Good day, ladies and gentlemen, and welcome to the Fortuna Silver Mines third quarter financial and operational results call. At this time, all participants have been placed on a listen-only mode, and the floor will be opened for questions and comments after the presentation. If you would like to join the queue for questions, please press star one at any time. To leave the queue, please press star two. It is now my pleasure to turn the floor over to your host, Carlos Baca, Vice President, Investor Relations. Sir, the floor is yours.
Thank you, Kate. Good morning, ladies and gentlemen. I would like to welcome you to Fortuna Silver Mines and to our financial and operations results call for the third quarter of 2021. Hosting the call today on behalf of Fortuna will be Jorge Alberto Ganoza, President and Chief Executive Officer, Luis Dario Ganoza, Chief Financial Officer, Cesar E. Velasco, Chief Operating Officer, Latin America, and Paul Criddle, Chief Operating Officer, West Africa. Today's earnings call presentation is available on the featured presentation box on our homepage at fortunasilver.com. As a reminder, statements made during this call are subject to the reader advisories included in yesterday's news release and in the earnings call presentation. Financial figures contained in the presentation and discussed in today's call are presented in US dollars unless otherwise stated.
Before I turn over the call to Jorge, I would like to indicate that this earnings call contains forward-looking information that is based on the company's current expectations, estimates, and beliefs. This forward-looking information is subject to a number of risks, uncertainties, and other factors. Actual results could differ materially from a conclusion, forecast, or projection in the forward-looking information. Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast, or projection in the forward-looking information and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information is contained in the company's annual information form and MD&A, which are publicly available on SEDAR.
The company assumes no obligation to update such forward-looking information in the future, except as required by law. I would now like to turn the call over to Jorge Alberto Ganoza, co-founder of Fortuna.
Thank you, Carlos. In the quarter, we delivered record sales of $163 million, adjusted net income of $22.5 million, EBITDA of $75 million, with a strong consolidated EBITDA margin of 46%. This solid financial performance is on the back of record gold production driven by the Lindero Mine, and this being the first quarter where we incorporate results from our West Africa business. As of the end of the quarter, we have liquidity available of $136 million and run the business with a conservative debt-to-EBITDA ratio of 0.2. Also, during the quarter, we announced the start of construction of our Séguéla Mine in Côte d'Ivoire. We plan for Séguéla to start production and continue driving growth for the company by mid-2023. We concluded successfully our 100-day integration plan with Roxgold.
Integration of our combined business has been a smooth process, and the main reason, of course, is the quality of people and shared values. We always said that in combining our business, we were not only acquiring quality assets, but a team of seasoned professionals with whom we shared a similar view of how you create value in our business. After the end of the quarter, on November fifth, we renewed our credit facility and expanded it to $200 million. Out of this amount, $120 million is currently available, with the full amount to become available upon the San Jose permit issue being resolved. In the quarter, we also managed to successfully settle for $9.6 million the disputed royalty claim with the Geological Survey and Secretariat of Economy of Mexico on one of our main concessions at the San Jose Mine.
This has been a protracted, complex negotiation where we achieved an arrangement to the satisfaction of the company and the said authorities. Now, what has tainted a good quarter is this new issue where the Mexican Ministry of Environment, SEMARNAT, has, on November tenth, denied our request for a 10-year extension of the environmental permit of our San Jose Mine. This renewal process is something we started on May of this year. SEMARNAT is citing two main reasons for the denial. One, not receiving requested information from us, and second, that we have an open evaluation for the regularization of 73 ancillary facilities not declared in the original 2009 environmental impact statement. With respect to the first point, we have already provided proof that dating back to 2019, we have been submitting and complied with the said information.
Second, we are of the strong view that the regularization of ancillary infrastructure, which is a process that we initiated in 2019, and is currently in the hands of SEMARNAT, and evaluates the mitigation of impacts for a greenhouse, a soccer field, a weather station, a core shack, and drill core storage facilities, an office, a 40,000-liter fuel truck, a power transformer, another infrastructure of similar nature, cannot provide grounds for a denial. Additionally, our legal team is also of the strong view that the regularization of 73 works does not form part of the request for the extension. The deadline for SEMARNAT to provide a response to our ten-year extension application expired on Saturday, October 23. This was informed on a press release dated October 25.
Before the October 23 date, as a precautionary measure, the company we initiated legal actions in Mexican courts and obtained preliminary protection to continue operations considering a potential delay in obtaining the extension or a questionable denial. Our San Jose Mine is currently operating under the protection of these court actions and we seek to strengthen this protection from the courts with the recent notification received from SEMARNAT. Our legal team is evaluating and working on this. Our credit agreement on our senior bank facility requires that we obtain a permanent injunction or similar protection before November 20. We have engaged with our lenders to provide for the flexibility and time that this circumstance requires. Additionally, we have not exhausted the avenue of dialogue with SEMARNAT and Mexican authorities.
We have the right to and will file an appeal to this negative resolution and have scheduled meetings with high-ranking SEMARNAT officials trying to untangle this unfortunate situation. SEMARNAT has also informed that they favor a consultation procedure on the environmental impact assessment and the evaluation covering the 73 ancillary facilities. The company is not opposed to any consultation procedure that adheres to the mechanisms provided in the environmental impact assessments, which are very clear and supported by jurisprudence in Mexico. Mexico is a country with a long and proud mining tradition, and we view this position from SEMARNAT as unprecedented. We're pursuing all avenues available to solve this as soon as we can. Under ESG, our prioritized KPI show improvement for greenhouse gas emissions, water and energy efficiency over the last year comparable quarter.
Our figures are benefiting from the inclusion of measurements from our Lindero Mine starting this year. We reported two lost time hand accidents of minor consequence in the quarter, one at the San Jose Mine and one at the Lindero Mine. Our figures for women in the labor force were impacted by the migration from a contractor-operated underground mine at San Jose to an owner operation where we incorporated approximately 265 workers to our payroll. At our Caylloma Mine in Peru, we successfully closed a six-year agreement with the community of Caylloma, which provides a solid framework for the relationship with all relevant stakeholders under our area of influence for the coming years. With respect to production, compared to last year's quarter, our gold production has expanded by 400% to 65,500 ounces.
Our largest contributor for gold was the Yaramoko mine in Burkina Faso with 28,750 ounces, followed by Lindero with 26,000 ounces of gold. Of note is our Caylloma mine, which since last year is contributing small but consistent gold that we estimate to be around 5,000 ounces a year. A small amount perhaps on the bigger picture, but a welcome and meaningful contribution to the economy of that mine. Silver production from our San Jose and Caylloma mines stood at 1.7 million ounces in the quarter. The shortfall with respect to the comparable quarter is explained by lower silver production at San Jose, impacted by downtimes as the mine transitioned from contractor to owner operations at the underground mine and lower grades compared to Q3 of last year.
Precious metals accounted for 88% of our $162 million in sales. Silver accounted for 22% of sales. Our costs tracked in line with our guidance range for the year at all our operations. San Jose exceeded its cost inflation against the comparable quarter, driven by lower silver and gold production stemming from lower grades and slightly higher OpEx of about 7%. I will now have Cesar Velasco, our Chief Operating Officer for LATAM, and Paul Criddle, our Chief Operating Officer for West Africa, provide some highlights from their respective regions. Cesar, you wanna go ahead?
Thank you, Jorge. Yes, our three mines in Latin America are performing in line with management's expectations and are on track to meet annual guidance. COVID-19 related restrictions in the three countries where we operate have been considerably eased and double dose vaccination rate at all operations are now well above 80%. The Lindero mine is operating within design parameters and delivered record gold production of 26,235 ounces in the third quarter. It is important to highlight the solid performance of the operation, good mechanical availability, and an increased gold production trend. As indicated, Lindero is on track to meet annual guidance, and management looks forward to an even stronger performance in the fourth quarter. B ack to you, Jorge.
Thank you. Paul, you wanna go ahead?
Thank you, Jorge. Operations in West Africa are progressing well against our plan. In both Burkina and Côte d'Ivoire, COVID impacts are largely mitigated now with little or no impact on operations today. Now that 90% of employees vaccinated at Yaramoko, production at Yaramoko is in line with the plan for Q3 and similarly remains the case for the year. I would like to highlight the excellent progress made by the team on the ground at our Séguéla project in Côte d'Ivoire within the third quarter, which was highlighted by the board's approval of the construction decision for the project in late September. As per the project execution plan, both the schedule and the cost remain on track with approximately 13% of the project completed. This has allowed us to advance in both the third and now fourth quarters projects critical path items.
We're executing and commencing the process plant EPC agreement with Lycopodium. We've commenced the plant site bulk earthworks contract. We executed the HV substation supply contract. We've continued to expedite the critical path mechanical items such as SAG mills, crushers, and transformers. In concert with the works ongoing in the field, the company's footprint and capacity is being grown with the establishment of the West African regional office in Abidjan, which will support the Séguéla project development effort now and ultimately the operational needs of Séguéla and Yaramoko. In addition, dialogue is ongoing with the Mines and Budget ministries in Côte d'Ivoire, with sessions planned in the coming weeks to advance the conclusion of the project's mining convention. Thank you, Jorge.
Thank you, Paul, Cesar. Now, Carlos, I'll turn it back to you.
We would now like to turn the call over to any questions that you may have.
Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your phone now. If you wish to leave the queue, you may press star two. We do ask that if you are listening on speakerphone, to please pick up your handset for optimum sound quality. Please hold a moment while we poll for questions. Our first question today is coming from Dalton Baretto at Canaccord. Your line is live, you may begin.
Thank you. Jorge, I'd like to start by saying I'm truly sorry that you continue to face these challenges in Mexico. I mean, these things happen in certain parts of the world, and I've no doubt you'll get this resolved, but it's gonna take some time. That said, this temporary injunction that you face, when does it expire? And what do you need to do to make it more permanent?
Yes. We have different legal actions in place and also workers have initiated actions in local courts in Oaxaca. Right now we are of the view that these legal actions now that there is a negative resolution can be moved to a more permanent injunction. Because part of the issue with the granting or the limitation for the granting of a permanent injunction was that we did not know what were the grounds for the delay in SEMARNAT's reply to us or what they were arguing, right?
Now that we have their arguments, as I explained them in the call, we are going back to the courts and based on what's being presented, which doesn't make any sense to us or our legal counsel, we're seeking a more permanent injunction, right? That's a process that can take several days, right? The preliminary measures that we have currently are preliminary in nature and it would be adventurous to me to say exactly what type of coverage we get, but it's measured in weeks probably, you know?
Okay. As a follow-up, and there's two parts to this question here. Should you not be able to turn this into a permanent injunction by November twentieth, what is the current penalty from your lenders? Part B of that is should you not be able to do it at all, and you're forced to shut San Jose down, how flexible do you think your lenders are gonna be?
You know, Luis, you're speaking with the lenders. You wanna come in?
Yeah, sure. Well, in principle, the straight answer is that noncompliance would, under our credit agreement, trigger an event of default. It is our expectation, however, that we'll work with our lenders to provide ourselves whatever flexibility is appropriate and warranted, given the evolving circumstances. We're still optimistic that our legal actions, you know, have a strong likelihood of progressing. We believe that the lenders will be working with us to, again, provide that flexibility required to avoid any unnecessary situation with respect to the status of our trade agreement and our covenant.
Okay. Thank you. I have more questions, but I'll jump back in queue. That's it for me for now.
Thank you. Our next question today is coming from Justin Stevens at PI Financial. Your line is live. You may begin.
Thanks. Yeah, just a couple from me here. This is good to see, obviously, conveyor stacking ramping up in Q3 at Lindero. I was wondering if you could give a bit of color on how leach times are reconciling with the model though.
Yes. Cesar, you wanna provide an answer there?
Yes. Okay. The reconciliation is looking pretty good. It demonstrates good relationship with the reserve model. Actually, for the Q3, we had a less than 6% difference in the reconciliation. As of year- to- date, it is even less than 3%. It's looking pretty good and consistent.
Yes. You were asking not so much about the reserves, but the leaching kinetics. We have loaded the leach columns. Right now, what we're seeing is we have unloaded the first columns that we loaded. We have final tail assays for some of those columns. What we're seeing is that with a coarser crush at around 13 millimeters, we're achieving the similar levels of gold extraction as we planned in the engineering phase and design phase with a 6-millimeter crush. Perhaps the explanation there is that the lab work was done with a small HPGR crush. With the much larger HPGR that we have in place, probably we are achieving higher comminution of the rock. Yeah.
You know, so far the metallurgical response is largely consistent with our expectations or better, right?
Yeah. That's good to hear. I was just gonna add a little following up on that, I guess. About how much of the material stacked then sort of year to date at the end of Q3 would you say you have on actively under leach?
How much of the placed material is under leach?
Yeah, just a rough percentage in terms of how much is being actively leached.
Everything.
Everything? Okay. It's just following. Your leaching is following along pretty closely behind your stacking.
Yes. You know, we start irrigating. We allow ourselves for safety, what 20 meters-40 meters from the retreat phase of the conveyor stacking, and we start irrigating. We started irrigating a couple months ago. We started with a program to irrigate slopes. We were not irrigating slopes. We initiated slope irrigation. No, but basically everything is under irrigation.
Got it. And then I guess the last thing then is obviously things are trending better at Lindero. Do you have an idea of when you might expect to declare commercial production there?
We are, you know, we have the early adoption of, I forget, Luis, what the accounting term there. You know, the mine's been operating within it. It consistently achieved design parameters in the third quarter. It's operating within design parameters. Everything has been flowing through down to cost since we started production in October of last year, a year ago. We're not declaring commercial operations, no? You do that when, you know, you're capitalizing and then, you know, you achieve production or design parameters, and then you stop capitalizing and start sending things down through to cost. We've been doing that since October of last year.
Yeah. Just to clarify, though, that doesn't have any effect with regards to what you have to do in terms of the Argentinian peso and the export sale for your doré, right?
No, nothing.
Okay. Great. That's it for me. Thanks so much.
Thank you. Our next question today is coming from Don DeMarco at National Bank Financial. Your line is live. You may begin.
Thank you, operator, and hello, Jorge and team. I suppose my first question for Jorge or perhaps Paul, Yaramoko was impacted by unplanned downtime on SAG maintenance and resequencing of production stopes in the 55 Zone. What's the situation? What's the outlook for Q4? And can we expect a rebound, perhaps with some higher throughput in grades?
Paul, do you wanna go ahead?
Thanks, Don. Yeah, no worries. Well, hey, Don, yeah, we suffered an outage on the SAG mill due to an unplanned downtime event on the pinion bearing, which saw us have four days out. At the same time. Oh, sorry, we did all this. We had a requirement to resequence the stoping sequence which is largely prescribed at Yaramoko, just given the nature of the deposit, which saw some higher grade stopes resequenced and pushed out into Q4. Yes, we will see those recovered, if you like, in the fourth quarter. But we don't hold concerns for Q4 or indeed the guidance numbers, and intend to recover those in this current quarter.
Okay. Thanks for that, Paul. Shifting to Lindero, I see that in Q3 sustaining CapEx was about $10.6 million. Do you expect to spend a similar amount in Q4, or should we model this to start easing?
Cesar?
Jorge, I had a problem with the audio. Can you please repeat the question?
Yeah, sure, Cesar. I was just asking about the Lindero sustaining CapEx. Should we continue the run rate of about $11 million that we saw in Q3, or would we model something lower than that?
No, it should be in line with that. You should be modeling same as we had some delays in the ADR expansion plant that are now scheduled to be commissioned in Q4. You should be modeling the same number.
Okay. Great. Then, finally, Jorge, on this, the situation at San Jose. Now, what I hear from your comments, I understand there's two issues that SEMARNAT has put forward. They allege that they haven't received requests, and then they're pointing to some ancillary infrastructure 73 works. You're going through the proceedings, providing proof and whatnot, and defending your position. Just building on a previous caller's question then, what should we look to next then? I understand that the timing may be uncertain, it may take days for the courts to review what you've submitted. Shall we look for a press release or in a week maybe, or how will you keep the markets updated on this as new information becomes available?
Yes. I wanna go back to something I said, no? We have not shut down dialogue with SEMARNAT. We're still trying to solve this administratively, no? Which is having SEMARNAT reassess their position based on the fact that we have presented proof that we are in compliance with the issues they raised in the denial or cited in the denial. There are meetings scheduled with high-ranking SEMARNAT officials, and there is dialogue ongoing, right? We have a degree of expectation that something positive can come out of that dialogue. We have to recognize that the Mexican government has made significant budget cuts across all government, you know, offices.
SEMARNAT is, you know, sometimes shorthanded to deal with the complexities of their business. Unfortunately, that's a reality. You know, because there are some things here that we just fail to understand. I mean, someone is not doing their work there. If they cannot identify themselves that, you know, we have submitted on at least three occasions dating back to 2019, the documents they are requesting from us. Right?
Mm-hmm.
Dialogue continues and, you know, through dialogue perhaps we can have a breakthrough with them sooner than later. But parallel to that, we have to continue advancing with our measures in court. This is something similar to what we did when, you know, two years ago we had an issue with the royalty claim. As you guys might recall, the Mexican government issued a cancellation procedure on one of our main claims, citing a royalty dispute. You know, eventually we were able to solve this. It has been a protracted process. But there is an administrative path of dialogue with the government and then the legal path in court. We're pursuing both.
I believe that, as I explained to the previous caller as well, some of these legal measures, which we are taking now that we have more information, so we're feeding the courts that this additional information that we believe strengthens our position in court, should lead to, you know, responses from the courts that can be measured in days, right?
Yeah, you're pursuing this on two avenues. The court avenue could lead to an outcome, could be a permanent injunction, whereas the administrative avenue perhaps could lead to an extension of the permit, perhaps. My last question then, just going to that permit, maybe the preferred outcome here is an extension of the permit. How often is this permit renewed? Is it on an annual basis, every couple years? And SEMARNAT presumably would have granted it. When did SEMARNAT last renew it?
No, this permit was granted for a 12-year period back in 2009 when we were granted our original environmental impact statement. Well, I mean, you might not recall, but when we built the mine, the mine had reserves and resources for a five-year life of mine. We requested a 12-year environmental permit. I am not sure right now if that is the limit that can be requested. I would have to check with council. We requested, you know, double, almost double the LOM we had back in 2009. You know, the years have passed. Exploration has been successful. We get to now. Our application was for a 10-year renewal.
Again, I would have to double-check with you if that is the maximum you can apply for.
Okay, thanks, Jorge. Good luck, pursuing both paths.
Thank you. Thank you.
Thank you. Our next question today is coming from Adrian Day at Adrian Day Asset Management. Your line is live. You may begin.
Oh, yeah. Thank you. Thank you, Jorge. Sorry to go back to Mexico again. I had a few questions, and maybe I'll just ask them all in a row, if I may. First, just a quick one. On the royalty settlement, I just wanna clarify, is that settling what they claim you owed in the past, or is that actually finalizing it so there's no future royalty? The rest of the questions are all to do with SEMARNAT. I'm just wondering if SEMARNAT had any contact with you prior to their decision, saying, you know, "We're still looking for this, we're still looking for that." Secondly, has the local government got involved in this at all? Do they have a sort of?
Do they have any sort of you know approach to keeping the mine going and to the workers? Lastly, a question you might not actually want to answer, but I've heard from several companies that they're getting decisions from SEMARNAT, but in their you know in the different companies' views, simply don't make sense and are unprecedented. I'm wondering if there is something going on at SEMARNAT. Is there a motive that they have in trying to forestall mining in Mexico? Those are my questions.
Thank you, Adrian. With respect to the royalty question, by way of background, the Mexican Geological Survey claimed that we owed an amount of $30 million plus for unpaid royalties on a concession. We disputed the legality of that claimed royalty and we went to court, right? Just like now, we went to court to have a court decide if the royalty was legal or not. At the same time, we continued trying to broker dialogue with the Mexican Geological Survey and the Secretary of Economics, and eventually we did. What we have achieved is an arrangement by which we are paying $9.6 million.
With that, we settle any past claim they have on owed amounts. Again, they were claiming that the owed amounts were plus $30 million, right? We have agreed to a 3% royalty moving forward, right, okay. With that, there is no royalty dispute, there is no claim, and we are actually removing from title the old royalty that was registered in the historic title, which gave rise to their claim. We are replacing that with the new agreement with the company for a 3% royalty moving forward, you know? That closes the issue.
I have to say that through the process, we have gained a lot of goodwill with the Secretariat of Economy, the Subsecretary of Mines and the Mexican Geological Survey. Moving forward with your questions, number two, the SEMARNAT process. The answer is no. Through the process on the extension of the permit that we initiated in May of this year, they had one request for information shortly after we initiated the process, where they requested three, four items of additional information. Those were very immaterial. They were asking who was the contact person in the file and other three minor issues of that nature. Since then, we never heard back. We requested meetings, we never got a reply. No.
They were quite non-responsive to our requests. Based on that fact that they became non-responsive to us, is that we decided to initiate legal actions ahead of the October 23rd date because, you know, we didn't know what was happening. In two occasions, we managed to speak with a low-level official and, you know, his reply to us would be that, you know, this is being managed at higher levels and that there are a lot of delayed files. Based on that uncertainty is that we placed ourselves on multiple scenarios, and we decided to initiate preemptively some legal actions, you know?
Right.
Number three is local involvement. I have to say that we have had a remarkable support from local authorities. When I speak about local authorities, first, the governor of the state of Oaxaca, Alejandro Murat, I think, we could not have asked for more support from the governor of the state. No? He's been behind us trying to help broker dialogue, and he's still playing a pivotal role in our effort to broker dialogue, and he's been quite supportive. More in the town of San José, the mayor of the town has also and his entire Cabildo have also played a... are playing.
No, they are playing a key role in supporting, and they have sent letters to their representatives in Congress. They have gone to Mexico City and spoken with representatives of Congress and Senate. They're certainly very active in support of the company, you know? Last is the attitude of SEMARNAT. You know, it is no secret that President López Obrador is not fond of mining and particularly Canadian mining, right? I mean, that's no secret, right? Now, he has also said that well, you know, operating mines will continue to operate, and he'll be supportive of that. That's something that he's on record saying. At the same time, he has placed a moratorium on new mining claims in the country, right?
Right.
You cannot apply for new mining concessions in Mexico today. You know, and I think there is a compounded effect of the budget cuts in different government offices like SEMARNAT. The fact that everything slowed down through the pandemic and certainly an issue with attitude towards mining that permeates, right? I believe that is compounded. I have to say that they are also quite sensitive to the risk of loss of jobs, right? I have to say that throughout Mexican government, they are also very sensitive to that, right? Yeah.
Right. Okay, thank you. I'm sorry, Jorge, just quickly. Are SEMARNAT decisions made at the local level, regional level, or are they made at the national level?
SEMARNAT is a federal office, so it's a national office. SEMARNAT has a local offices, but they depend of central government. No?
Okay.
It's a national office with different subs in the different states, right?
Okay.
It's not local. They're not governed locally. It's everything is federal, right?
Okay.
Central government.
Okay, great. Thank you very much.
Thank you.
Thank you. Our next question today is coming from Michael Anthony, a private investor. Your line is live. You may begin.
Yes, sir. I didn't catch that earlier. When did you say you was gonna get the permit, you thought?
We have not provided a date for when we believe we can get the permit because we just don't know that. What we have described is all the actions that we are taking in hope that we can get a permit and the measures, the legal measures we're taking to protect ourselves in case this is a protracted process, right?
You have like 1,200 people working there at that mine?
We employ direct employees around 1,200 people. In addition to that, there is an entire world of service providers that go from a local mess hall for contractors, you know, tire shops for the contractor trucks, and you name it. Our community support agreement at San José El Progreso is of the amount of about $1 million a year that's invested in infrastructure, sustainable development, education, health. We have only this year about 160 scholarships in the town. We support many initiatives on greenhouses for tomato growers, support, irrigation programs.
We do all of that through this structured community agreement that every year is in the amount of roughly $1 million. So all of that investment, plus the direct employment and indirect employment, has a huge impact on an area that's not industrialized. I mean, as you know, mines are located in remote areas, and this mine is not particularly remote, but there are no other decent job opportunities available in the valley where we are located. These towns are full of a large female population because most of the males migrate to the U.S. for work. What you're left with is single mothers and broken families because of the migration.
You know, I believe that SEMARNAT, as they get more knowledgeable on this particular case, will also become sensible to this issue, right?
Right. The Mexican government, they can't afford to hurt their people like this, so they're probably gonna issue a permit later on in future, as I gather, because that's just putting too many people out of work.
Yes, and.
It stops royalty payments as well to the government.
Also very important to note is that we have never been signaled for environmental pollution or anything like that. No. I mean, the only thing they're citing is, you know, wrongly, we believe, paperwork.
Yeah. I've been a shareholder for over six months or close to it, probably nine months or so, 'cause I know y'all, you're very undervalued. You trade net book value. I know everything's gonna get solved because I know the type of person you are. Matter of fact, I called you, and I hope you put me into investor relations, and for you to return my call later on this afternoon if you get a chance or tomorrow.
We will. Thank you very much.
All right. Thank you, and good luck. I know you're gonna get things taken care of because I know you're good folks.
Thank you, sir.
Thank you.
Thank you. Our next question is a follow-up from Dalton Baretto. Your line is live. You may begin.
Yeah. Thanks for taking the follow-up. Jorge, I've got a much simpler question for you, and maybe this one's for Paul, actually.
You've just started building Séguéla. I'm hearing from a lot of your peers that are building projects now that there's massive inflation in steel and consumables and labor, all that good stuff. I've also heard recently that there's a lot of congestion in the port of Abidjan. I'm just wondering, you just took your CapEx budget up by $32 million. How much of that is already captured in the budget? What does the contingency look like? Are you seeing any delays as you start to bring stuff in? Thank you.
Yeah. That's a very good question and something we have addressed with the team and I'll let Paul provide all the details here.
Thanks, Tom. Look, you're right. Your contacts are rightly concerned about what's happening. As of late, I guess one of the key features of how we're executing Séguéla is that well over, or closer to 60-odd% of the $173 million capital budget is fixed cost. It is a fixed cost. You know, and obviously with that, you know, that comes at a premium to do that with the various contractors. The ability to approve the project in the third quarter and actually execute those agreements and allow those contractors to make those procurement decisions to meet those schedules was crucial.
At the moment, all of the schedules and costs that you see in front of you there incorporate the current reality that we see in the world. The current critical path from an equipment perspective sits around the mill, sits around the crushing circuit, sits around transformers. All of those have been ordered and are being expedited as per the schedule. As we sit today, I don't have any schedule concerns. Yes, we've increased our allowances in the budget and in the schedules for the current levels of congestion in Abidjan. Yeah, we're closely monitoring that, but we have contemplated these current delays in our thinking. We are moving equipment and people in and around West Africa.
We continue to operate the Yaramoko mine, as you know, in Burkina Faso. All the equipment that is required to operate that project does come through Abidjan. I think, you know, I feel we have a reasonable handle on that. That's not to say that we're not focused on it going forward.
That's great. Thank you for that. That's all from me.
Thanks, Dalton.
Thank you. Our next question today is coming from Jacques Wortman at Laurentian Bank Securities. Your line is live. You may begin.
Yeah, thanks very much. Jorge, just so I'm clear, did you indicate earlier in the Q&A that Lindero is now at design capacity? How would you characterize the current ramp-up stage, given the COVID-related issues with travel restrictions? I'm just trying to get a sense of where things sit, 'cause I thought from an ore to the stack to leach pad, you were still behind and there was still some things to iron out. Go ahead.
Yes. In the third quarter, starting around mid-third quarter, we have been achieving a rate of production within 80% of design parameters. Sorry. No. Yeah, at 80% plus of design parameters, right? You know, all of the equipment in isolation had been tested on performance criteria and everything had performed. Making the entire train and bear in mind that here we have although Lindero has always been viewed by us as a, you know, project with low technical challenge on the mine. You know, we move 40,000 tons per day between ore and waste at a strip ratio of about 1 or under 1 with 5 trucks and 2 loaders. No, 40,000 tons per day with 5 trucks and 2 loaders.
The ore is, as with metallurgics, we call it, is quite sweet, you know. Or gold leaches quite easily and with a good leaching kinetics. But the issue is that we have a primary crushing system, secondary crushing system, the tertiary crushing, agglomeration, conveyor stacking, of course ADR and a SART plant, right? That's where the complexity is. Getting that entire train working at or above 80% of design capacity is what has been a protracted challenge through COVID for the last year, right? I think we're comfortable now seeing the operation steady at rates that are at or above 80% of design. No?
In July, when you gave your updated guidance, you had indicated that you thought you would be at design capacity. I would assume it's 100% of design capacity early in Q4. That, I guess, hasn't been achieved and that's because of these travel restrictions. What would be your best guess of when you'll be at design capacity, not simply 80% of? Do you think that's a quarter away? Two quarters away? I don't know if you wanna get that granular until you have the people on the ground that can help you achieve that with the entire train, but just your best estimate at this point, I guess.
You know, we provided revised guidance. That revised guidance continues to project production rates that increased slowly but steady. I will let Cesar provide, for example, some of the details regarding some of the work that we're doing on Q4. We're still doing some minor adjustments to the system in Q4, and changes. For example, that generates downtime, right? That's a scheduled downtime, if you will, but it's downtime nevertheless. The system is operating, you know, steady at or very close to design parameters. Cesar, you wanna add something to that?
Yes, Jorge, you're correct. The entire process and you did have a very accurate remark there. This is a process, an entire process, and one stage impacts the other. It has to be all balanced and aligned. We have been able to achieve over the past few months a steady growth in delivering tonnage to the leach pad by means of our conveyor stacking close to the design capacity. We are now focusing on bottleneck some activities, planning to get them done by the third, excuse me, the second quarter of 2022, the last of them.
Continuous, you know, delivering according to design at full capacity on a permanent basis, on a steady basis.
There it was a little bit rough. Are you saying that you believe you'll be at 100% design capacity by the end of Q2? Is that what I heard?
Well, we do have the process. We expect to have the processes ready and available at 100% capacity, although obviously we operate at a lower capacity on a permanent basis. We should be able to debottleneck those minor or those details that we have identified by Q2.
Jorge, if you could just confirm if you heard better than I did, I'll let it go, but am I hearing Q2?
What he's saying is we have some work to do to remove some, you know, bottlenecks. For example, we are making changes to the liners in the agglomeration drums and whatnot. That will require some downtime and all of those works are gonna be done by Q2 of next year. If we talk about run rate, the system is operating steady within 80% of design. Okay?
Okay. Thank you very much.
Thank you.
Thank you. Our next question today is coming from Trevor Turnbull at Scotiabank. Your line is live. You may begin.
Hi, Jorge, and I apologize, this might have got touched on before, but just a really simple question going back to the royalty. Was this royalty now gonna cover the entire San Jose property, or is it still limited to the Progreso concession, which is kind of where this all started?
Progreso alone, Trevor.
I apologize. I missed the first part of the call, but if that's the case, Progreso only represents something on the order of, you know, 25% of the production, or how much of it going forward does Progreso and this new royalty really impact?
I don't have the breakdown of resources and reserves on the Progreso concession off the top of my head right now, but it is a meaningful amount, you know, north of, you know, 25%-30%, right? Bear in mind that all of those concessions belong to the Mexican Geological Survey, and a lot of those where we've been producing since day one do carry royalty commitments, right? But this one, and through this dispute, is that we have paid the MXN 9.6 million to settle any historic claim. We have agreed voluntarily to pay on an ongoing basis a 3% royalty. I would have to double-check, and Carlos can provide that to you on a follow-up on the exact amount of reserve resources that are subject to that 3% moving forward.
I don't have the number on my head right now.
No, that's fine. Yes, if Carlos can send that through, that would be great. Thank you very much, Jorge.
No, thank you, Trevor.
Thank you. Once again, ladies and gentlemen, the floor is open for questions. If you have any questions or comments, please press star one on your phone now. Our next question today is coming from Eric McFerrin, a private investor. Your line is live. You may begin.
Hello, gentlemen. I thought the results were basically good. Obviously, the main concern is the San Jose property. We touched on it earlier in the call, but I just wanted to get your feel again. Do you feel that the SEMARNAT actions are a personal matter for their wishes or is it just the infrastructure that it seems like you're willing to do? I didn't know if there was any clarity on that. I had three questions, that's just one of them. The second one was, is there any thoughts on obviously the market cap and the stock has been pummeled over two days, 20%, which seems to be a large market cap of $350 million of loss.
The San Jose only brings in at least from your numbers about $172 million. What's your thoughts on the overselling, for lack of a better term? With this type of price crash, is there a thought of any stock buyback program that could help support some of the momentum shorters that are kind of hurting this company? Because the market cap does make a difference. Thank you.
Yes. Thank you for the three questions. With the first one, I would not like to think that this is, you know, a directed action or attack on the company by any means. No, I wouldn't like to think anything like that. Now, we have to admit also that southern Mexico is not an industrious part of Mexico, right? The more industrious part of Mexico are the northern states where, for example, you have the congregation of mines in states like Durango, Pachuca, Zacatecas, Guanajuato, Sonora. Right? Southern Mexico is not as industrious.
In Oaxaca, there are only two operating mines and, apart from the wind farms, there's only one cement plant and a beer, Corona beer bottling factory. Outside of that, there is nothing else, right? That's all the industry that you'll find in the state of Oaxaca. Does that have something to do with us getting a bit more attention? I don't know. I can only speculate, right? We know that there are many companies, and because we speak with them, that have their environmental files stuck in that office, right? We know that.
What's surprising is, to us, the little care taken in citing the arguments they put forward in order not to extend the permit, right? With respect to the overselling, you know, it's hard for us to comment on market activity. We can say that, you know, this is an issue that we take with a high degree of seriousness and consideration. I myself been directly involved in supporting the team in Mexico along with Cesar. We're very involved. This is something we take very seriously. Today, the San Jose Mine accounts for roughly 25% of our sales or consolidated sales. 25%-28% of our consolidated sales, right?
It's an important asset, but it's one of the legs that support the chair, right? It's not the only one. You know, I can say that we are always hopeful that reason will prevail here and we'll be able to sort this one out. As I said during the call, we are in dialogue as we speak with the authorities and apart from the court, the legal actions, right? With respect to the stock buyback, you know, considerations that go into a stock buyback are many. Of course, valuation being central one, but also use of funds, and short-term, medium-term capital commitments.
In assessing a share buyback program, we have to bring in all of those considerations and make a decision based on that. No, it's not only on, you know, we're undervalued, let's buy stock. Again, we have a large, well, not large, but $170 million in capital commitments for Séguéla, and that's something, that's a key project for us. We, you know, Séguéla is a project, you know, that once it's a mining operation, we'll be producing 130,000 ounces of gold annually at all-in sustaining costs below $1,000. The internal rate of return of that project at spot prices is in the high 30s-low 40s%.
It's technically very simple. We have the right team building it. I think, you know, that's a key project and a key place where we wanna commit capital, right? All of those things will weigh a decision to do a stock buyback, right?
Correct. I appreciate that, Jorge. I just like I said, because the mine is still active, and it seems like the market is treating you like there's nothing, no production at that, in San Jose. Even still, it's only 25%. It just felt like an opportunity with, I mean, if a $350 million market cap loss just in a matter of 24 hours. That was my concern, at least at that point. Because, you know-
Yeah.
Snowball effect.
I think at a personal level it certainly sounds like I might be in the market, certainly. Now that the blackout is removed, I personally am considering buying. Yes. The company-
Well, I appreciate it.
all those other factors.
Thank you very much.
Thank you. Our next question today is coming from George Froly at Pacific Income. Your line is live. You may begin.
Hi, Jorge. You know, Jorge, you're really dropping the ball on all of us. Number one, you said about 18 months ago, we're doing 100,000 ounces at Lindero, and we're at 49 ounces for 9 months. It's not working. Why are you sitting out there in Peru when you're miles from all the action? I mean, you should be in Mexico dealing with the Mexicans, or you should be out there in the Lindero getting the property to work. It's not working right. Things don't work right unless the owner's there, and especially in South America. Number two, you blew it with this merger. You bought a Class C mining company with mines in Timbuktu, the world's worst places. They have one decent mine and the rest of them are junk. You gave away. Our stock was $8.
Today, it's $4. It's down 50 fucking percent . Jorge, you really need to tune in your jockstrap and find another team to play for because you have screwed this company horribly.
You know, thank you for your questions. We're on a conference call, so the cursing, I will always address all my shareholders with a lot of respect. I would expect the same type of respect back, right? With respect to your first question, yes, I am based in Peru, but I live in an airport. So I have spent the last month in Mexico in support of the team. Today we have our Chief Operating Officer in Mexico for the last three weeks, Cesar. Right? With respect to your views on our business in West Africa. You know, the largest gold producer in the world is China. It produces 380 tons of gold annually.
The second-largest gold producer in the world, if we group the countries in West Africa, is West Africa. It's ahead of the U.S., Russia, Australia, Canada. No. We believe it's a place where, you know, if you're a mining company, you need to be there, right? If you are gonna produce precious metals, you need to be there. It is our view that, medium long-term, this is an investment that will pay off for the benefit of us shareholders very handsomely, right? No, that is what I can say to you.
As the CEO, leader of this company and the one who created this company back 15, 16 years ago from an idea to where it is today, can tell you that I'm very committed to the success of this company long term. I have skin in the game, I'm putting all of my energy and effort into the success of this company. Now, mining is a challenging business, and you need stomach for that, right? Mexico is not for the faint of heart either, right? Oaxaca is not for the faint of heart. It's been a good mine for 10 years, and I expect it will continue to be a good mine for 10 years, and we're doing all of our efforts to ensure that. Okay?
Thank you for your question, and if you wanna continue speaking with me, I'm available anytime.
Thank you. Our next question today is coming from Sean Bedford at Nomadic Publishing. Your line is live. You may begin.
Oh, hi. Thank you for taking my question. So on First Majestic Silver's quarter three reporting, one thing they mentioned was that they were holding back silver inventory due to suppressed silver prices in the third quarter. Here we have one of the biggest silver miners outwardly saying that the COMEX silver spot price is a fiction. It's suppressed by the banks, and they're doing something about it by refusing to sell some of their silver. I'm just wondering if you would be willing to do the same thing.
The short answer is not at this stage. I have to say something. No, I'm as bullish as anybody else on metal prices. I've been, you know, and I do subscribe to some of these ideas with respect to price manipulation. I've been in the business for what, 30 years now, over 30 years, probably getting closer to 40, if I count the first time I went to a mine. I, you know, I haven't seen yet the actions taken that you propose serving a purpose of breaking those sort of cartels, right? Manipulating the price.
Sure, we are at this stage not contemplating holding off silver sales. No, we're not. No. It's something we can consider evaluating, and, you know, absolutely, that's something we can revisit, but not at this stage, no.
Okay, thank you.
Thank you. Once again, ladies and gentlemen, if you have any questions or comments, please press star one now. Our next question today is coming from Rick Sherman, a private investor. Your line is live. You may begin.
Yeah, good afternoon. I had a question again on the royalty stream that you mentioned was gonna now be 3%. Is there any previous royalty stream that you were paying to the government entity, or is this completely brand new after the settlement you made? Do you have any quantifiable number as to what this will cost the company on a net basis?
Yes. We have a series of concessions in and around the San Jose Mine. On a few of those, the one that hold the bulk of our reserves and resources, we have royalties. We did not have and we were not paying a royalty on the Progreso too, right? Starting this month of October, we are gonna be paying the 3% royalty. In order to settle any past claims the government had on the royalty, which they quantified in the amount of $30+ million, we agreed to pay a $9.6 million amount, right?
Was that-
Uh-
I'm sorry to interrupt. Was that 9.6 million based on what timeframe? Was that a settlement, or even if you were using their $30 million number, was the royalty based on 10 years' worth of payments or five years? Or what?
Yes. To derive the $9.6 million figure, we resorted to the time when they registered their claim to the royalty on the public mining registry. They only did that in 2017. Right? They claim there's been a royalty there forever and their quantum of, you know, $30+ million came from them deriving a figure from 2011 onwards, which is when the mine started production. Through the negotiation, we said, "Well, you know, when did you register the claim, the royalty? In December 2017? Okay, then let's use that as a basis for our negotiation." Right?
Right.
Again, here, it was either get stuck in court.
Sure
for years with your host government or, you know, I have to say again that the Mexican government today is not so fond of Canadian mining, right? We decided
Right
to settle this, right?
Totally understand the settlement. I was just trying to figure out, like what either going, looking backwards or going forward, you know, is it a $2 million or $3 million, you know, number that is a reduction of operating earnings net after having to pay the new royalty? I was just trying to come up with some general idea to figure out-
Yes.
This might.
I don't know. I don't have the numbers fresh on my head right now. I don't know if Luis does, but if not, we can certainly follow up on a call and provide you more color.
Okay.
Yeah, Jorge, let me help there. This is Luis. Over the remaining life of mine, considering the tonnage that's coming out of that particular claim, the nominal amount of the 3% is approximately $6 million, and that is pre-tax. Net of taxes, it ends up being somewhere in the range of $4 million in terms of the net impact to the bottom line, right? The nominal value alone is around $6 million.
Is that $6 million at over the remaining life of the mine or on an annual basis?
No, over the remaining life of the mine.
Okay. The current projected remaining life of the mine is 10 years.
No, it's over four and a half years. A bit over four and a half years.
Okay, four and a half years. Just the back of the envelope, you would divide the 4.5 years into the $6 million, and it's basically costing you $1.25 million a year or $1.5 million, somewhere in there.
Approximately, yes.
Okay. Thank you very much for that color. Appreciate it.
Thank you. Our next question today is coming from Ron Zager, a private investor. Your line is live.
Thank you, operator. Thank you so much for the answers today. I've got a question on the bank and the bank covenant. I'd like to know which banks are they with, how much money are we talking about, and is the problem with the bank more serious than the dawdling by the authorities? Thank you.
Luis, you wanna-
Yes
Talk here?
Yes, the new lenders are comprised of a syndicate that includes BNP, Bank of Nova Scotia, the Bank of Montreal, and Société Générale. Upon closing of the new facility, the total amount of outstanding debt has been restricted to $120 million. That's the amount drawn on the new facility. As we disclosed in the news release, I mean, the outstanding prior assumed debt from the Roxgold transaction with Société Générale of $28 million was paid out. After the closing, the total senior secured debt outstanding is $120 million.
As we've also disclosed, the additional $80 million of the committed amount under the facility will become available once this issue is resolved. In terms of the November 20 date, again, we touched on this earlier in the call, but that date really had to do originally with the expected time that the legal process to go from a provisional injunction to a definitive injunction takes. Now, things are evolving, not necessarily in the same way that was planned for and expected, so hence our expectation that we'll work with the banks to gain additional flexibility around that date. That is all I have on that question.
Okay. Thank you.
We have no further questions in the queue at this time. I will now turn the floor back over to management for any closing remarks.
If there are no further questions, I would like to thank everyone for listening to today's earnings call. We wish you a great end of the year.
Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time, and have a wonderful day. We thank you for your participation.