeMarco from National Bank Financial.
Don DeMarco: Thank you, operator, and good morning, Jorge and team. Congratulations on the strong quarter. So first question, Jorge, I'm just reading in the MD&A that at Lindero, the company may be required to temporarily repatriate U.S. dollars into Argentina and convert them into Argentine pesos. Can you just give us a sense of what maybe quantify the financial implications of this?
Jorge Alberto Ganoza: So what we -- where we're disclosing is that in the next few quarters, what we expect to see in Argentina is a shift from what we have been seeing up to now, where we have been able to repatriate cash surpluses from Lindero, through intercompany financing arrangement we had in place that has been exhausted by now. And we will find ourselves in the situation most exporters are in today. Any cash surpluses will have to be either kept in country or we'll be looking into different alternatives as to how to manage that exposure. All cash surpluses are kept in local currency in pesos in country, right? So we are going to only start accumulating cash locally towards year-end. It will build up at current prices over the course of 2025, and we're looking to different alternatives as to manage that exposure. That's the best we can say at this stage.
Luis D. Ganoza: And this is subject of course to the current FX restrictions in country. The government has consistently been signaling lifting of those restrictions, but have not provided a date. As we know Mr. Miele is very pro-market President trying to promote investment into the country and the removal of those FX controls is central to that. So I mean, he indicates his priority with lifting those FX controls is a priority, but he has not provided a date. For that, we believe the country is tracking in the right direction, but we still need to see that those some of those milestones. There are some positive signs there. The gap between the official rate and the parallel rate in the street has significantly narrowed. Country risk is coming down. But again positive signs, but we're not we are still subject in the country, the country is still subject to those FX restrictions, right.
Don DeMarco: Okay. And do you have any opportunities to invest either at Lindero or in Argentina?
Jorge Alberto Ganoza: Yes, absolutely. We well, one, we've been expanding our leach pad for the next decade that has been a $42 million project that sets the mine as I said for a very long time for the life of reserves we currently have. And we have other opportunities in the Arizaro porphyry, in other properties in South, if that were to be the case. But we're looking at options. I think it's still very dynamic. We are in a different situation than about a year ago with respect to the government. The previous government for the previous government removal of those FX controls was not a matter of discussion. For this government it is a priority. So now when it happens is something we're all looking and watching carefully right, anxiously.
Don DeMarco: Okay. Thanks for that. Then just one more question on the mining codes in the proposed changes to mining codes in Côte and Burkina Faso. Have you been in touch with the government or have any dialogue with the government or have a sense of what the potential implications of these changes might be on either Yaramoko or Seguela or separately, the Diamba Sud?
Jorge Alberto Ganoza: Yes. The answer is we are in a very close and sometimes intense dialogue with both governments on the matter at a company level and also through the mining chambers that are quite active in both countries. And with respect to the changes recently enacted in Burkina Faso, they really do not impact us. Today we do not see an impact to our business. And with respect to Cote d’Ivoire, there is a different process being driven. I believe the authorities are doing the right thing. There is a draft, a new mining code being circulated and properly consulted with industry. And that's what's taking place right now and we see that as positive. And I would say if I have to characterize it the process in Cote d’Ivoire has been far more orderly than what we've seen in Burkina Faso. But yes, we're very engaged and right now we don't see any dramatic change to our business in Cote d’Ivoire or Burkina Faso as an outcome of these changes.
Don DeMarco: Okay. Thank you for that. That's all for me. Good luck with Q4.
Operator: The next question will be from John Pereira. John is a Private Investor.
Unidentified Analyst: Yes. Thank you. And Jorge, yes, congratulations on a good quarter to the team. From the last call, you reported that the leach pad, and I think you just mentioned that was a $42 million project, correct me if I'm wrong. Was you expecting to complete the CapEx spend on that during Q3? And I think I heard earlier that, that was going to extend into January of 2025. Can you just elaborate on what's still left to complete, not the details of the project, but in terms of the spend here in Q4 and so how much more is left on that CapEx spend?
Jorge Alberto Ganoza: Okay. Thank you for the question. The leach pad has a couple of key components. One is the availability of that real estate for placing ore for leaching, right? So that has been met even ahead of time in early mid-October, right. So we are the leach pad has been turned to operations and the leach pad has been turned to operations and we're placing on the leach pad, right? The second one is there are some ancillary activities that don't impact the continued operations of the expanded leach pad that will drag on until early 2025 and conclude with the mobilization activities of the contractor and whatnot in January perhaps spending into February. But the key thing is that the leach pad is operational. With respect to the leach pad amount that we might see still coming into 2024.
David Whittle: Not in an isolated manner for the leach pad. We can the -- what we can say is that part of the payments expect in Q3 associated to the leach pad have are rolling into Q4. As Jorge mentioned, the project for all material purposes is on track. It's a matter of timing of payments mostly and the leach pad exclusively might be in the range of $10 million to $15 million right in Q4. The expectation that we had provided before with respect to a bit of the spend taking place in January hasn't changed for any significant purposes.
Luis D. Ganoza: Yes, it's about $10 million what we might see coming into Q4 in the range of $10 million
Unidentified Analyst: Okay. Yes, so if you had $38 million of sustaining capital in Q3, are you expecting any upward surprises then in sustaining capital here in Q4? Or are you expecting then that the sustaining capital cost should start to diminish as time goes on because essentially this project is completing?
Luis D. Ganoza: Yes, that is the case. That is the case. As I said, we'll see a bit of spillover into 2025, a few a couple of million something in the range of $4 million, $5 million and then something in the range of $8 million still attached to these final activities of the leach spread in Q4.
Unidentified Analyst: Yes. Just trying to get a sense for the cash flow number, overall cash flow number and net cash flow. But anyway, just a second question, a follow-up on Burkina Faso. You mentioned in terms of the government noise about the licenses, it's really not going to affect, Fortuna. And I think the understanding from the news release you put out on it was that those were just their impact would be just on new mines and new licenses being issued going forward. Is that kind of the sense that you're getting from the government?
Jorge Alberto Ganoza: So I believe you're referring to unfortunate statement made by the President of Burkina Faso, Captain Traore some weeks ago, is that what you're referring to?
Unidentified Analyst: Yes, that's correct.
Jorge Alberto Ganoza: Yes. He was misquoted really. What he was saying in that statement is that companies that do not comply with the new mining code they could be subject to a cancellation of their licenses. And I think that as a general statement is something we're all subject to in many jurisdictions all the time. If you don't comply with the law well you're subject to cancellation of your concessions. But I believe that statement was caught by Reuters and put out there without much context. We do not see as I restate any vacation to our business from the new mining code or any actions that the government could take or not. I think the government of Burkina Faso is spite of all the challenges the country is going through on security, humanitarian crisis and political instability is quite receptive to the foreign mining companies in country, right. If we -- if I need dialogue with the Ministry of Finance he is available. With the Ministry of Mines, he is available. With the Head of National Security, he is available. So all of that is going well.
Unidentified Analyst: Okay. Yes. And then there was another statement that was made earlier about the recovery of it was at a VAT, I didn't quite understand. And is that in Burkina Faso? Can you just elaborate on what that was?
Jorge Alberto Ganoza: Yes. All companies are struggling to get the VAT recovery in Burkina Faso. That is not an inconsequential amount of money that's building up on VAT for us towards the end of the year is a figure in the amount of $40 million to $50 million. The government of Burkina Faso I would say up to a year ago has been quite diligent in providing returns on VAT, but that has stopped. As I said the country is going through all sorts of crisis not only security humanitarian, financial crisis as well. So we did receive an advance on VAT within the last 3, 4 months about $1.5 million but it's trickling down, right. It's coming slowly and it's building up right particularly at these prices.
Unidentified Analyst: So when you're reporting your cash flow numbers, are you accruing for these VAT numbers that are they included and they're accrued or they are just not included in the cash flow number because you haven't recovered it yet?
Jorge Alberto Ganoza: It is included as a negative change in working capital, right. So when we talk about free cash flow, it is considering the fact that we're seeing those delays in collecting VAT.
Unidentified Analyst: So was that part of the $25 million in receivables that was referenced, is that VAT and that which reduced the --
Jorge Alberto Ganoza: Yes, that's correct.
Unidentified Analyst: Okay, okay, good. All right. So it did so it's not you're not including it in your cash flow. It's affecting your cash flows. Well, that will come through whenever that comes through and be built into the cash flow at that time?
Jorge Alberto Ganoza: That is correct, yes.
Unidentified Analyst: Okay. And then the last question, I'm sorry it's taking up so much time, but the last question with respect to San Jose, we didn't see any further drill results on San Jose, but I guess I'm going to assume that there is nothing meaningful that would allow the company to make the decision to continue to run the mine, a combination of higher silver prices and a new find. Has the company looked at potentially selling that mine versus, obviously, sustaining the closing costs that you're going to have to absorb over the next months or years?
Jorge Alberto Ganoza: With respect to the first part of the question, we have stopped exploration at this stage. And as I stated during the call, we are planning to carry a mining at least for 18-months because the mine although it is exhausting the reserves we estimated a year ago still has resources, right. The discovery of the ESC vein and resources at the Victoria vein and other portions of the mine. So yes, we are updating those resources based on not only the current prices but also the current exchange rate which has moved in our favor. Current peso to the dollar is at around 20 when a year ago was closer to 16, right. So all of those things do have an impact. But the way we see it is just residual mining, right? We are always considering strategic options now for the asset. Yes, but independent of those that might come or not we have a base case which is the progressive closure.
Unidentified Analyst: Okay. So the current dry, you're calling it a progressive closure, so you continue to mine on a reduced rate to help absorb --
Jorge Alberto Ganoza: It can be launched pretty much. So we will we're winding down operations. We have a this year already we executed a significant reduction in workforce and concurrent with mining activities in 2025 and into 2026 that will be taking place at a reduced rate. We will be conducting also closure activities of ancillary facilities. We have 2 tailings disposal facilities. We have a dry stack facility and a conventional tailings facility. We will be starting the work to close the one of those. So concurrent with the production at a smaller rate there are a lot of activities that we can initiate. And at the same time as I'd say we keep the strategic options open, right. There are still remaining resources and exploration opportunities in a bigger property package that we have decided for strategic reasons not to pursue.
Unidentified Analyst: Okay. Yes. And then the last point is I think the -- I read the expectation is that the ongoing reduced mining operation will should cover costs. So you're expecting that that mine is not going to be a cash drain. It's going to continue to at least breakeven during that 18-months period?
Jorge Alberto Ganoza: We are doing a trade-off between a complete halt of production and just carrying the closure cost, which is a project, right? A closure is a project. So you will be carrying a project that will be intensive in the initial 24, 36 months and then goes into more of a monitoring phase, right? So we trade-off a complete health of operations versus that option where the alternative is where we can continue doing some residual mining, generate some positive cash flows that help offset some of those costs that we will be incurring anyhow, right, those project costs if you will. So in our estimate today, we see a benefit, an economic benefit of continuing with that residual mining, while we concurrently do closure activities starting with ancillary facility, right.
Unidentified Analyst: Okay. And then you had accrued for the mining closure costs, I think it was $90 million several quarters ago. So the effect wouldn't there would not be an effect on the net earnings number, just an effect on potentially effect on the cash flow number. Do you believe that what's been accrued on the balance sheet should will be adequate at this point?
Jorge Alberto Ganoza: We are updating we are currently, as I stated during the call, updating a feasibility level closure plan. And I -- we anticipate that as an outcome of that with more basic detailed engineering on some of the closure activities that figure will increase, right? So the final study will be complete this Q4 probably end of November, sometime in December we should have the final numbers. But we can anticipate that that provision will likely increase, right?
Luis D. Ganoza: To be precise the numbers in the balance sheet for direct closure costs are in the $10 million range. The provision we carry in the balance sheet plus end of last year we took a provision, a charge for $6 million of severance costs severance costs, I'm sorry, of which around $2.5 million have been spent. So that is the amount that's currently in the balance sheet, something in the range of $14 million. Yes.
Jorge Alberto Ganoza: We anticipate that number will increase, right.
Operator: And the next question will be from Adrian Pay from Adrian Pay Asset Management.
Adrian Pay: Yes, good morning. Excuse me, I had 2 questions, if I may. Sorry, one just quick follow-up, if I may. I'm sorry about this on San Jose. So does the residual mining get does the cost of residual mining continue to show up as a cash cost of mining? And does it get included in your all in sustaining costs? I'm obviously asking because with the lower production, those costs are going to go way up and it's going to affect your company wide costs or does it just count as a sorry, go on.
David Whittle: No, no, that's a very good topical question for us right now and that's something we're looking into as we speak, Adrian. What would be the more adequate way to account for that income, right? The way we see it technically is we have a closure project that's generating some income. We're even considering if we should include that those ounces which are small in our guidance, right, in our 2025 guidance. We're giving consideration to that. We're talking with the auditors. We're talking with we're analyzing that as we speak. I wanted -- we'll have more clarity when we provide guidance next year on how all of this is going to manage. But we did we've been telling sharing with investors, with analysts that we will be taking a position with respect to the future of San Jose in the Q3 and consistent with that is that we are advancing to you all that San Jose is going into closure and that we have the opportunity to offset a significant portion of those closure costs in the initial 2 years by carrying some residual mining of resources that we have which are high grade, right. Some of the higher grade resources updated to current exchange rate and prices do believe we believe provide an economic benefit to the project right offsetting closure costs. So that is what we're advancing but we certainly have a bit more work to do. As I said we do not have final closure numbers yet. We can anticipate that it's going to be a number higher than what we currently have in the provision as discussed with the previous caller. And how we're going to manage the reporting of those ounces or not is something that we're still figuring out.
Adrian Pay: Okay. Thank you. The second question, if I may, is on exploration. So two parts. One is, what is the proportion of your total exploration spend that is on new projects, new exploration projects? And then do you look at new exploration projects when you're looking at the potential for a new exploration project? Is it purely opportunistic or do you are you favoring particular regions? And I'm just hypothetically because you'd like to rebalance a little bit more to Latin America from West Africa or are you favoring certain metals or is it purely opportunistic as to whether you take on a new project?
David Whittle: I will start with the second part of your question and then we will allow Luis to provide the breakdown. But to answer the second part of your question, we have the benefit of being in different geographies and that we see opportunities emerge in all of them. And what we do, Adrian, is we rank them based on their own merit, on their own technical merit first. And then depending on the nature of the opportunity, we decide if tactically it makes sense for us. Strategically, we are very comfortable for the long term being in all the jurisdictions where we are, right. Now tactically, there are places where we could commit to deploy more capital than others. Today we clearly favor Cote d'Ivoire, Senegal ahead of Burkina Faso or for any large capital investment ahead of Argentina, right? But our process to help you understand it is we first rank we see opportunities emerging throughout. We rank each one under technical merit and then we assess tactically if we can if it's an opportunity with hydrologic potential but correspondingly low financial risk to the company where we can be a bit more adventurous on where we move or not versus opportunities that demand high capital commitment. So we do not gear or the opportunities as always we want to be more weighted towards Latin America now or more weighted towards silver or not. No, we rank the proper emerging opportunities on their own merit first.
Adrian Pay: Okay. That's very helpful. Thank you.
David Whittle: Luis, on the breakdown?
Luis D. Ganoza: Yes. So and just to try to answer that question in most effective way possible, the only new project really where we're spending exploration dollars is Diamba. There's a bit of greenfield, $2.5 billion but the only new project really is Diamba. The bulk of our exploration budget is being spent in the areas around our existing projects, our existing mines, I should say, and mainly today, Seguela, right?
David Whittle: But what goes we have a breakdown of sustaining versus non-sustaining.
Luis D. Ganoza: Yes. The question is between sustaining and non-sustaining in terms of what we would call brownfields exploration expenditures, around 1/3 today is staying in sustaining and 2/3 is being classified as non-sustaining. As we the objective of those budgets is to expand resources and the exploration camps, right?
Jorge Alberto Ganoza: Yes. So yeah, close to $15 million allocated to sustaining the balance of sustaining, Adrian.
Adrian Pay: Okay. I was thinking of new greenfields like say the joint venture or the earning you have with Riverside on Cecilia and Mexico? Is that all very, very small?
Jorge Alberto Ganoza: Well, yes, as described by Luis, our largest greenfields project is Diamba. We have a total budget allocated to the Diamba in 2024 in the range of $13 million total budget that includes exploration, engineering or owners cost associated with being in country managing the project. So that figure was around $13 million, probably $9 million out of that is classified as exploration.
Operator: The next question is coming from Peter Fried, who is a Private Investor.
Unidentified Analyst: Thank you, moderator, and congratulations on the solid quarter. My questions are regarding the normal course issuer bid, specifically the approximately $36 million that had of in funds that were to satisfy the 2019 convertible debentures. And why none of those funds were then used to repurchase the 7,184,000 shares that were converted despite several many opportunities to repurchase those shares at below $5, and then also what does this mean for the company's NCIB program going forward?
Jorge Alberto Ganoza: Well, in terms of execution on the NCIB, we've been as you would expect, we've been managing at the discretion of management based on opportunities we see in the market. We have not committed publicly to any particular price. And I think all that's relevant to say on that point is that we will continue taking those opportunities as we see them in the market given the restrictions we would typically have around certain blackouts during the year. So we I mean, with a specific reference to $5. I don't believe we've made any commitments again to any specific share price, right? Our capital allocation priorities, I think are clear. We've been first given priority to providing the strength we need in the balance sheet. I believe at times like these companies, mining companies where we have no purchasing power pricing power, of course, need to work on the balance sheet. And that's something we've been doing after many years of capital intensive phase, right? It's the first time we pivot into a net cash net positive cash position in several years. So with that, it's a set priority that strength on the balance sheet and return to shareholders. Of course, for us it's not a question of when or if, but when. And we have in place the NCIB and be sure that we are keen to provide at the right time returns to our shareholders, right. Via the buybacks or the institution of a dividend policy that's something that's being analyzed and discussed at the Board level at this time.
Operator: And there were no other questions from the lines at this time. I would now like to hand the call back to Carlos Baca for closing remarks.
Carlos Baca: Thank you, Paul. If there are no further questions, I would like to thank everyone for listening to today's earnings call. Have a great day. Bye.
Operator: Thank you. This does conclude today's conference, and you may disconnect your lines at this time. Thank you for your participation.
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