Good morning. I would like to turn the meeting over to Mr. Jamie Porter, Chief Financial Officer. Please go ahead.
Thank you, operator, and thanks to everyone for attending Alamos' Q2 2022 conference call. In addition to myself, we have on the line today both John McCluskey, President and CEO, and Peter MacPhail, Chief Operating Officer. We will be referring to a presentation during the conference call that is available through the webcast and on our website. I would also like to remind everyone that our presentation will be followed by a Q&A session. As we will be making forward-looking statements during the call, please refer to the cautionary notes included in the presentation, news release, and MD&A, as well as the risk factors set out in our Annual Information Form. Technical information in this presentation has been reviewed and approved by Chris Bostwick, our Senior Vice President of Technical Services, and a Qualified Person.
Also, please bear in mind that all of the dollar amounts mentioned in this conference call are in US dollars, unless otherwise noted. Now I'll turn it over to John to provide you with an overview of the quarter.
Thank you, Jamie, and welcome everyone to the call. Now, starting with slide three, we had a good Q2 on multiple fronts, meeting our short-term operational targets while also delivering on two key growth initiatives, including achieving first production at La Yaqui Grande and announcing a larger and more profitable Phase III expansion of Island Gold. Both have solidified our strong outlook, supporting growing production and declining costs. At the same time, as we are growing our production, we also expect to reduce our total greenhouse gas emissions, as we detailed in June, with a 30% reduction targeted by 2030.
Our Q2 production of 104,000 ounces of gold was in line with guidance, while total cash costs of $895 per ounce and all-in sustaining costs of $1,170 per ounce were well below quarterly guidance and substantially an improvement over the Q1 . This reflected solid performances from our Canadian operations, including a significant increase in production and decrease in costs at Island Gold, as well as a strong start from La Yaqui Grande. With production from La Yaqui Grande continuing to ramp up, we expect our consolidated production to increase to between 115,000 and 125,000 ounces of gold in the Q3 . We expect a further increase in the Q4 and decrease in total cash costs, given La Yaqui Grande's substantially lower cost profile.
We remain well-positioned to achieve our full year guidance and production guidance and cost guidance. Now, looking at slide four, while La Yaqui Grande will be a key driver of higher production and lower costs over the near term, Island Gold is going to continue that trend over the long term. At the end of June, we announced the Phase III+ Expansion of Island Gold to 24,000 tons per day, creating a larger, longer life, and even more profitable and valuable operation.
Following the completion of the shaft in 2026, production is expected to more than double from current levels to average 287,000 ounces of gold per year, with all-in sustaining costs through the larger expansion, 43% larger minable resource and lower capital per ounce costs, all contributing to a significantly more valuable operation with a $1.8 billion valuation at current gold prices. Island Gold would not only be a much larger and productive operation, it will also become a greener mine, with the expansion expected to reduce our life of mine carbon emissions by 35% compared to the existing smaller operation. Moving to slide five. This is going to transform Island Gold into one of Canada's largest and most profitable gold mines.
Following the completion of the expansion, Island Gold will be the seventh largest gold producer in Canada, the lowest cost and the fifth most profitable. This is truly a unique asset and like Young-Davidson, among the most valuable operations in Canada. Turning to slide six, La Yaqui Grande and Island Gold are key contributors to our strong outlook with growing production and declining costs. We expect to be producing closer to 500,000 ounces of gold per year by next year and at progressively lower costs, with all-in sustaining costs expected to decrease 18% to approximately $1,000 per ounce by 2024. Following the completion of the Phase III expansion, we expect our annual production to increase above 600,000 ounces of gold per year with a further decrease in costs.
Lynn Lake remains an important part of our longer-term goal, growth strategy, with the capacity to increase our production to approximately 800,000 ounces of gold per year. In the near term, we are taking a more conservative and balanced approach to growth by deferring any significant capital on Lynn Lake until the Phase III expansion is well underway, such that we can fund this growth internally while generating solid free cash flow over the next several years. I'll now turn the call over to our CFO, Jamie Porter, to review our financial performance.
Thank you, John. Moving on to slide seven. We sold 102,200 ounces of gold at a realized price of $1,871 per ounce, for revenues of $191 million in the quarter. Total cash costs averaged $895 per ounce, and all-in sustaining costs were $1,170 per ounce, a significant improvement from the Q1 , reflecting higher grades at Island Gold, the strong start at La Yaqui Grande, and the weaker Canadian dollar. As previously guided, we expect our second half costs will be lower than the first half, with the ramp up of low cost production from La Yaqui Grande being the largest driver. Operating cash flow before change in the non-cash working capital was $85 million or $0.22 per share in the Q2 .
Our reported net earnings were $6 million and included a non-cash after-tax inventory adjustment of $15 million in Mulatos, unrealized foreign exchange losses of $13 million recorded within deferred taxes and foreign exchange and other gains of $4 million. Given the decline in the gold price during the quarter and higher costs at Mulatos, a review of the carrying value of its leach pad inventory was undertaken, which resulted in the $15 million inventory adjustment, which is a non-cash reduction. Excluding this and other non-cash items, our adjusted net earnings were $29 million or $0.07 per share. Capital spending totaled $69 million in the Q2 , including $20 million of sustaining capital, $43 million of growth capital and $6 million of capitalized exploration.
With the ramp up of construction on the Phase III+ Expansion at Island Gold, we expect capital spending to increase in the second half of the year. We generated $7 million of free cash flow in the quarter, reflecting the strong performances at Young-Davidson and Island Gold. With the ramp up of production from La Yaqui Grande, we expect stronger free cash flow in the second half of the year. We returned a record $18 million to shareholders during the quarter, consisting of our quarterly dividend of $10 million or $0.10 per share on an annualized basis and $8 million in share buybacks. We continue to have a strong balance sheet with no debt, $122 million in cash, $23 million of equity securities, and $500 million of undrawn credit capacity.
We are well positioned to fund our internal growth projects while supporting ongoing returns to shareholders. I'll now turn the call over to our COO, Peter MacPhail, to provide an overview of our operations.
Thank you, Jamie. Moving to slide eight. Young-Davidson had another strong quarter, with mining rates averaging 8,160 tons per day, exceeding design rates of 8,000 tons per day for the fourth consecutive quarter. This drove production of 46,400 ounces and record mine site free cash flow of $31 million. Mill throughput averaged 7,750 tons per day, lower than tons mined due to a planned liner change in the mill. This resulted in a stockpile being built up on surface, which will be processed in future quarters. Given the strong overall start to the year, costs in the quarter and through the first half of the year remained toward the lower end of annual guidance. Young-Davidson remains on track to meet its full-year production and cost guidance. Over to slide nine.
Island Gold produced 37,300 ounces of gold in the Q2 , a 52% increase from the Q1 . This reflected higher grades, which averaged 10 grams per ton and higher processing rates of 1,260 tons per day. Costs were also down substantially from the Q1 and consistent with that annual guidance. The higher production and lower costs contributed to mine site free cash flow of $20 million in the quarter. With similar grades expected through the remainder of the year, we remain on track to achieve our full year guidance. Over to slide 10. Construction activities on the Phase III+ Expansion will continue ramping up through the second half of this year. As can be seen in the photos, site clearing and preparation work is well underway and expected to be completed in the Q3 .
The project is expected to begin in August and shaft sinking to start in 2023, with first production from the shaft in 2026. We have made significant progress on the expansion to date, with the bulk of the earthworks completed, the tailings facility already expanded, and more than 30% of the project capital already committed. Combined with the fact that this is an operating mine, this is a lower risk expansion, which is going to create a bigger, lower cost operation that will be among the most profitable and valuable gold mines in Canada. Moving to slide 11. Production from the Mulatos District totaled 20,200 ounces in the Q2 at costs roughly in line with first half guidance. This included 15,200 ounces from Mulatos and 5,000 ounces from La Yaqui Grande.
We expect substantially higher production from La Yaqui Grande in the second half of the year as stacking rates continue ramping up. Consistent with guidance, we expect approximately 65% of full year production from Mulatos District to come in the second half of the year at significantly lower costs. Moving to slide 12. Construction of La Yaqui Grande was completed in June ahead of schedule. Total capital for the project is expected to come in at around $160 million, 13% higher than the initial 2020 estimate, primarily due to scope changes. This included the decision to build a new crusher instead of refurbishing the El Chanate crusher and the construction of a new camp to help mitigate the challenges with COVID-19.
With the early completion of construction and higher grade stacked of 1.6 grams per ton, production of 5,000 ounces at total cash costs of $450 per ounce exceeded expectations. Grades stacked are expected to average closer to the reserve grade of 1.2 grams per ton in the second half of the year. With stacking rates continuing to ramp up to design rates of 10,000 tons per day, La Yaqui Grande is expected to drive significant production and free cash flow growth within the Mulatos District. With that, I'll turn the call back to John.
Thank you, Peter. That concludes our formal presentation. I'll now turn the call back to the operator who will open the lines for your questions. Operator?
Thank you. We'll now take questions from the telephone lines. If you have a question and you're using a speakerphone, please mute your handset before making your selection. If you have a question, please press star one on your device's keypad. To cancel the question, please press star two. Please press star one at this time if you have a question. There will be a brief pause while participants register. Thank you for your patience. The first question is from Trevor Turnbull from Scotiabank. Please go ahead.
Yes, thank you. I just wanted to ask about the Lynn Lake feasibility study that you mentioned would come out after the EIS approval. I just wondered if we should expect that the feasibility would be coming fairly quickly after that? Or i f it might be delayed a bit, given that you also mentioned at the front that you don't really expect to commit a lot of significant capital to Lynn Lake until you're further along with Phase III+ Expansion. I just wondered if you would perhaps hold off on the feasibility to keep it as contemporary as possible when you do start spending.
Hey, Trevor, it's Peter. You know, we're working in parallel on this feasibility study update. Sometimes with permitting, you get some, you know, commitments that you have to build into it, so I could see it, you know, taking a bit to work that in. But I would think we would look to come out with it in any case as soon as that, you know, pretty soon after we get the permits in place.
Okay, great. Thanks, Peter. That's all I had.
Thank you. The next question is from Fahad Tariq from Credit Suisse. Please go ahead.
Hi. Good morning. Thanks for taking my question. One thing that I noticed wasn't in the presentation or the press release was talk about inflationary pressures and that's positive. Can you talk a little bit about, you know, I understand there's some offsets with the higher production in the second half. You know, Island Gold grades are doing better than expected. Maybe just talk a little bit about the underlying inflationary pressures, if there are any, that you're seeing.
Yeah. It's Jamie here. I mean, across the industry, we're seeing obviously higher diesel, higher cyanide, higher grinding media prices. I mean, we've been able to manage the impact of inflation this year. We've certainly benefited from the weakness in the Canadian dollar. We've benefited from some of our diesel hedging that's in place. It's helped reduce our costs by about $20 an ounce. You know, we have long-term supply contracts in place. We're seeing inflationary pressures, but the factors that I mentioned combined with the fact that we're bringing on low-cost production from La Yaqui Grande has really helped offset that. We're performing well from a cost perspective.
We will see, I mean, you'd expect inflation, you know, in the range of 5% to be impacting our costs for next year, but we'll look at what we can do, you know, we set our annual budgets to mitigate that.
Okay, great. Just a quick follow-up. Like, some of your peers are talking about labor inflation and, you know, labor tightness, particularly in Canada. Just curious if you're, you know, also noticing any specific pressures there or difficulty retaining employees, et cetera.
We have not had any specific challenges at our operations. I think some of our peers have noted that with contractors is that that's a challenge, and we are seeing that in terms of both contracted underground development and exploration drilling. Overall, it's not having a significant impact on our operations.
Okay, great. That's it for me. Thank you.
Thank you. The next question is from Lawson Winder from Bank of America Securities. Please go ahead.
Hi. Good morning, and thank you for the update. I have a couple, maybe a few questions. First off, on La Yaqui Grande, congratulations on getting that started. Just how have you prepared LYG for the upcoming rainy season in Sonora?
Yeah. We're almost through it. I mean, the rainy season kinda ends late July, early August, typically, and we've managed through it. I mean, we've put ponds in place. You know, you have, you know, for running heap leach operations, you have your pregnant pond, your barren pond, and your event pond. The event pond is. We've got a huge event pond there just to be able to manage that. It'll cover any sort of contingency that you could imagine with rain. We've also, you know, have a big. You would've seen on the pictures, there's a large heap leach area there with a lot of plastic down with no ore on it yet. So we've diverted any water that falls on that around the facility.
You know, we're in good shape.
I mean, since you've now had an opportunity to observe how the leach pad performs with the rain, have you noticed any dilution or the need to use excess cyanide?
Lawson, we've been producing down there since 2005. You know, it's not our first rainy season, and we learned how to manage pretty well. From time to time, you'll get a really unusual rainfall that will happen on one particular day, and that can have a very short-term effect on what we do. Other than that, I think we've got that rainy season issue well in hand.
Yeah. The other thing is that we're very, you know, we're early on in this heap leach. There's not a lot of ore stacked on the pad yet, not a lot of water to deal with, not a lot of solution to deal with. It's very, you know, it's just starting out. So you divert all that other water away from you.
Yeah, that makes sense. Okay, thanks for that. Wanted to ask about return of capital. If I just kinda look at return of capital since 2019, it's been quite consistently around 9% of operating cash flow. I just wanted to ask, like, is that how you guys think about capital return as a percentage of operating cash flow?
As a percentage of operating cash flow, I mean, we have targets and, you know, we're measured annually by our board with respect to our return on invested capital metrics. I think, you know, we've been in a heavy investment phase, and we're starting to see the benefits of that. Young- Davidson now, you know, we've had five consecutive really strong quarters. We're spitting out annualized over $100 million a year. La Yaqui Grande's got a 60%+ IRR. We're starting to see that, the, you know, those returns coming online now. Yeah, I'd say we're targeting increases in our overall capital returns in the years ahead.
As a percentage of operating cash flow.
Well, we don't specifically pin it to that. For example, we took advantage of very low share prices to get more active with the share buyback, and we've been opportunistic on that front. You might see some variability in shareholder return on that basis alone. Well, when we look at our return on capital metrics, Lawson, we're looking at free cash flow, not just operating cash flow.
Okay. Gotcha. That's really helpful. Okay, finally, I just wanted to also ask on Lynn Lake. So you've delayed Lynn Lake so as to push out the CapEx commitment, so that it can be fully funded internally, which makes a lot of sense. So I just wanted to inquire about your slide that shows gold production growth, which has Lynn Lake. It looks like a full run rate in 2027, which would imply a start to spending in 2024. I mean, as I understand it, 2024 is expected to include some pretty heavy spending on the Island expansion. Am I thinking about that conceptually correct? I mean, so might 2024 be a year where you have to draw significantly on the balance sheet?
Lawson, I'll take that. No. Not at all. I mean, we're in great shape now. With La Yaqui Grande up and running, we should be cash flowing $100 million annually from Mexico. We're getting $100 million annually from YD. At current gold prices, Island funds the majority of the Phase III+ Expansion. We're free cash flow positive, net of all the expansion spending over the next couple of years. We could easily start Lynn Lake in, you know, late 2024, early 2025 and finance that from, you know, existing operating cash flow. There wouldn't be a need for us to, you know, materially draw down our cash balance or access our credit facility.
I guess that begs the question, I mean, could you start even a little earlier? Like, I mean, could next year still be a reasonable timeframe for starting up, spending on Lynn Lake?
It could be, but you know, as we've been saying for about six months now, you know, our focus is on Phase III+. That's the highest return development project we have in front of us. We wanna get going on that and move that forward before we, you know, start focusing on Lynn Lake as well.
Gotcha. Okay. Well, thank you very much for your time today.
Thank you. Once again, please press star one at this time if you have a question. The next question is from Kerry Smith from Haywood Securities. Please go ahead.
Thanks, operator. Jamie, just on the reporting, you have split out La Yaqui Grande this quarter. Is that the plan on a go-forward basis to separate that from the main pit then in terms of the reporting?
Yeah, Kerry, we'll assess that going forward. We did decide to separate the physicals. I think some of the financial metrics are blended, but we do separately disclose our costs on La Yaqui Grande and Mulatos. I mean, the reality is, going forward, La Yaqui Grande is gonna be 80-85% of our production at Mulatos, so it may not make sense to have them separate, just given the Mulatos production metrics will be somewhat immaterial. But we'll assess that going forward.
Okay. With the trucking some of the ore over to the mill at YD from Island, can you just give me a rough idea as to what that costs in terms of grams that it costs to truck it over there or cost per ton or however you?
Yeah, Kerry, I look at it as about a gram trucking cost. It's about $60 a ton to truck it over there. You give up a gram on the head grade that you're trucking over there. You actually gain on operating, you know, on mill costs because it's a bigger mill, it's lower cost mill somewhat.
Right.
You move cash flow forward. Those are higher cost ounces. You're moving that cash flow forward because we have a, you know, we've been carrying a, like, kind of a two-month stockpile at Island since we purchased the thing five years ago. The mine is performing well. I don't see us in a situation that we're gonna wish we had that stockpile in front of that mill at Island. That mill at Island is limited from a permitting perspective to around 1,200 tons a day, a bit more. It just makes sense to process stuff a bit earlier, if we can.
Otherwise, it's gonna sit on the ground until we expand the mill in 2025.
Right. You could benefit from a bigger stockpile at YD as well, so that would obviously help.
Yeah.
Yeah. Okay. Just last question. I'm not sure if Scott Parsons is on, but you talked about a bunch of drilling that was done on some of the peripheral targets around Mulatos, Carosito, Bajios, Halcon West. I think there was maybe Refugio even. Just wondering if in that, those drill programs, if you've seen anything that is interesting or, you know, how the program is going?
There's lots of really interesting stuff around the Mulatos District. There's, you know, it's a, you know, big land package that we have there, and, you know, it continues to surprise us. You know, all I'd say is maybe stay tuned. We'll, you know, we'll put out results when we have something to share.
Yeah, the only thing I'd add to that, we published that underground reserve at the start of the year, Kerry, the 430,000 ounces at 4.5 grams. I think there's the potential for us to look to increase the size of that deposit, and we're evaluating that in the second half of the year.
Okay. That's Puerto del Aire, right?
Yeah.
Yeah. Gotcha. Okay. Okay, great. Thanks very much, guys.
Thank you. There are no further questions registered at this time. This concludes this morning's call. If you have any further questions that have not been answered, please feel free to contact Mr. Scott Parsons at 416-368-9932, extension 5439. Thank you for participating today. You may now disconnect your-