Good morning. My name is James, I will be your conference operator today. At this time, I'd like to welcome everyone to the Dundee Precious Metals first quarter 2018 analyst conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star 1 on your telephone keypad. If you'd like to withdraw your question, press the pound key. Thank you. I'd now like to introduce Janet Reid.
Good morning, everyone. I'm Janet, the manager of investor relations, welcome to Dundee Precious Metals' first 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; Nikolay Hristov, senior vice president, sustainable business development; John Lindsay, senior vice president, projects. They are here today to assist with answering questions following our formal remarks. After close of business yesterday, we released our first 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 the 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, any references to 2017 pertain to the comparable period in 2018 on this morning's call. Rick will comment on our first quarter 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 first quarter financial results and our guidance for 2018. With that, I'll turn the call over to Rick Howes.
Thanks, Janet. Hello everyone. Thanks for joining us today for our first quarter 2018 conference call. I am pleased to provide you with an update on our first quarter results and progress on our key projects and initiatives. As the global economy continues its gradual recovery, commodities should continue to benefit. The gold price has remained above $1,300 US since December, but ranged down between $1,300 and $1,350. Prospects for gold remain strong based on the macro trends of US dollar weakening, slowing gold supply growth, strong demand growth trajectories in both India and China, who are the largest consumers of gold. Despite the continued rise in interest rates as the Fed continues its policy of monetary tightening, gold still built momentum.
With soaring equity values in a low interest rate environment, gold as a store of wealth offers investors a good alternative and a hedge against potential rising inflation and geopolitical risk and uncertainty. Following the strong price performance in copper for 2017, copper declined more than 6% in the first three months of 2018. Surging warehouse inventories and weaker Chinese demand put pressure on prices. In the near term, prices may remain volatile to these factors, as well as to near term supply disruptions. In the longer term, however, the copper market is expected to go into a deficit, with rising copper demand from general global growth, growing electric vehicle demand, and a lack of recent investment in new supply. We expect copper to go into a deficit starting in 2019.
Global gold and base metal equities are down 2% and 4% respectively year to date. The GDXJ is down 6%. Following our strong share price move up in 2017, our share price has continued its positive trend in 2018, improving 10% since the beginning of the year and up 20% since the beginning of 2017, as we advance our low-cost organic gold growth project at Krumovgrad to production. We continue to execute on our strategy to create value by optimizing operating performance, advancing our organic growth projects, and building a pipeline of future growth opportunities while we maintain our balance sheet strength. We had a strong first quarter performance from both Chelopech and Tsumeb operations, which is record quarterly gold production at Chelopech of 57,331 ounces and copper production of 9.3 million pounds. Our all-in sustaining cost per ounce of gold was $696.
At our Tsumeb smelter, we smelted 54,142 tons of complex concentrate, more than planned as a result of deferring the annual maintenance shutdown from Q1 into Q2. We are currently on track to achieve full year guidance in all performance measures. Overall, financial results were negatively impacted by the weaker US dollar relative to the euro and to the South African rand. Earnings of $0.02 per share in Q1 was also not really reflective of the high first quarter metals production due to the timing of deliveries. This should correct itself in the coming quarters as deliveries catch up to the production. Growth capital expenditures of $25 million, primarily related to the completion of the Krumovgrad Gold Project, are on track with plan. 2018 sustaining capital expenditures are expected to be between $29 million and $39 million with spending in Q1 of only $5 million.
Sustaining capital expenditures are expected to increase in the remaining quarters. We have increased our exploration investment this year to $14 million to increase our effort to add to our resource base around existing operations and projects. The increased budget will fund drilling programs at Chelopech, Krumovgrad, Timok in Serbia, and Malartic Gold Project in Quebec. With Krumovgrad project construction more than 59% complete, our balance sheet remains strong, with $33 million in debt and total equity of $294 million, made up of $15 million in cash, $242 million in undrawn revolving credit facility, as well as investments at fair value of $37 million. The smelter performance in Q1 continued the trend to more reliable and consistent operating performance. We smelted 54,000 tons of complex concentrate.
This was higher than planned due to the annual maintenance shutdown being deferred from Q1 into Q2 as a result of the furnace integrity improvement initiative, which has extended the life of the furnace bricks. Historically, furnace refractory life has been around nine months. This campaign will achieve 15 months, and we believe further improvements are possible. Concentrate throughput in the quarter was hampered by power interruptions during an abnormally heavy rainy period in February and March, and off-gas related problems, which we have since addressed. The start of maintenance shutdown is now scheduled to occur in May. Volumes concentrated are expected to improve significantly in the second half of the year. Throughput for 2018 is still expected to be within the guidance of 220,000-250,000 tons as we continue to optimize the performance and gain experience in operating this newly upgraded and interconnected facility.
Q1 cash cost per ton of concentrate processed was ZAR 499. This was negatively affected by the 12% stronger rand relative to the US dollar. Cost reduction efforts this year will help to reduce some of this impact. Reductions have been targeted in the areas of productivity, maintenance, contractors, and outside services and utilities. We continue to make progress reducing the secondary copper inventories that have accumulated during the construction and commissioning of the acid plant and copper converters. This reduction will continue through 2018, and we expect to be back to normal levels in 2019. This will result in a reduction in stockpile interest and allow higher throughput capacity for new 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 main and implementation capital cost of approximately ZAR 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. Early discussions are underway to secure sufficient complex concentrate feed to fill this expanded capacity. A decision on this project is not expected to occur until 2019 at the earliest. Chelopech had a record quarter of gold production of 57,000 ounces, following our record year last year of 197,000 ounces. This was a result of higher gold grades of 4.5 grams in the quarter due to positive reconciliation from our 103 and 19 blocks, as well as higher recoveries.
We expect copper grades to remain about the same for the rest of the year. However, we expect gold grades to return closer to reserve average grades of around 3.2 grams for the remainder of the year. Higher gold grades and higher concentrate also contributed to the higher gold production. Cash cost per tonne of ore processed was $37, which was 12% higher than Q1 2017, due primarily to the 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, and we continue our process plant optimization work designed to reduce energy, consumables, and improve metal recoveries. Chelopech is on track to achieve production and cost guidance for the year.
In our in-mine exploration program, we drilled 9,146 meters and continued to identify extensions to existing ore bodies and one new zone. We will be focused on reserve conversion of some of these recently discovered resources, particularly in the inactive upper levels of the old sublevel cave mining area. Very positive results were recorded for downward plunge extensions of block 18, 19, 25, and 150 in the upper levels. In our active regional exploration program around Chelopech, we began a 20,000-meter drill program designed to systematically drill test the 1.6-kilometer strike length target known as the South East Breccia Pipe zone. 1,600 meters were completed in the first quarter, resulting in several good mineralized intersections, the best one being 25 meters at 4.5 grams gold equivalent, with assays still pending on four more holes.
Two holes were completed on the Krasna Deep target following encouraging results from the first two drill holes in Q4 2017, and drilling on the Krasna Shallow target will begin in Q2. A number of other new targets have been identified from ground geophysics and geochemistry work, which will be tested in the near future. Our Krumovgrad construction project was approximately 59% complete at the end of March, and the project remains on track for first concentrate production in the fourth quarter of 2018. Approximately $96 million has been incurred to date, with an additional $68 million to $72 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 Q1. The integrated mine waste facility earthworks was completed.
The major mill mechanical installations began. The electrical and instrumentation contract was mobilized to site and have now begun their work. Good progress was made on the key remaining construction permits, including the new access road, main power line, and discharge water pipeline. Pre-commissioning activities will begin in Q2, followed by hot commissioning and open pit pre-stripping and ore stockpiling in Q3. First concentrate is expected in Q4 and commercial production in Q1 2019. The operating team is focused on operational readiness and deploying its shared service model to maximize the synergies with Chelopech. Exploration has identified a number of satellite deposits within a few kilometers of Krumovgrad. Drilling on the Sernak satellite began in Q1 to test the eastern and southern resource boundaries. Five holes were completed with an additional 25 drill holes planned for the remainder of the year on this target.
An additional three holes are also planned for the Kupol North satellite. Once this program is completed, a resource assessment and technical report will be completed on these satellite deposits in the first half of 2019. The Kompleks satellite will be drilled in 2019, followed by drilling on the remaining satellites. On our Chirugite license, approximately 20 kilometers northeast of Krumovgrad, we are following up on a near-surface low-sulfidation gold vein system drilled by the state in the 1980s. At our greenfields Timok Gold project in Serbia, following the discovery of the Korkin West oxide deposit in 2017, we completed a major re-logging program of the Korkin and Bigger Hill deposits to model the oxide and transitional zone boundaries. We also conducted coarse ore bottle roll tests and column leach tests on the Korkin West, Korkin, and Bigger Hill oxide and transitional zones.
Bottle roll tests indicate recoveries of 90%-95% for Korkin and Bigger Hill oxide, 75% for Korkin West oxide, and 50%-55% for Korkin transition zone oxide. Column leach test results are expected in Q2. We believe initial phase oxide heap leach could have the potential to significantly improve the economics of this project. Additional drilling is planned for Bigger Hill gold repeater targets in the Korkin West oxide zone in Q2, and an updated resource estimate will be completed for all deposits in Q3, followed by an internal scoping study. At our Malartic joint venture with Pershimco in Quebec, an initial 1,942 meters of scout drilling program was completed. This program was designed to characterize the various targets that were defined within the volcano sedimentary Blake River Group exploration from mapping and geophysical work completed in 2017.
Sampling, logging, and an updated geological modeling to refine the targets will be completed in Q2. For 2018, our focus will be on executing our organic growth projects, specifically the successful construction, completion, commissioning, and ramp-up of the long-anticipated high-grade, low-cost Krumovgrad open pit gold project in Bulgaria, which will generate significant growth in gold production and cash flow starting in 2019. The continued optimization of the Tsumeb smelter performance so that we continue to generate growing free cash flow from this business. Number three, continue pursuing our growth opportunities with our existing portfolio of assets and through a disciplined approach to acquisition opportunities. Thank you. I will 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 first quarter, we reported adjusted net earnings of essentially nil per share, compared to an adjusted loss of $0.04 per share for the first quarter of 2017, and adjusted EBITDA of $20 million compared to $14 million in 2017. These increases were primarily driven by higher volumes of throughput due to the timing of the annual maintenance and reduced deductions for metals exposure at Tsumeb, higher realized metal prices, partially offset by a U.S. weaker dollar, and lower volumes of payable metals sold due to the timing of deliveries at Chelopech, which masked what was otherwise a strong production quarter for Chelopech and was the key factor that resulted in our Q1 financial results being weaker than what you would have expected given the underlying strong performance.
From a cash flow perspective, funds from operations during the quarter were $18 million, up slightly from $17 million in 2017. Free cash flow defined as funds from operations plus sustaining capital and debt service obligations was $11 million, essentially unchanged from 2017. As Rick has already commented on our Q1 costs, I will simply add that the increase with respect to our per ton cost at Chelopech was entirely due to currency, which more than offset the per unit lower operating costs that we achieved during the quarter. With respect to our all-in sustaining costs, the favorable impact of a higher gold grade in concentrates sold more than offset the FX impact during the quarter as well.
At Tsumeb, our cash costs of $499, which was down $53 per ton relative to prior year, was essentially entirely attributable to the volume impact associated with a full run in Q1 versus annual maintenance in Q1 of 2017 last year. From a capital expenditure standpoint, the sustaining growth capital expenditures for the quarter were $5 million and $25 million respectively for an aggregate spend of $30 million, up $22 million in the corresponding period of [2017] , and a little lower than what we'd actually planned. This increase was related primarily to increased construction activities at Krumovgrad, where we incurred approximately $18 million during the quarter, or approximately $96 million since commencement of construction. With approximately $70 million to go.
Based on installed quantities, we are approximately 60% complete, pretty much in line with schedule, and we're tracking to come in under budget and deliver first concentrate in the fourth quarter of 2018. During the quarter, no additional hedging was undertaken beyond the regular QP hedging that we do. As a result, for the balance of the year, 52% of our expected payable copper byproduct production was hedged at $2.62 or is hedged at $2.62, which was part of our de-risking strategy to support moving forward with Krumovgrad. 36% has been hedged using options, which provide a floor of $2.80 and a ceiling of $3.32.
From a currency standpoint, we've hedged approximately 33% of the Namibian dollar at NAD 13.68, and effectively all of our projected EUR capital expenditures in respect to Krumovgrad at 1.15 for the balance of the year, which essentially supports our objective of staying within the capital budget. Coming into the second quarter of 2018, we remain in very good financial shape. We've got $257 million of aggregate liquidity comprised of the undrawn $242 million revolving credit facility and $15 million of cash. With increasing forecast cash flow generation, we're well positioned to complete the Krumovgrad Gold Project and advance the other growth initiatives that Rick referred to.
Looking out over the balance of the year, we're confident that both Chelopech and Tsumeb will achieve the expected levels of performance, with Chelopech's metal production being lower and its sales being higher than what was reported in Q1, Tsumeb throughput on average after taking into account the annual maintenance shut scheduled for mid-May, being higher over the balance of the year. As a result, our 2018 production and cost guidance has remained unchanged from what we issued in February. Notably, gold production is expected to be between 165,000 and 195,000 ounces, and that excludes the 3,000 ounces that we expect to produce out of Krumovgrad prior to declaring commercial production. Copper production is expected to be between 34 and 40 million pounds. Tsumeb production is expected to be between 220,000 and 250,000 tons.
Our all-in sustaining cost for gold is expected to be between $640 and $855, and the cash cost at Tsumeb is expected to range between $440 and $500. On the capital front, sustaining capital expenditures for 2018, as Rick noted, are expected to be between $29 million and $39 million, up on average over our Q1 levels, and up from prior years due to raising the elevation of Chelopech's tailings management facility and a few projects that were shifted from 2017 to 2018. Growth capital expenditures in 2018 are expected to be in the $92 million to $100 million range, consistent with what we said earlier, $88 million of which relates to Krumovgrad, and the balance relates to resource development, drilling, and a new SMART Centre at Chelopech, and the upgrade of the slag milling and flotation plant at Tsumeb.
Our exploration spending range is $10 million to $15 million, with the majority being directed towards Chelopech, Krumovgrad, and our advanced exploration project called Timok Gold in Serbia, with the balance focused on greenfield projects in Bulgaria, Serbia, and our Malartic project in Quebec. Corporate G&A, excluding the mark-to-market impacts associated with the share-based compensation, which resulted in higher G&A in Q1 due to the continued appreciation of our share price, is expected to track current levels and fall within our annual guidance of $20 million to $24 million. As Rick mentioned, we're very focused on delivering Krumovgrad on time and under budget, preparing for startup and advancing a number of initiatives, all of which are expected to increase profitability and grow our business. Finally, our investment in MineRP is performing as expected and made very good progress executing its business plan in Q1.
Interest in its industry-changing tools is high, while we do not expect MineRP to have a material impact on our financial results for 2018, we remain confident in its future growth potential and its ability to add value as a portfolio investment and as a component of our overall digital strategy. In closing, while the timing of the delivery at the Chelopech dampened Q1's financial results, this is expected to correct itself and translate into better financial results over the balance of the year. As a result, we anticipate exiting 2018 with a strong balance sheet. As Rick already noted, with Krumovgrad construction being complete, we expect to see a substantial increase in reported production and free cash flow generation commencing in 2019. With that, I'll turn the call back over to the operator.
At this time, I'd like to remind everyone, in order to ask a question, please press star followed by the number one on your telephone keypad, and we'll pause for a moment to compile a Q&A roster. Again, as a reminder, if you'd like to ask a question, please press star then one on your telephone keypad. Your first question comes from the line of Trevor Turnbull from Scotiabank. Go ahead, please. Your line is open.
Yeah. Hi, guys. I just wanted to ask a little bit about the costs at Tsumeb. In the MD&A, you mentioned there was labor cost, electricity cost, then obviously the South African rand, which is tied to the local currency. I thought you guys were able to take out some of the contractor cost at Tsumeb, I was kind of wondering if you could talk a little bit about where you see labor costs going forward I think Rick might have mentioned something about electricity, which sounded like it may have been a temporary issue. If you could mention that as well. Given that you are hedging up to a third of your Botswana and currency exposure through the rand, do you see that as continuing to be a pressure on the cost going forward?
All right. This is David. Let's start with contractors. One of the things that we've done in the course of the last few months is we've insourced our maintenance activity, and we've also insourced the oxygen plant activity. In combination, that's potentially a 5% overall operating cost per year saving directly with that activity. What we're doing is that as we've finished the other activity now in terms of continuity, we're looking towards those areas where we've been working with external third parties, where we're paying additional money for those service provisions. We believe we're in a better position now to take that on and get efficiency. I don't know if that answers your question. Those are the primary targets on contractors.
In terms of electricity, the electricity rates in Namibia have been increasing at a rate of between 10% and 17% per year. That's primarily a concern for us. There's lots of opportunity in terms of optimization of our energy use, because maximum demand consumption is a large part of that cost. What we're doing is we're looking for continuity on energy, that better operation of the plant so we make better use of the power that we're actually paying for. There's some optimization in terms of the power utilization. Other than that, we're also considering alternative supply of energy with the potential of constraining that inflationary cost. I don't know if that helps with the electricity.
Yeah. Sorry, David, just on the electricity, what proportion of the cost is electricity right now?
It's mid 20%.
It's tied to the local currency, I would assume.
It is.
Okay, thanks.
Hume?
Sorry. On the currency, do you feel that that one-third is sufficient? For example, the level of currency hedging that you're talking about at this time, was that in place for Q1 as well?
Yeah. We did hedge a little over 30% of the ZAR or the Namibian dollar, which is linked to the ZAR, heading into 2018. We consciously stopped hedging anything further following the abrupt move in the currency very late in the year. We continue to monitor it. As you probably know, like last year, it probably averaged 13.5. With the election in South Africa, there was a very strong rally that caused it to probably go down to about 11.5, and it's currently trading around, I think, 12.60-12.70. We're monitoring that. I would anticipate that we would opportunistically try to put on some additional hedging and increase that position. From an overall standpoint, we can certainly tolerate the volatility in the currency.
From a Tsumeb perspective, it is significant and key objective for us is to continue to manage Tsumeb to a free cash flow situation.
Sorry, what proportion of the costs then are tied to the currency? I would assume virtually all of it.
Virtually all of it. Yeah.
Okay. Just one last question while I've got you, Hume. You mentioned MineRP, also there was a comment that suggested that it's going through a bit of a growth and ramp-up period, which was why it had some higher G&A costs. Is that something that you expect to continue, or will those costs start to come down now that you're through that at least initial spend?
I think it's probably more like the opposite. They've had to increase their G&A to support the growth trajectory that they're on. What's lagging is the signing of contracts, and we're seeing very good momentum in that regard, and we expect additional contracts to be signed over the balance of the year and into 2019. No, that G&A increase was fully contemplated, expected to stay, and probably increase further based on getting traction on signing additional contracts.
We should be looking for the revenue to start to catch up.
Yeah. You'll recall that when we did the deal, we made the investment. We provided them a ZAR 5 million line. They drew ZAR 3. We don't expect at all to put any more than ZAR 2, if any more at all, in over the balance of the year. It's all just going to be predicated on the timing of closing certain sales.
Okay, great. Thanks. That's all I had.
Again, as a reminder, if you'd like to ask a question, please press star then one on your telephone keypad. Your next question comes from the line of Don MacLean from Paradigm Capital. Go ahead, please. Your line is open.
Just a quick question on the rebricking. I think you've been talking about extending it to sort of 14, 16 months. Does that look like that's a sustainable schedule?
Yeah. Don, actually it looks like that's actually very cautious. We've already done 14 months now, and the remaining brick life is double what it was at the end of the last campaign. We're very confident of the ability to move towards 18 months. The main thing now is understanding what we have to do with the rest of the plant to have that able to utilize that full timeline.
Including the roof. Just kidding.
The roof at this point is we've got that sort of three-day replacement once every six months. It's not really material, and we're still looking at the design of that. That will in the meantime be a constraint, but it's not material overall.
Right. Okay. Well, that's good going on the rebricking. Thanks.
There are no further questions at this time. I turn the call back over to Rick Howes for closing remarks.
Okay, thank you very much for joining us on the call today, and I wish everyone a good week and a Happy Mother's Day.
This concludes today's conference. You may disconnect.