Good day, ladies and gentlemen, and welcome to the Dundee Precious Metals second quarter 2018 analyst conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. If anyone should require operator assistance during the conference, please press star then zero on your telephone keypad. As a reminder, today's conference is being recorded. I would now like to turn the call over to Janet Reid. You may begin.
Good morning, everyone. I'm Janet, the Manager of Investor Relations, and welcome to Dundee Precious Metals second quarter conference call. With me today are Rick Howes, President and CEO, and Hume Kyle, Chief Financial Officer, who will each comment on the quarter, as well as David Rae, Chief Operating Officer, Nikolay Hristov, Senior Vice President of Sustainable Development, and John Lindsay, Senior Vice President, Projects, who are here today to assist with answering questions following our formal remarks. After close of business yesterday, we released our second quarter results and hope you've had an opportunity to review our material. All forward-looking information provided during this call is subject to the 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 judgments 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 2017 pertain to the comparable periods in 2017. 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 provide an overview of our second quarter and year-to-date financial results, as well as our guidance for 2018. With that, I'll turn the call over to Rick.
Thanks, Janet, and hello everyone, and thanks for joining us today for our second quarter 2018 conference call. I'm pleased to provide you with an update on second quarter results and progress on our key projects and initiatives. We have seen some recent weakness in the gold price, with fourth straight monthly decline, primarily due to rising interest rates, strength in the U.S. dollar, and global economic uncertainty as a result of protectionist trade policies of the U.S. Year-to-date gold prices are down 6.3%. The realized price for gold in the second quarter was $1,307. Copper and other base metals have seen more dramatic price weakness, with copper off more than 14% since the middle of June. Year-to-date copper prices are down 13.6%. The realized price for copper in Q2 was $3.12. In the near term, prices are likely to remain volatile. Longer-term fundamentals for both metals remain good.
Global gold and base metal equities are down 7% and 5% respectively year to date, and the GDXJ is down 6%, reflecting this recent metal price weakness. We continue to execute our strategy to create value by optimizing operating performance through innovation, advancing our organic growth projects, and building a pipeline of future growth opportunities while we maintain our balanced sheet strength. We had continuing strong performance from Chelopech and improving performance from our Tsumeb smelter. We achieved record quarterly gold sales at Chelopech to 54,660 ounces. Gold production was 48,272 ounces, and copper production was 8.5 million pounds. Our all-in sustaining cost per ounce of gold was $540, 22% lower than the first quarter. At our Tsumeb smelter, we smelted 46,409 tons of complex concentrate, reflecting a lower quarter due to the 24-day annual maintenance shutdown. We are on track to achieve all guidance measures.
Due to the strong first half gold performance, gold production guidance was adjusted upwards, and our all-in sustaining cost guidance was adjusted downward. Overall, financial results in the second quarter were strong, with earnings per share of $0.09, reflecting strong metal sales and metal prices, offset somewhat by the effect of the annual maintenance shutdown at Tsumeb and a weaker U.S. dollar relative to both the EUR and the ZAR. Total capital expenditures are in line with guidance, with the forecast capital spending related to the completion of the Krumovgrad Gold Project coming in 7% below budget. With Krumovgrad Project construction 71% complete, our balance sheet remains strong with $41 million in debt, total equity of $250 million, made up of $14 million in cash and $236 million in the undrawn revolving credit facility, as well as investments at fair value of $35 million.
At Chelopech, we received record first half gold production of 105,603 ounces, following our record full year gold production last year of 197,000 ounces. This was the result of higher gold grades than expected in several mining blocks in the sequence, as well as higher recoveries due to the focus on improving mill performance. We expect copper grades to remain about the same for the rest of the year. We expect gold grades to decline somewhat in the third and fourth quarters compared to the first half of the year. Cash cost per ton of ore processed was $35, which was 12% higher than the Q1 2017, due primarily to a much stronger EUR. A number of improvement projects are underway and should help offset some of the impact of the stronger EUR.
We have several projects to further increase mining intensity and lower mining costs. We continue our process plant optimization work designed to reduce energy and consumables and improve metal recoveries. Chelopech is on track to achieve production and cost guidance for the year. We are completing construction on our new Smart Center pilot project, which will begin operating in September. It will ultimately support our two operations in Bulgaria and provide real-time monitoring and control, as well as advanced analytics capability using a fully integrated data enterprise platform. In our in-mine exploration program, we drilled 8,977 meters and continue to identify extensions to existing ore bodies and new zones. We are focused on reserve conversion of some of these recently discovered resources, particularly in the inactive upper levels of the old sublevel cave mining area.
Positive results were recorded for extensions of Block 8, 18, 19, and 150 in the upper levels. Six underground diamond drill holes totaling 1,918 meters were completed in the southeast Breccia Pipe zone. Several new 20 to 50-meter-wide zones of altered breccias were identified, which include a 4-meter interval with 3.3 grams gold equivalent from 469 meters downhole. Diamond drilling at the Krasta target, approximately one kilometer northwest of the main Chelopech ore bodies, has outlined a new zone of shallow copper gold mineralization over a strike length of about 300 meters. Six holes drilled in the second quarter and additional two holes completed in July have all intersected copper gold mineralization. The true width is estimated to be about 70 meters.
The mineralization at Krasta is open to the northeast and southwest, as well as up-dip and down-dip of the current drilling between the 130 and the 280-meter levels from surface. Future drilling will focus on defining the lateral and up-dip and down-dip extent. The smelter performance in Q2 continued the trend to more reliable and consistent operating performance. We smelted 46,409 tonnes of complex copper concentrate. This was lower than planned in the quarter, primarily due to the annual maintenance shutdown being deferred from planned Q1 timing into Q2 as a result of the furnace integrity improvement initiative. This initiative has already extended the life of the furnace bricks to 15 months. We expect further improvements with this next campaign. We are targeting to reach 18 months before the next major maintenance shutdown, with the goal of ultimately reaching a 24-month shutdown cycle.
This represents a significant cost savings opportunity and a potential increase in throughput. The off-gas system refurbishment completed during the maintenance shutdown is expected to provide more operating continuity in the second half of 2018. As such, the full year 2018 concentrate throughput is expected to be within guidance. Already, July concentrate smelting has surpassed previous production records, demonstrating the continuing improvements being achieved in smelting operations. The cash cost per ton of concentrate processed in the first half of the year has been negatively affected by the lower throughput, stronger rand relative to the U.S. dollar, as well as higher electricity and labor costs. A number of cost reduction efforts are underway that will help us to bring these costs in line with guidance for the year. Reductions have been targeted in the areas of labor productivity, maintenance, contractors, consultants, and outside services and utilities.
We continue to make progress reducing the secondary copper inventories that accumulated during the construction and commissioning of the acid plant and copper converters. This reduction will continue through 2018 and 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 throughput of complex concentrate to as much as 370,000 tons per annum. The feasibility study was completed in the fourth quarter of 2016 and confirmed the robust project economics, with an estimated implementation capital cost of approximately $52 million. The scope of the project includes the rotary holding furnace, additional cooling and other upgrades to the Ausmelt furnace, as well as upgrades to the slag mill area.
Work is progressing on securing the necessary permits to support this planned increase. Discussions are underway to secure sufficient complex concentrate feed to fill the expanded capacity. A decision on this project is not expected to occur until 2019. Our Krumovgrad project construction is approximately 71% complete and slightly behind schedule at the end of June. However, the project is still expected to reach first concentrate production late in the fourth quarter of 2018. Spending of $111.6 million has been incurred to date, with an additional $52 million-$56 million forecasted to complete in 2018. The aggregate cost of the project is expected to be between $164 million and $168 million, compared to the original estimate of $178 million. A number of key milestones were achieved in Q2.
The construction permit for the new access road was issued in June. Construction for the main power lines of the site has commenced. The open pit fleet of equipment has arrived. Hiring and training of the open pit crews is underway. Planned grade control drilling for the initial grade control model of the pit was completed. The first open pit blasting and stockpiling of ore began in early July. Major mill structural, mechanical, and piping installations are progressing well, as is the electrical and instrumentation work. The only remaining permit required for the construction is the discharge water pipeline, which is expected in August. Pre-commissioning activities have begun. Hot commissioning will start later in the third quarter. First concentrate is expected in Q4 and commercial production in Q1 2019.
The operating team is on track with all elements of the operational readiness plan, as well as deploying the shared services model to maximize synergies with Chelopech. Exploration has identified a number of satellite deposits within a few kilometers of Krumovgrad. Phase one drilling of the Cernak satellite deposit, located approximately four kilometers to the east of the Krumovgrad open pit, which began in Q1, was completed in Q2. The aim of the first phase drilling was to explore the eastern and southern sides of the Cernak deposit. The results show that mineralization continues down dip and is open to the east, while no extension was found to the south of the deposit. Preparing for phase two drill sites is in progress and is expected to be completed in the third quarter of 2018, which will be followed by a new resource estimate for this deposit.
Drilling also continued on Kupel North satellite with no significant results to report. Early-stage exploration work progressed on several other regional targets as well. Following the discovery of the Korkin West deposit in 2017, we have continued to advance exploration of our greenfield Timok gold project in Serbia, with the goal of adding more ounces to the existing resource. Diamond drilling commenced in April, and a total of 3,174 meters was completed during the second quarter of 2018. In addition, 724 meters of trenching and 35 line kilometers of ground magnetic surveys and infill soil sampling were carried out. Drill plans for the third quarter of 2018 including testing near resource targets and further drilling at Korkin West and shallow drilling of gold anomalies in soil.
We expect to release an updated resource estimate for Timok in the third quarter of 2018, which will factor in updated drilling at Korkin West. Reporting of oxide, transitional, and sulfide zones within the mineralization of Korkin West, Bigger Hill, and Korkin. We conducted preliminary metallurgical test work on composite samples representing the oxide material from Bigger Hill, Korkin, and Korkin West, as well as transitional material from Korkin. The metallurgical test work concluded in June 2018, including coarse ore bottle roll test as well as column leach test. The nine-week column leach test indicated gold extractions of 94% for both the Korkin and Bigger Hill oxide samples, 76% for the Korkin West oxide sample, and 68% for the Korkin transitional sample. We are planning to do a more comprehensive ore characterization test work program to support a potential scoping study.
At the Malartic joint venture project in Quebec, all assays were received for the 1,942-meter scout drilling program that was completed in early April. Significant results, in addition to those reported in the first quarter of 2018, include 7.2 grams per ton gold over 3.3 meters. Exploration plans for the remainder of 2018, including soil and sediment sampling program over large areas with detailed mapping and high-resolution aeromagnetic survey, along the Marbenite and Norbenite shear zones within the Malartic Group, along with further drilling of known targets. In summary, our three key near-term focuses are to successfully execute our Krumovgrad project, specifically the successful construction, completion, commissioning and ramp-up of this long-anticipated high-grade, low-cost open pit gold project in Bulgaria, which will generate significant growth in gold production and free cash flow starting in 2019.
Secondly, to continue to optimize the performance and reduce the cost at our Tsumeb complex copper smelter so that we generate growing free cash flow from this business. Third, to invest in exploration to discover additional resources to extend the life of both Chelopech and Krumovgrad mines, as well as to advance our Timok gold project in Serbia. Thank you. I'll now turn the call over to Hume, who will review the financial results and 2018 guidance, following which we will open the floor to questions.
Thanks, Rick. For the second quarter of 2018, we reported adjusted earnings of $0.08 per share compared to $0.07 in the second quarter of 2017, and adjusted EBITDA of $32 million compared to $31 million in 2017. These increases were primarily driven by higher volumes of copper concentrate deliveries as a result of timing of deliveries. You may recall in Q1, timing of deliveries hurt Q1, and that timing positively impacted the second quarter. It was also impacted by higher realized gold and copper prices, partially offset by lower volumes of complex concentrate smelted and acid deliveries as a result of the 24-day Ausmelt maintenance shutdown during the quarter. Higher stockpile interest and lower metal recoveries at Tsumeb and a weaker U.S. dollar.
For the first six months of 2018, we reported net earnings or adjusted net earnings of $0.08 per share compared to $0.03 in the prior year, and adjusted EBITDA of $51 million compared to $45 million in 2017. The increases were primarily driven by higher realized gold prices and copper prices, higher volumes of copper concentrate deliveries and higher production, increased estimated recoveries, metal recoveries at Tsumeb, partially offset by a weaker U.S. dollar and lower third-party toll rates and higher stockpile interest at Tsumeb. Similarly, from a cash flow perspective, funds from operations during the second quarter and first six months were $29 million and $47 million respectively, compared to $26 million and $43 million in 2017.
Free cash flow, which we define as funds from operation less cash outflows for sustaining capital and mandatory debt service obligations, was $22 million and $33 million in the second quarter and for the first six months. Compared to $2 million and $14 million in 2017. These increases reflect $16 million of term loan repayments that occurred in the second quarter of 2017 and higher funds from operations. Turning to our key cost measures, cash costs per ton of ore processed was $36 for the second quarter and first six months of 2018, up approximately 13% from 2017, the vast majority of which was due to a weaker U.S. dollar.
All-in sustaining cost per ounce was $540 and $601 for the second quarter and first six months of 2018, down $161 and $106 from 2017, due primarily to higher by-product credits and lower cash outflows versus sustaining capital expenditures, partially offset by a weaker U.S. dollar. At Tsumeb, cash costs per ton in the second quarter and first six months was $548 and $522, up $130 and $50 from 2017. Second quarter increase was due largely to the impact of the maintenance shutdown, and the year-to-date increase was primarily attributable to a weaker U.S. dollar and higher labor and electricity rates that were partially offset by reductions in contractor and consulting expenses. From a capital expenditure standpoint, our sustaining and growth capital expenditures for the second quarter of 2018 were $6 million and $21 million respectively, for an aggregate spend of $27 million, up from $21 million in 2017.
Sustaining and growth capital expenditures for the first six months of 2018 were $11 million and $46 million respectively, for an aggregate spend of $57 million, up from $43 million in 2017. These increases relate principally to Krumovgrad construction activities, and at June 30th, we've incurred approximately $112 million or roughly 70% of the estimated final cost of approximately $164 million-$168 million. At June 30th, our financial and liquidity positions remained strong with minimal debt and approximately $250 million of cash resources, including $236 million under our revolving credit facility, $14 million of cash, as well as a 10% interest in Sabina valued at approximately $35 million. As a result, we are well positioned to complete our Krumovgrad Gold project and to advance our other growth capital initiatives.
During the quarter, we also hedged the balance of our $28 million operating cost at Tsumeb, locking in a weighted average rate of approximately 13.16 over the balance of the year. Turning to guidance, based on our year-to-date operating results and our outlook over the balance of the year, we updated our guidance to reflect higher than anticipated grades and recovery at the Chelopech. As a result, gold production sales guidance has been increased approximately 5% based on the midpoint of the guidance provided, such that gold produced is now expected to be between 180,000-200,000 ounces, with gold sold now expected to be between 155,000-172,000 ounces. Our mine cash costs and all-in sustaining cost guidance was similarly adjusted and is now expected to range between $35-$38 per ton and $640-$755 per ounce, down approximately 5%-7% from our previous guidance.
At Tsumeb, cost guidance was lowered to reflect the additional currency hedges and is now expected to be between $430-$480 per ton and byproducts. Sustaining capital expenditure guidance was reduced to reflect certain expenditures in respect of the TMF grade at Chelopech being shipped to 2019, and as a result, it's now expected to be between $28 million-$33 million, down approximately $4 million. While we've not provided any guidance in connection with MineRP, and do not see it really having any significant effect on our 2018 results, what I will say is that we are very pleased with the progress that the team is making in executing the business plan, and remain confident in its future growth potential and the value proposition that it offers the mining industry and DPM.
In closing, with first gold from our low-cost Krumovgrad Gold project expected later this year, we are nearing a period of significantly higher gold production and free cash flow generation, which we firmly believe should support further increases in our share price. It will also provide us the opportunity to further grow our gold mining business and return a portion of this cash to our shareholders, the execution of which was based on a disciplined capital allocation process directed at increasing the value of our shares. With that, I will turn the call back to the operator.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your telephone keypad. 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 please place your line on mute once your question has been stated. Our first question comes from the line of Cosmos Chiu of CIBC. Your line is now open.
Hi, Rick, Hume, and team. Thanks for the conference call. Maybe just a few questions from me here. Maybe first off on Krumovgrad. You mentioned in the MD&A that you're slightly behind right now, 71% completion versus 78% completion. Could you maybe give us a bit more color on that? Then in terms of looking ahead, what are some of the critical path items that you need to target to ensure that you have concentrate by the end of late Q4?
Good morning. It's John Lindsay here.
Yeah.
As you are, I'll just say we are a little bit behind. That's mainly a result of our concrete contractor didn't perform quite as we expected in the fourth quarter of last year and the first quarter of this year. We've subsequently replaced them and brought additional resources to the site.
Unfortunately, in the second quarter, the weather didn't quite cooperate with us. It was particularly wet and rainy, and we weren't able to accelerate to the extent that we had anticipated. Having said that, the major foundations are now in with the structural steel and mechanical installation progressing well. All the mills are in, flotation cells are in. We started with cold commissioning in some of the areas. It's pretty much going according to plan from here on in. Yeah, as you say, it's slipped out a little, but we're still anticipating making first gold in the fourth quarter.
Mm-hmm. Great. Maybe as a follow-up, you also mentioned that you started pre-stripping here at Krumovgrad in Q2. Have you hit any ore yet? Have you started stockpiling any ore yet?
Yes, we have. Absolutely.
Okay.
We've had, I think, a couple of blasts already, and we've started stockpiling both high-grade and low-grade ore at the site in readiness for the start-up.
Mm-hmm. The grade has been okay compared to the mine plan, compared to the block model?
Yeah, they are in line with our expectation.
Okay. Great. Maybe switching gears a little bit here in terms of Chelopech. Congrats on getting higher grades in the first half of 2018. I think, Rick, you have mentioned it a bit in your comment here, how has it reconciled in terms of to your block model here? Are the higher grades, sort of higher-than-expected grades kind of confined to a certain area? I am just trying to figure out if the potential higher grades could come through in the second half again.
This is David Rae. The grades are tending to run at around 5% higher than what we had anticipated in the block model. The reason why we are guiding lower is just to caution you that the first quarter, in particular, had high grades relative to expectation. We did not want the anticipation that was going to continue through to the end of the year. The Q2 is much closer to what we expect in Q3 and Q4. We are just a couple of percentage points higher than we would expect. Within 3%-5% where gold is higher than anticipated in the block model.
Okay. Then maybe going to Tsumeb here. Clearly with a full-year guidance of 220,000 to 250,000 tons of complex concentrate for 2018 at costs of $430 to $480 per ton. Looking at what you've done so far in the first half in terms of production or in terms of throughput, in terms of cost, second half will have to improve. Is it just simply a function of now that you've got your maintenance behind you in Q2, just the ramp up will get you to full-year guidance?
That's correct. If you look at the profile of the shutdown, what tends to happen coming close to the shutdown is your ability to produce consistently and steadily is affected by continuity in the maintenance of the equipment. What we've seen post-shutdown is that the smelter is now for the first time as a complete unit operating extremely well. We've had issues with odd items before. First month's production has actually been in excess of requirement in order to meet that target for year-end. That's why we're confident that we can be within guidance.
Great. Then I guess that's why it's going to help as well when you target, I guess the last one was 15 months since the last shutdown. You're now targeting hopefully 18 months for the next shutdown here. Will that change the number of days? You did 24 days in terms of the maintenance shutdown this time around. Even when you make it longer with a period of 18 months, would it still stay at about 24 days?
The days are unaffected because the primary driver refers to the Ausmelt. That's the critical path, and the breakout and replacement of refractories, that's what dictates the timeline. We would expect to see the interval between campaigns increase. This one, we did 15 months. I saw the vessel when it came offline, it was in fantastic condition. We could definitely have done more time already.
The key thing now is we're looking at what other vessels do we need to be increasing their life in order to have us achieve 15 months and 18 months, and then beyond that, consistently and reliably going forward.
Mm-hmm. Okay. Maybe one last question on Tsumeb here. Certainly when I go through the financials for just Tsumeb as a business unit, it reported a net loss of $1 million for the quarter. On top of that, you spent about $4.5 million in CapEx. Looking at the accounting for Tsumeb, it's always difficult just given the integration you process ore coming from Chelopech. Could you maybe remind me again, what kind of mix in terms of complex concentrate could actually propel Tsumeb as a standalone business unit to start reporting a positive earnings or positive cash flow? All things considered, would you need the expansion to take place first as Rick sort of mentioned the potential expansion here at Tsumeb. Would that be necessary for you to report as a standalone unit, a positive earnings for Tsumeb?
Yeah, we don't need the expansion to report positive earnings for Tsumeb. What we've seen in the first half of the year is that dominated in 1 quarter by the shutdown. Our variable costs remain around 25% of the total, you're talking about $100 to $125 per ton. When you consider that in the performance premium over what's happened at 100,000 tons or so in Q1, as you can see, we should be generating positive cash flow.
Yeah, I think that's great. I think, based on the levels that our current infrastructure that we have in place, and what we are targeting for this year and what we are targeting to achieve next year, which is really getting up to closer to the 265,000 tons per year, we are looking at generating, I will say, EBITDA somewhere in the $20 million-$30 million range.
Less sustaining capital in the business, which could range anywhere between, let's say, $10 million and $18 million as a range, with a positive free cash outcome. That is what we think we can do in the near term based on existing capital that we have invested in the facility. Yeah, on a standalone basis, it does not look like it, and certainly does not generate a return on investment that you would expect on a standalone basis. As you know, it is very integral to Chelopech and processing this concentrate to actually get Tsumeb to achieve a return on capital that would make sense on a standalone basis. The expansion comes into play, and that is the $50 million capital project with incremental cash flow of somewhere north of $30 million per year.
When you do that together, we would expect certainly improved metrics on a standalone basis. Again, from our standpoint, we look at the smelter both as a standalone because that is how we report it, but on an integrated basis with Chelopech and provide a secure outlet for its complex concentrate.
Hume, to confirm the $20 million to about $30 million and a $10 million to $18 million, that is on an annualized basis?
That's on an annual basis, correct.
Yes. Okay.
Even for this year, as David said, we had the first half of the year that had the impact associated with the 24-day shut. We do expect substantially higher volumes in the second half, and we do expect to generate positive free cash flow for the smelter for the year.
Okay, perfect. Thank you. That's all I have.
Thanks.
Thank you. Ladies and gentlemen, as a reminder, if you have a question at this time, please press the star and then the number 1 key on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. We ask that to prevent any background noise, please place your line on mute once your question has been stated. Our next question comes from the line of Don MacLean of Paradigm Capital. Your line is now open.
Good morning, guys. Just a few follow-up questions. On the Krumovgrad, have you actually done a review of the unit costs, the inputs since the feasibility study so that you can get a sense of where these operating costs will start out?
Yeah. We had updated the operating costs, I guess it was over a year or so ago, when we updated the capital. We haven't looked at them since then. What we had reported then is still what we're anticipating. Was there any area in particular that you were maybe looking for more color on?
I guess we've seen through the startup of the Rainy River project that there can be a whole host of different cost changes that were not forecast, obviously, in the feasibility study that take place. I guess questions like exchange rate and labor costs, as you're seeing at, say, at Tsumeb, these can move around a fair amount.
I think as John said, we haven't actually done an update since then, but the reality is that those operating costs are denominated in local currency. I think they were based on a, was it 114?
114, yeah.
114 exchange rate. The exchange rate today, I think, is around 116. It's different, but not materially different. Labor rates have increased since then as well. Again, given that there's very low inflation domestically within Bulgaria, that wouldn't have a material impact either.
In terms of unexpected costs, as you say, we've got Chelopech running in Bulgaria, so we know what the salaries are, we know what operating costs are in the country. We're confident in those. Our mine fleet has leased, so those costs are fixed. I think we have a fairly high degree of confidence in the numbers that we have to date.
Okay. I guess that's the key. Second question, maybe a second and third, would be related to Tsumeb. Maybe a little more color on what's happening with their energy and labor costs. Maybe, David, you talked about how the predictability of the project had really picked up in the last month. Is your sense that you're now onto a better level altogether for the Tsumeb smelter?
In terms of costs, if you look back the last few years, we've seen 15%-19% increase in our energy costs. The outlooks and projections from NamPower and the regulators in the country have indicated something much less. We're now less than 10%, and between 5%-10%. We have some mitigating activity that we've got going on to have a look at alternative power supply. In terms of labor, that continues to be something in Southern Africa where there are high expectations, and we have to manage that as a combination of what we do in our negotiations and also looking at productivity improvements. That's clearly a driver for us. In terms of predictability, we've seen a marked improvement.
Really all of the work over the last few years, the capital spend, the optimization, making sure that we understand exactly how do we get the best out of the integrated asset. All of that came to fruition when we saw with a newly started facility, a significant difference in performance, both in terms of continuity of the process, reductions in rework, increased treatment rates, gas, everything improved. I think we have now seen a change to a different environment in terms of the operation. Record online times, record concentrates. We've got record blister production, copper inventory reductions. All round, it was a good month. On top of that, we had 1 million man-hours that we achieved at the end of June. Performance is broad-based.
Excellent. That's good. Those are the things that you can control. Maybe a little color on what's happening with the concentrate market, the complex concentrate market would help too.
I think the complex concentrate market, as you know, it's a relatively small market in comparison to the green concentrate market, the clean concentrate market. What's happening there is we've seen with pressure on capital projects and capital discipline, that some of the projects that were previously on the books, they're either later, and in some cases they've come off completely. In other cases, we have seen projects that are now more urgent to bring in, which would increase the amount of tonnage to market. We've seen this balance. Overall, I think the sentiment on TCs and availability of material is improving. Like Rick said, we're not planning to make any decisions on this investment soon in terms of the expansion. We're rather looking at how can we optimize the asset that we have first, to get performance. I don't know if that helps, Don.
Yeah, no, that's helpful, David. Maybe just on the expansion, is there anything in the expansion that you actually need to have for the existing operations that would prompt you to do it sooner or later? Or can that just sit as an inventory item to do whenever you feel that the market is suitable to give you a high rate of return on the project?
Yeah. There are some elements of the project that actually have a fairly high return, and we would deal with that differently. Mostly those are around things like the slag mill, where we can get improved performance and recoveries by making fairly modest capital changes. The other thing I think that we haven't really spelled out is that what we're finding are some of the things that we thought were imperatives and in fact going to accelerate, such as water cooling, which has a fairly big price tag. You're looking at more than 20% of the overall capital cost of the project just for water cooling. We've now been able to defer that by the performance improvement that we've had in refractories. We've now got to a point where we're achieving close to 300,000 tons on a single lining.
We could afford to bring that down to an annual repair. In other words, half that performance without water cooling is a worst case, and we suspect that's not going to happen. We'll continue to get good performances on refractories. There may be some modest reductions, but not a dramatic reduction as we previously anticipated. That means that there are capital elements within the $52 million that Rick mentioned, that actually are being deferred rather than brought forward.
Interesting. Well, I'll pass it back to the operator. Thank you.
Thank you. Ladies and gentlemen, as a reminder, if you have a question at this time, please press star and then the number 1 key on your telephone keypad. I am showing no further questions at this time. I would now like to turn the call back to Rick Howes for closing remarks.
All right. Thank you everyone. Have a great long weekend. Enjoy the summer festivities. Thank you. Bye.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.