Good day, ladies and gentlemen, and welcome to the Dundee Precious Metals second quarter and year-to-date 2019 earnings results conference call. At this time, all participants are listen only mode. Later, we will conduct a question and answer session. Instructions will follow at that time. If anyone should need our assistance anytime, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Janet Reid. You may begin.
Good morning, everyone. I'm Janet Reid, the Manager, Investor Relations. Welcome to Dundee Precious Metals second quarter conference call. With me today are Rick Howes, President and CEO, Hume Kyle, Chief Financial Officer, who will each comment on the quarter, as well as David Rae, Chief Operating Officer, and Nikolai Wistow, VP Sustainable Development, who are here today to assist with answering questions following the formal remarks. After close of business yesterday, we released our second quarter results, and I hope you've had an opportunity to review our material. All forward-looking information provided during this call is subject to forward-looking qualification, which is detailed in our news release and incorporated in full for purposes of today's call. Certain financial measures referred to during this call are not measures recognized under IFRS and are referred to as non-GAAP measures.
These measures have no standardized meanings under IFRS and may not be comparable to similar measures presented by other companies. The definitions established and calculations performed by DPM are based on management's reasonable judgment and are consistently applied. These measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures prepared in accordance with IFRS. Please refer to the non-GAAP financial measures section of our most recent MD&A for reconciliations of these non-GAAP measures. Please note that unless otherwise stated, operational and financial information communicated during this call have generally been rounded, and any references to 2018 pertain to the comparable period in 2018. On this morning's call, Rick will comment on our second quarter and year-to-date operating results, as well as the progress being made on our capital projects and exploration programs for the quarter.
Hume will then provide a brief overview of our second quarter and year-to-date financial results, as well as our guidance for 2019. With that, I'll turn the call over to Rick.
Thanks, Janet. Hello, everyone. Thanks for joining us today for our second quarter 2019 conference call. I'm pleased to provide you with an update on first quarter results and progress on our key projects and initiatives. Financial results in the second quarter of 2019 reflected strong operating performance in Chelopech and Tsumeb. Both operations performed in line with second quarter operating plans and remain on track to achieve their 2019 production guidance. This resulted in earnings per share of $0.09 and a cash flow per share of $0.17 in the quarter. Gold production at Ada Tepe reached commercial production on June 8th, but was somewhat lower than anticipated in the period due to temporary constraints with the Integrated Mine Waste Facility, which are expected to be resolved in the third quarter.
We still expect ramp up to full design capacity in the third quarter, resulting in even stronger financial performance for the second half of the year and only a minor deferral of production revenues. Gold production for the second quarter was 52,425 ounces at an all-in sustaining cost of $707. With most of the Ada Tepe capital spending now complete or all of the Ada Tepe capital spending complete, our balance sheet remains strong. At the end of the quarter, we have a net debt of $19 million, $34 million in investments and an undrawn revolving credit facility of $134 million, following the downsizing of that facility in the quarter to reflect the upcoming growth in free cash flow and lower capital spending requirements.
With Ada Tepe now ramping up, we expect to start building a cash position in the second half of the year. We saw a quarter-on-quarter move up in the gold price to an average realized gold price of $1,321 from $1,301 in the quarter compared to Q1. Copper prices were relatively unchanged with an average realized copper price of $277. This recent strong move up in the gold price in June was perhaps an overdue correction to the upside given the dovish sentiment of both the Fed and European Central Bank and expected interest rates cuts dictated by the economic concerns over the U.S. China trade dispute and geopolitical concerns over increasing tensions with Iran.
Chelopech produced 47,000 ounces of gold and 9.1 million tons of copper at a cash cost per ounce net of byproduct credits of $618 an ounce. The increase in gold production compared to the first quarter was due primarily to higher grades and recoveries. Gold grades are expected to be slightly lower in the third and fourth quarter and copper grades slightly higher, consistent with the plan. We have a number of key improvement projects underway this year that will enhance revenues and decrease costs, including drill and blast optimization and the transition from the use of ANFO explosives to emulsion explosives, autonomous drone surveying, further mill optimization, and move to integrated dynamic planning and execution with MineRP and the introduction of Digital SmartCenter for improved decision making.
We continue with our investments in exploration in and around Chelopech to increase resources and reserves. In mine resource development, drilling totaled 17,000 meters in the quarter, concentrating on the upper levels of Block 18, 151, 5, 8, and Target 700, with the aim to expand current ore body extents and allow conversion of mineral resources into mineral reserves. Fit further to this year is down plunge from Block 147, 149 South, 151, and Target North were also drilled during the second quarter of 2019.
Both programs produced a number of significant intercepts, which can be seen in our Q2 MD&A. In the regional exploration program around Chelopech, a total of 6,866 meters of diamond drilling was done and continued from the underground positions along the one-and-a-half kilometer long Southeast Breccia Pipe Zone and from surface on the Krasta to Target and other prospects located in the Sveta Petka and Brevene licenses. Krasta now has 21 of 22 holes drilled, hitting mineralization in 21 of 22 holes in a new zone of shallow copper gold mineralization over a strike length of 300 meters between 130 and 500 meters from surface. This will be further tested in Q3 and Q4 with drilling to determine the optic extents towards surface as a potential open pit resource. Results of the significant intercepts from this drilling can be seen in our Q2 MD&A.
Complex concentrates melted during the second quarter of 2019 at the Tsumeb smelter was 61,667 tons, which contributed to a record six-month EBITDA of $22 million. With good process stability reached and the continuing effort on performance and cost improvements, we are seeing continually improving financial results at the smelter. With the improved temperature stability of the furnace operations, we anticipate achieving a record 18-month lining life between rebuilds, which means the annual maintenance shutdown would occur in Q4 2019, and we would not see a major maintenance shutdown in 2020. The cash cost per ton of complex concentrate smelted at byproduct credits during the first six months of 2019 of $372 a ton was $150 a ton lower than the corresponding period in 2018. This is primarily due to the higher volumes smelted as a result of the extended furnace lining life.
We continue to make progress reducing the secondary copper inventories that accumulated during the construction and commissioning of the new acid plant and copper converters. We have now reduced excess inventories by 64% since July 2017. This reduction will continue through 2019 and will result in a reduction in stockpile interest and allow higher throughput capacity for fresh concentrates. We continue to advance the smelter expansion project to increase the throughput of complex concentrate to as much as 370,000 tons per annum. A feasibility study was completed in the fourth quarter of 2016 and confirmed the robust project economics with an estimated implementation capital cost of $150 million. The scope of the project includes the rotary holding furnace, additional cooling, and other upgrades to the automatic furnace, as well as upgrades to the slag mill area.
Work to secure the necessary permits to support this planned increase in production is progressing. We submitted an updated ESIA for approval in Q2 and are awaiting review and approval from the Environment Ministry. Discussions are ongoing for potential new sources of complex concentrate feed to fill this expanded capacity. Construction of the Ada Tepe Gold Project is now 100% complete and construction crews have been demobilized. First concentrate production was achieved in March, and commercial production was achieved on June 8th. We expect to receive the operating permit in Q3. The commissioning and ramp-up phase of both the mine and mill have gone very well so far and much faster than is typical of most startups. We have seen many days in the second quarter where the plant has already been running at 100% design throughput of 105 tons an hour and design recovery of 85%.
Mining of the ore and waste continued through the second quarter of 2019, with 196,000 tons of waste and 73,000 tons of ore mined. 98,700 tons of ore were treated through the mill at an average grade of 2.8 grams per ton. Head grades during the second quarter were not representative of what can be expected going forward, as lower grade ore from the stockpile was purposely fed to the mill while we commissioned and ramped up production. Now that we have reached design recovery grades will be brought back to planned grades for the remainder of the year. Gold production in Q2 of 5,351 ounces was lower than planned.
The mill was constrained by the ability to dispose of tailings in the integrated mine waste facility due to the longer than expected tailings settlement time in the first North Valley cell, which delayed cell construction and readiness to accept tailings in a subsequent cell on the next lift in the North Valley. This resulted in having to shut the mill down for 21 days to complete this construction of this North Valley cell, which was completed on July 7th. Since then, we have run the mill at 60% capacity until construction of the next cells on the second lift in the South Valley are complete, which is expected to occur before the end of August. Construction of these cells is progressing as planned. We have a number of other steps that will help solve the problem quickly and permanently.
Our engineering consultants have made a number of design improvements to the IMWF cells to allow faster drainage and consolidation. We are advancing test work on different chemical reagent additions to aid with faster drainage and settling. We have sourced additional earthworks equipment and contractors to assist with accelerating construction of the new cells. We are constructing two contingency cells in order to have a backup tailing storage location if needed. Also, as we advance up the two valleys, the area and total volume of storage in the cells per lift will increase, taking some pressure off the settlement time and cell construction time constraints we've experienced at the bottom of the two valleys, where the cell capacities are much smaller, which results in a much shorter cycle time to the cell above.
In other words, we will be able to build much bigger cells as we move up the two valleys with more time for settling and construction of the next cell. We view this as a temporary problem and small production deferral that will be resolved in this quarter. We have also had some operating flexibility and make up capacity with the ability to blend feeds to the mill from our high-grade ore stockpiles for the remainder of the year. We have lowered annual gold production from 55,000-75,000 ounces to 45,000-60,000 ounces to reflect the impact of this. Project spending is complete as of the end of June, with final project costs coming in under budget at $164 million compared to the original estimate of $178 million. Exploration has identified a number of satellite deposits within a few kilometers of Krumovgrad.
We have completed the drilling program for the Surnak satellite deposit located approximately three kilometers southwest of the Krumovgrad open pit, and are waiting on metallurgical test work to be completed before releasing the maiden resource estimate, which we expect to complete and release in Q3. Drilling will begin on the next two satellite discoveries, Synap and Kuklitsa, in Q4. Drilling on two other exploration targets in the region, Chatalkaya and Erlichevo, will begin in Q3. On July 15th, 2019, we announced the results of the preliminary economic assessment for our Timok Gold Project in the Bor district in Serbia. The PEA is based on an updated mineral resource estimate completed in September 2018 and provides a base case considering primarily oxide and transitional material, upon which the project will now be optimized for mining and processing strategies, including an economic valuation of the larger sulfide resource.
The study is based on open pit mining and heap leaching of the oxide and transition material, followed by later construction of a conventional mill facility to produce a flotation gold concentrate. Summary highlights of the project are: it has an after-tax NPV of 5% of $105 million, after-tax IRR of 18.6% at $1,250 gold, and an all-in sustaining cost of $717 an ounce, and peak annual gold production of approximately 132,000 ounces. Initial capital cost is $136 million, with a mine life of nine years. Based on the results of the PEA, DPM is conducting a geotechnical and hydrogeological study, as well as further optimization work to target additional sulfide material prior to commencing a preliminary feasibility study.
Development of a permitting approvals plan incorporating the environmental and social impact assessment process approvals, as well as additional licensing, major permits, and authorization requirements, were initiated in the fourth quarter of 2018. Exploration during the second quarter of 2019 included infill soil sampling and geological mapping to the north and west of the Korkan deposit and on the northern half of the Umka licence. A technical review that included an artificial intelligence study identified many high-priority near-resource drill targets as well as other targets within the geochemical and geophysical anomalies that occur over a distance of 5 kilometers north of the Korkan pit deposit. Exploration plans for the third and fourth quarters of 2019 include up to 2,000 meters of trenching and 5,000 meters of diamond drilling on these new targets, with the aim of increasing near-surface oxide resources.
The application to extend the Pantelejkuka and the Aris exploration licenses for an additional two years were approved on July 19th. We see great potential with our investment in MineRP as a unique new enterprise digital platform for the mining industry. We ourselves are adopting MineRP as well as many other digital technologies to transform our business. The intent we have with MineRP is to introduce new mine planning enhancements and enable the intelligent use of data. Key benefits expected from this initiative are data unification to a single platform, rapid parametric life-of-mine planning and sequencing, and real-time mining of performance versus plan with fast response to interruptions and better decision-making. MineRP is making good progress in introducing this unique platform that marries the science of mining to the business of mining to the industry, with good industry interest and uptake.
We expect significant growth in revenues beginning in the second half of 2019, as several major new mining customers have signed on or are in the process of signing on to this new software platform. In summary, the strong results from Tsumeb and Chelopech, along with the ramp-up of production that is now underway at Krumovgrad, reflects the exceptional progress our team has made to improve the performance of our operations and advance our growth projects. Tsumeb continues to improve and contribute to the free cash flow of our business with further upside possible by increasing throughput and reducing costs further, which is a focus for 2019 and beyond. With significant near-term growth in free cash flow coming from our Krumovgrad project beginning in the second half of this year, we represent a real growth and value investment opportunity for investors.
We expect to build a cash position, which will start this year and grow rapidly over the next several years. In discussion with our board, we have adopted a disciplined capital allocation framework that will balance the reinvestment in the business with returning capital to shareholders once we are in a position to do so. Thank you. I will now turn the call over to Hume, who will review the financial results and 2019 guidance, following which we will open the floor to questions.
Thanks, Rick. Overall, Q2 financial results reflected the solid operating performance of Chelopech and Tsumeb. While Ada Tepe, they didn't contribute to earnings in the quarter nor generate the ounces that we forecast, it did achieve the commercial production on June 8th that we expected. As Rick noted, is expected to ramp up to full design capacity in the third quarter of 2019. From an earnings perspective, we reported Q2 adjusted earnings of $0.09 compared with an analyst consensus estimate of $0.03 and to $0.08 in 2018, and adjusted EBITDA of $34 million, up from $32 million in 2018.
These increases were primarily driven by Tsumeb, which reported higher volumes of complex concentrates smelted, mainly attributable to improving performance and to the furnace maintenance that was done in Q2 of last year, as well as reduced stockpile interest, higher estimated metal recoveries and a stronger US dollar relative to both the euro and the South African rand. These were partially offset by lower volumes of gold and concentrates sold as a result of lower planned grades at Tasiast and higher local currency operating costs.
For the first six months, we reported adjusted earnings of $0.08 per share and adjusted EBITDA of $51 million, which were comparable to 2018 and reflect the same factors that impacted Q2 results, as well as higher treatment charges related to unfavorable final settlements on previously reported and provisionally priced concentrate sales, and the mark-to-market impact related to the increase in our share price, mainly in Q1, each of which dragged down our Q1 financial results. For the quarter and year-to-date results, gold and copper realized prices did not have a significant impact relative to 2018, with the gold price increase being offset by a reduction in copper prices. Q2 and year-to-date funds from operations were $30 million and $45 million respectively, while free cash flow was $24 million and $34 million respectively.
These results were essentially unchanged from the comparable periods in 2018 and reflect the same factors that affected adjusted EBITDA, with the exception of free cash flow, which also benefited from lower sustaining capital expenditures during the first half of the year, which primarily reflect the timing of Tsumeb's scheduled furnace maintenance, as well as work related to Tasiast's TMF raise. Turning to cost measures at Tasiast, Q2 and year-to-date cash costs per ton of ore processed was $35, comparable to 2018, down 4% from year-to-date 2018, due primarily to the stronger US dollar. At Ada Tepe, Q2 and year-to-date cash costs per ton of ore processed was $48, which was in line with plan. On a consolidated basis, our all-in sustaining cost per ounce for Q2 was $707, up $167 from 2018, due primarily to lower gold grades.
Year-to-date, all-in sustaining cost was $761, up $160, primarily due to lower copper grades and gold grades, higher treatment charges, higher share-based compensation as a result of the mark-to-market impact related to our share price increase in Q1, higher cash outlays for sustained capital expenditures relating to the TMF raise, and partially offset by the U.S. stronger dollar. At Tsumeb, Q2 and year-to-date cash costs were $373 and $372 per ton, down 32% and 29% compared to 2018. This was due to the higher throughput, higher by-product credits from increased acid deliveries and prices, and the favorable impact of the weaker ZAR, which offset higher local currency operating costs. From a capital expenditure standpoint, sustained and growth capital expenditures for the second quarter were $5 million and $15 million respectively, for an aggregate spend of $20 million, down from $27 million in 2018.
Sustaining growth capital expenditures for the six first months were $7 million and $33 million respectively, for an aggregate of $40 million, down from $57 million in 2018. These decreases were due primarily to the reduced outlays in connection with the Ada Tepe mine and the timing of planned sustaining capital expenditures, including the timing of Souma furnace maintenance, which is scheduled for Q4 this year versus Q2 in 2018. At June 30th, construction on the Ada Tepe project was complete. The aggregate capital cost for the project was $164 million and is 8% below the original budget of $178 million. At June 30th, our financial position is strong, with $156 million of cash resources, including $135 million of undrawn capacity under the revolver and $22 million of cash, as well as a 10.3% interest in Sabina.
During the first half of 2019, we also took the opportunity to divest our royalty interest in some equipment no longer required at Tasiast. This generated proceeds of approximately $8 million. While it was not reported in our free cash flow numbers, it did add to our cash resources. With Ada Tepe production now ramping up and DPM shifting towards a period of significant cash flow generation, we reduced the size of our revolver to $175 million to better align with our near-term capital requirements and made certain other amendments to reduce costs and increase flexibility. From a risk management perspective, during the quarter, we increased our 2020 hedge position in respect of the Namibian dollar to reduce Tsumeb's operating cost exposure.
As a result, at June 30th, approximately 96% of Souma's 2019 operating costs were hedged for the balance of the year using a zero cost option strategy that provided for, on average, a minimum and maximum exchange rate of 14 and 15.46. For 2020, approximately 59% was hedged using a similar strategy with a floor that on average provides for a floor of 14.64 and a ceiling of 16.15. Looking forward, based on the current market environment, we expect further increases in our operational and financial results in the second half of this year, driven by continued solid operating performance from both Tasiast and Souma, as well as the startup of the Itycyr mine. By year-end, we expect to have no drawdowns under our revolver and will have built a modest and growing cash position.
For the full year, guidance remains unchanged from the guidance that we provided on July 8th.
10th in connection with our Q2 production results, as well as the updated guidance in respect of Ada Tepe's ore throughput, gold production, and sales to reflect the temporary constraint in the IMWF. With the release of our financial results yesterday, we also updated our guidance for Ada Tepe's cash costs per ton of ore processed to $55-$65 per ton, up from $50-$60. Overall, the IMWF constraint is in no way material to the business, and we've taken a number of actions to address the issue and remain confident that Ada Tepe will remain on track to achieve full production in Q3, and thereafter contribute significantly to increase in gold production and free cash flow, and should support further increases in our share price. With that, I'll turn the call back over to the operator.
Thank you. Ladies and gentlemen, if you have a question now at this time, please press the star key, followed by the one key on your touch-tone telephone. If your question has been answered, or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you mute your line once your question has been stated. As a reminder, ladies and gentlemen, that is star, then one to ask a question. Our first question comes from Cosmos Chiu from CIBC Capital Markets . Your line is now open.
Great. Thanks, Rick, Hume, and team, for a very thorough presentation. Maybe first off, my question is on Ada Tepe, or also known as the artist formerly known as Krumovgrad here. On the IMWF, it sounds like you figured out the issues behind the settlement and the longer-than-expected settlement of some of the fines and whatnot, and it sounds like you've built the next set of cells at the end of July. Next set's coming up as you go up the valley in late August. Could you remind us, Rick, does that give you enough capacity for the remainder of 2019?
Well, it's an ongoing process, so you have to keep constructing cells, and you alternate cells from one valley to the next. Well, we got behind the schedule because of the delay in the settling. It was really started with the very first cell.
We're playing catch up. We'll be caught up by, as we say, pretty much the end of August. After that, we don't anticipate that we'll have any problems keeping up with the cycle between the north valley and the south valley.
That's really the process. There'll be many cells constructed over that period towards the end of the year or to the end of the year.
Okay
they'll happen on a fairly consistent frequency.
Mm-hmm. As you go up the valley, when I was on site back in April, it opens up, so there is more areas there where you can construct cells.
Yeah, that's correct. The cells we're constructing now on the south flank are quite a bit larger, particularly one of them is quite a bit larger, and will hold a much longer and larger quantity of tailings. It gives us much more time to prepare the other cells and so on. That's kind of where the relief comes from, and that's why we've been saying we're pretty confident at the end of August, we'll be in a situation where we can run full capacity on a continuous basis thereafter.
Yeah. On that, Rick, in terms of your revised guidance of 45,000 to 60,000 ounces coming from Ada Tepe, is that based on, as you said, getting to 100% capacity by the end of August? Or is there some kind of flexibility in terms of grade that you can rely upon, just given all the ore that you've stockpiled, and I believe some of that is fairly high grade.
It's based on the assumption that by the end, that we will be in that position at the end of August to turn the mill back up to full capacity. We may even be able to do that slightly earlier, and that's what we're looking at as some upside potential there. As you say, the other opportunity really agreed all around feeding higher grade from the stockpiles into the feed mix from the mining activity. We'll definitely expect that we'll bring grades up as well.
Yeah.
Not all that's built into the, obviously the base assumption. It's upside that we intend to try and execute on.
On that, Rick, I don't know if you have it handy on you, but what kind of tonnage and what kind of grade do you currently have in the stockpiles?
Well, David probably has the answer to the stockpile size.
Stockpile's around 150,000 tons, and the grade on the stockpile at the moment is around four grams a ton.
Okay.
As Rick said, there's quite a number of different grades in those stockpiles. What's currently coming from the mine and what we're blending together with the higher grades on the stockpiles allows us to get to a number beyond what's in that stockpile in terms of grade. What we anticipate coming from the mine is also going to be higher grade going forward.
Mm-hmm. For sure.
440 is the number that's the asset grade. We're going to be able to run at a number higher than what we're anticipating between now and the end of the year.
Thanks, David. You also mentioned that in the MD&A, you're still awaiting the formal operating permit from the government. Any updates here? I guess when we talked about this back on the site tour, there's really no concerns. It's really just crossing the Ts and dotting the I's here. Is that still the case?
Yeah, Cosmos. This is a significant piece of work. The people at the site have done an excellent job to get us to where we are now. What we have is two sort of groups of these things. The first one is around the power supply, and We have sight to that completion. We're expecting that to be done in the first week of August. The main area of the site itself, four different sub permits. On that, there are meetings to be held on the eighth or the ninth, where basically we formally review and are expecting final of those items to say the site is in compliance. There'll be a short period after that until we're issued with a permit, but at that point, we're already in a position where we are able to operate normally.
Basically, within the first half of August, we're expecting to have that behind us.
Yeah, for sure. Maybe switching gears a little bit, as you mentioned, Hume and Rick, you're entering a period of very high or increasing free cash flow with Krumovgrad, Ada Tepe coming in. I think, Rick, you sort of touched on that in terms of your capital allocation strategy. Could you give us a bit more color in terms of, you have a lot of areas where you can kind of allocate capital. You touched on Timok, you touched on Tsumeb, you touched on would you repay the debt, would you issue or initiate a dividend? Maybe if you can give us a bit more color on that, I think that would help.
Yeah. The context of the strategy really for that is really to look at the priorities within the capital allocation opportunities, reinvesting in the business, particularly around exploration in and around existing assets is giving us the highest returns. That gets the highest priority. After that, it falls down through the ranks. Basically, clearly sustaining capital plus reinvestment in exploration to extend the life or add to reserves. After that, it really comes to around growth of the company. What are the opportunities that are in front of us? What are the returns that can be generated from that capital? Also, returning money to shareholders in the form of potential dividends or share buybacks. We're weighing those options going forward.
I think the outlook is pretty good in terms of free cash flow, and we think we can actually do both, return some money to shareholders in the form of potentially a dividend, once we get in, build a cash position up, and continue to look at opportunities around potential growth in the company. We've got, obviously, our organic project in Timok, which we're moving forward on, but also looking at potential acquisition opportunities that might fit our strategic alignment and generate the returns that we would anticipate to meet our hurdles for return to shareholders.
Okay. On free cash flow, you mentioned $24.4 million in Q2. Could you tell us how much of that actually came from Tsumeb?
The free cash flow for Tsumeb for the period?
For the quarter, yeah.
It would've been actually quite strong. Let me just take a quick look here. Yeah, for Q2, it probably would've been like $10 million.
$10 million? Great. Okay. Great. Thanks Rick, Hume, and David. Those are all the questions I have. Thank you.
Thanks, Cosmos.
Thank you. As a reminder, ladies and gentlemen, dial star then one to ask a question, star then one. Our next question comes from Jacob Willoughby from Beacon Securities. Your line is now open.
Thank you. Congrats on a good quarter, guys. My questions Well, first.
We can't hear you.
Oh, sorry. Can you hear me better now?
Yeah. Now it's good. Thanks.
Hello?
Yeah, we can hear you, Jacob.
Okay. Can you tell us what your next steps are for your project for Timok?
We just completed the PEA, and the economics as we show are, I'll say, just at kind of our minimum hurdle rate. We would like to see the project a little bit more robust, and we see some optimization opportunities. Before we decide to move to pre-feasibility, we're going to look at some of these optimization possibilities, particularly around the sulfides and whether we've optimized the pit shells and that around the sulfide aspect of it. We know pretty well the oxide portion, transition portion fairly well. The pit shells were not designed originally to optimize the complete package. It was really just to optimize the heap leach part of the project. Now we're going to go back and just look at that. Also exploration.
We think there is some upside that we could get around near additional oxide ounces near surface in and around the existing pits there. As I mentioned in the early discussion, we have done some work with AI on all the exploration data, and we've identified a large number of new targets to test near surface oxides on. That's what we'll be doing in a quarter. With that, if we can add oxide ounces also and optimize the sulfides, we think that we can improve the project economics. From there, if it looks good, we'll move to pre-feasibility. That's kind of the steps we're on now.
Okay, that's good. No rush there?
No rush. I mean, certainly it's going to take a few years to get permits and so on. On the overall timeline, would be more likely a 2024 production start or something like that, looking at the timelines now.
Just on the smelter shutdown. Is it going to start right around the beginning of Q4?
We're anticipating the shutdown is going to be an October start.
Okay. I mean, you have to shut it down, and then it's got to cool down and everything. If you shut it down October 1st, do you think it'll be back running January 1st?
Oh, yeah. We're talking basically 21 to 24 days from the time you take the process off, you stop putting feed to the furnace, to the time you put feed back on the furnace. It'll be running again mid-October.
Okay. Just basically a month. How long does it take to heat it up again?
The heat-up is included in that timeline, and it's four to five days.
Okay. That's excellent. Thanks very much.
Thanks, Jacob.
Thank you. Our next question comes from Ingrid Rico from GMP Securities . Your line is now open.
Thank you. Good morning, everyone. My question is on Tsumeb and looking at the CapEx. Guidance remains at USD 14 million-USD 18 million, which I presume the bulk of it will be spent in Q4 with the shutdown. Really giving the year-to-date spend, that CapEx number seems kind of high for Q4. Could you maybe comment on that, and how should we think about CapEx at the smelter?
It's possible that might be a stretch for Tsumeb to spend. You're correct. The bulk of the money remaining to be spent is, let's say, it's already allocated and understood is around the shutdown. We're anticipating that's going to be in the region of about $5 million-$8 million for the shutdown. This one we would anticipate to be a little bigger than what we're going to have going forward because there's a number of things that we're testing during this shutdown, which we expect to mitigate costs going forward and potentially extend timelines. To your question of, do we think that's likely to occur? I would say that they're likely to underspend, so they're at the bottom of the range of spend on capital between now and the end of the year.
Okay. All right. Just to follow up to, on Cosmos' question on capital allocation. Thinking on that and Timok, could you remind us what does DPM look for a project, looking at other opportunities?
Well, sorry about that. What?
Just on capital allocation. What does Dundee look for another project if you're looking at other opportunities?
Well, strategic fit. Clearly the number 1 thing is robust returns that would generate, including acquisition, if it was an acquisition, and if it required development, total returns that would exceed our, I'll say, requirements, and be accretive to shareholders. That's the key criteria. Beyond that, it's obviously mainly around risk and jurisdictions and making sure that a strategic fit with the business itself and plays to our strengths, and I think that's sort of the whole package, really. Our strength mainly being underground mining, but doesn't mean we couldn't do open pits. Basically look at areas where we think we can create value that may not be visible to people or opportunities that we can out-perform the current assumptions around value creation for the assets.
Okay, great. Thank you.
Thank you. There are no further questions at this time. I would like to turn the call back to Rick Howes for any further remarks.
Oh, yeah. Thank you very much for joining us today on the call, and wish everyone a great day and a great rest of your week.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.