Hello, and thank you for standing by, and welcome to Kinross Gold Corporation Q1 results conference call and webcast. I would now like to turn the conference over to your speaker today, Tom Elliott, Senior Vice President, Investor Relations. Please go ahead.
Thank you, and good morning. With us today, we have Paul Rollinson, President and CEO, and the Kinross senior leadership team, Andrea Freeborough, Paul Tomory, and Geoff Gold. Before we begin, I'd like to bring to your attention the fact that we will be making forward-looking statements during this presentation. For a complete discussion of the risks, uncertainties, and assumptions which may lead to actual results and performance being different from estimates contained in our forward-looking information, please refer to page two of this presentation, our news release dated May 11, 2021, the MD&A for the period as of March 31, 2021, and our most recently filed AIF, all of which are available on our website. I'll now turn the call over to Paul.
Thanks, Tom, and thank you all for joining us today. While the global environment remains challenging, we are pleased to report that our business continues to perform well against our expectations. I'll elaborate on this momentarily, but first I want to provide a quick update on how we are managing through the impacts of the pandemic. The safety and wellbeing of our people is our top priority, and we are maintaining many of our pandemic-related protocols in order to protect our employees and communities. As a result of this work and the continued support from our local governments, all of our mines remain operational and our development projects remain on schedule. I'm also pleased to report that we are cautiously optimistic and see some signs of a return to normal starting to take form.
Before turning the call over to Andrea for a financial review, Paul for an operating review, and Geoff for an update on Mauritania and government relations, I will comment briefly on Q1 performance, our outlook, and our commitment to continued leadership in ESG. Overall, we are pleased with our start to the year. During the Q1, our three largest mines, Paracatu, Kupol, and Tasiast, once again represented approximately 60% of our production and delivered the lowest costs in the portfolio. As always, there were some puts and takes throughout the portfolio, but consolidated production is tracking well against our plans. As indicated previously, we expect production to increase throughout the year, with the fourth quarter being the strongest. Adjusting for gold prices, which were above the $1,500 per ounce we used for internal budgeting, our financial performance in the Q1 was also in line with our plans.
As expected, we generated approximately $76 million of free cash flow in the Q1, which is lower than recent quarters, due primarily to anticipated higher tax payments in Brazil, which relates to higher gold prices received in 2020. Like production, we also expect free cash flow to strengthen each quarter, with Q4 being our strongest, which is typical of our business. Our balance sheet remains strong, and we finished the Q1 with just over $1 billion of cash and net debt of approximately $900 million. Looking forward, we remain on track to meet our full year guidance for production, costs, and CapEx, and are also well positioned to achieve our three-year production guidance and long-term production goals. At Round Mountain, mining activities in Q1 were impacted by precautionary measures taken after movements in the north wall of the pit were detected by the site's comprehensive monitoring system.
The site deferred mining in the area, which delayed access to Phase W ore and affected the mine's performance during the quarter. Paul will elaborate on the issue and potential remedies later, but as I indicated, we do not expect this to impact our 2021 production and cost of sales guidance, our longer-term production profile, or Round Mountain's total life of mine production. Finally, in line with our commitment to strong environmental stewardship, we took an important step this quarter by committing to reach net zero greenhouse gas emissions by 2050. Kinross currently ranks as one of the lowest greenhouse gas emitters in our sector. Notwithstanding our strong ranking, we are also identifying specific greenhouse gas emission targets for 2030. I'll now turn the call over to Andrea for a more detailed review of our financial results
Thanks, Paul. I'll begin with financial highlights from the quarter, give an overview of our balance sheet, and provide some commentary on our outlook. Production during the quarter was approximately 559,000 ounces. Sales of 548,000 ounces were 11,000 ounces less than production due to timing of shipments, particularly in West Africa and to a lesser extent at Bald Mountain in Nevada. As a reminder, quarterly variances such as this are not unusual and tend to smooth out over time. Production cost per ounce was $756 in Q1, which was up from the prior quarter, mainly due to lower production and roughly in line with Q1 of last year. Attributable operating margins were robust again in Q1 at 58%, driven by strong gold prices and cost discipline.
All-in sustaining cost per ounce of $975 were down compared to last quarter and Q1 of last year, primarily due to lower sustaining CapEx in the Q1. Our adjusted net earnings of $193 million were up approximately 50% from the same quarter last year, largely due to stronger gold prices. Our adjusted operating cash flow of $400 million was down slightly from Q1 of last year, mainly due to higher current tax expense in the quarter, partly offset by increased operating earnings. Q1 free cash flow of $76 million is reported on an unadjusted basis and includes net working capital outflows, including taxes paid of approximately $120 million. Cash taxes during the quarter included a payment of approximately $90 million in Brazil related to 2020. As Paul mentioned, Q1 is expected to be our lowest free cash flow quarter of the year, depending on gold prices.
Moving to our balance sheet, our cash position remains strong. We finished the quarter with over $1 billion of cash and cash equivalents. Our cash balance was down slightly from the end of 2020, as our positive free cash flow was offset by the final payment of $142 million on Chulbatkan, as well as regular interest and dividend payments. Our net debt at the end of the quarter was approximately $900 million. Our trailing 12-month net debt to EBITDA ratio stood at 0.4 times. Subsequent to quarter end, we announced that on June 1st, we will be redeeming $500 million of senior notes. These notes have a maturity of September 1st, however, we elected to repay a few months early as we're able to do so without incurring any penalties while also saving on additional interest costs.
After repaying the notes, we will have $1.25 billion of senior notes remaining and will assess any future repayment as we approach the next maturity date in March 2024. Our cash position is strong. Our debt levels and leverage metrics are very manageable, and our free cash flow outlook remains robust. Even if gold prices were to decline from current levels, we expect to be able to fund our project internally. I'll now turn the call over to Paul Rollinson.
Thanks very much, Andrea. I'll provide a brief update on how we're managing COVID across the portfolio, followed by updates on operations and projects. As Paul mentioned earlier, we're encouraged to see some positive signs with respect to COVID. Nevertheless, we're maintaining our precautions. Vaccines have been rolling out across our operating regions, and we see signs of potentially returning to a more normal operating environment. Our ability to manage well through COVID thus far has been made possible by the tireless efforts of our employees, our operating communities, and very strong support from our host governments. Moving to a more detailed review of our portfolio of operations and projects, the year began on plan with a lower production quarter. As Paul indicated, our three big mines, Paracatu, Tasiast, and Kupol, continued their strong performance.
These assets once again accounted for approximately 60% of production and had the strongest margins in the portfolio. Paracatu delivered a record quarterly throughput, although production was down somewhat compared with recent quarters due to lower mill grades. We expect production at Paracatu to be higher in the coming quarters. In Russia, production was similar to the Q1 of 2020, and unit costs were down slightly due to lower mining costs, as mining activities at Dvoinoye were completed last year and we are processing some stockpiled ore. Favorable foreign exchange rates in Russia also contributed to lower costs. At Udinsk, the PFS is advancing on plan and is expected to be complete in the fourth quarter, with first production still targeted for 2025.
This year's exploration activities on the larger Chulbatkan license have commenced, with drilling focused on new targets showing soil and geophysics anomalies near the Udinsk resource pit, and we have received permits to commence drilling on some of these prospective areas. Moving to Africa, Tasiast. COVID restrictions continue to ease and shift schedules are normalizing. The site achieved record quarterly throughput rates. However, production in the Q1 was lower than previous quarters as a result of a planned move to lower grades for more stockpile material as we focus our mining activities on stripping the next Phase of West Branch. Tasiast is performing as expected, and the project remains on schedule and on budget to reach throughput capacity of 21,000 tons per day by the end of the year and 24,000 tons per day by mid-2023. We've also begun an evaluation for a potential renewable energy source at Tasiast.
At Chirano, production was higher relative to Q4 and roughly in line with one year ago. Costs were somewhat elevated in the quarter due to higher operating waste mined, higher maintenance, milling, and power costs. Turning to our U.S. operations. At Fort Knox in Alaska, Q1 production was down slightly from previous quarters with lower mill through, but largely due to challenging winter weather. However, results compare favorably with Q1 of last year. During the quarter, we also completed our FS for the Gill satellite pits. The project was subsequently approved. We are on track for production later this year. Highlights from this FS are included in the appendix to this presentation. Progress continued at our Manh Choh project, which was recently renamed from Peak, in close consultation with the local village of Tetlin.
The scoping study for Manh Choh is advancing as planned and is expected to be completed in the Q2. Moving to Round Mountain, as Paul mentioned, we encountered a setback in the quarter, which we're currently working through. During the quarter, our team uncovered some early instability in the pit wall, which prompted us to make adjustments to the mine plan. With safety as our top priority, we temporarily paused mining in this area of the pit, while other areas of mining and processing continue uninterrupted. We are currently mitigating this potential issue by relocating waste from the top of the north wall and accelerating dewatering in the area to enhance stability, while continuing to monitor the situation.
As a result of the disruption to mining activities in this area, access to some of the higher grades within Phase W are expected to be deferred by a couple of years, although we don't expect any impact to total life of mine production. Furthermore, the potential for changes to the geotechnical parameters in the north wall, in addition to the potential Phase S pushback, is providing us with the opportunity to perform a holistic mine plan re-optimization, as we've done with great success at several of our other assets. Following our re-optimization, we don't expect a significant impact to Round Mountain's NPV, and the results of this work are expected in the Q2 of 2022. Bald Mountain had a good quarter with production up over 20% year-over-year and cost and capital declining again.
Shifting to our projects in Chile, we continue to make good progress at both Lobo and La Coipa. Starting with La Coipa, pre-stripping began in January and is advancing very well. Fleet refurbishments are expected to be completed in the Q2, with plant refurbishment and mine ore construction advancing as planned. Finally, at Lobo, the FS is advancing on schedule and is expected to be completed in the fourth quarter of this year. To wrap up, our priorities continue to be the health and safety of our employees, our social license to operate, and the well-being of our communities and stakeholders, delivering strong, consistent operating results and delivering our projects on time and on budget. With that, I'll turn the call over to Geoff Gold.
Thanks, Paul. We have a track record of more than 10 years of successfully operating in Mauritania, and that success has continued under the previously announced agreement in principle. Despite delays caused by COVID, we have been able to maintain ongoing discussions with the government, and our engagement has been frequent and constructive, particularly in the last couple of months. We have held multiple virtual meetings with the government committee charged with finalizing the definitive agreements. In fact, I was on a productive call with our team and the government negotiation committee on Monday of this week. In the last few weeks, there have also been meetings with high-ranking cabinet members, including the Minister of Mines, Economy and Finance, and I can report we are making substantial progress towards finalizing our agreements.
We have also had discussions on other matters of mutual interest not covered by our agreement in principle, including health and community initiatives, customs and work permit arrangements, and tax assessments. Such discussions are not unique to Mauritania and occur in other countries of our operations. As part of the finalization process of the definitive agreements, we are taking the time to incorporate the detailed commercial arrangements from our agreement in principle into the definitive agreements that will encompass four mining concessions for the Tasiast north and south properties. Since the announcement of our agreement in principle and our ensuing discussions, the parties have continued to work together and maintain business continuity during the pandemic. I'll now turn the call back over to Paul for closing remarks.
Thanks, Geoff. I want to reiterate our gratitude to our employees, suppliers, communities, and host governments who have all continued to work together to help us stay safe and productive. Our business remains very well positioned. We have an attractive portfolio of operations coupled with a robust pipeline of projects and exploration opportunities. We have a proven track record for operational excellence and project execution across all of our geographies. We continue to generate strong free cash flow and further strengthen our investment-grade balance sheet, and we remain focused on our ESG commitments and sector-leading performance. With all these characteristics, we are in a great position to continue driving meaningful value creation over the coming quarters and years. With that, operator, I would now like to open up the call to questions.
Okay. Thank you. If anybody would like to ask a question, please press star one on your telephone keypad. Again, that is star one on your telephone keypad. The first question comes from Tyler Langton from JP Morgan. Your line is open.
Good morning, Paul and team. Thanks for taking my questions. First, just for the upcoming study that I guess you did in Manh Choh and Lobo-Marte, could you just talk a little bit about the level of costs that you're using for items like fuel, energy materials, just sort of given all the upper movements we've seen for those materials?
Yeah. Look, I think I'll start and maybe hand off to Paul. We are starting in early days to see early signs of inflation out there in the system. I guess I look at it, there's two sides to the coin. On the cost side, we have a few, I guess I call it arrows in our quiver. We're constantly using continuous improvement initiatives to drive efficiency and cost savings to offset inflation. Several years ago, we moved to a global procurement strategy that gives us negotiating leverage globally on consumables, so there's negotiation opportunities. Right now, currencies are somewhat in our favor, and we do carefully hedge around both currencies and oil, and we've got oil hedges in place. Lots of things we can do to proactively mitigate and manage on the cost side.
Then to the extent we do see further inflation continue, we would also expect we'd see some benefit on the revenue side with the gold price. For project specific, I think maybe, Paul, you could give some anecdotes of the kinds of things we may see.
Yeah. This inflation question has been a big theme, both in the media, among the investment community, and also internally. We've noted a lot of other mining companies talking about this topic on their calls. In the near term, we do see inflationary pressure on several of our operating consumables. For this year, we don't see any impact to our guidance. It's within the buffer range that we have on the guidance. For our projects, we still continue to advance these studies at a $1,200 planning price. We are seeing signs of inflation, really two areas. One is the macro inflationary environment driven by monetary and fiscal policy, just the inflation of input commodities. We're starting to see the early signs of more micro inflation, where the supply chain to mining is a limited supply chain.
As more companies put projects into the pipeline, particularly in copper and iron ore, there will be competition for equipment resources, in these projects. Some amount of pressure on CapEx in those projects ought to be expected. It is still early days on the indicators that we're seeing.
No, great. That's very helpful. Thanks. Just one follow-up question, just on Paracatu. I think last October, you talked about sort of production exceeding 600,000 ounces per year in 2021 through 2023. I know Q1 production was a little bit lower just on grades. Can you just talk about, should we expect sort of production to kind of increase sequentially throughout the remainder of the year, and is that more grades versus throughput? I know throughput was strong in the quarter, but just any color there.
Yeah, definitely. We expect a much better Q2. Q1 was on plan. We were mining a part of the pit that had the lower grade, so it was as expected. We see Q2 and Q3 strong quarters, more in the 150 range. Yes, to answer your question, our comments previously on Paracatu in the $600 range remain.
Great. Thanks so much.
Thank you. Next question will come from Anita Soni from CIBC World Markets. Your line is open.
Hi, good morning. This is a question for Paul Tomory. With respect to the Round Mountain pit wall, as you can imagine I'm going to ask. Can you just give me an idea, a little bit more color? Round Mountain's had a pit wall movement, I think it was three years ago as well, and you mentioned that you've got waste at the top of the pit wall. You're moving that, do you think that'll be sufficient to mitigate the issue that you have there? Is there fracturing? You mentioned, I think, dewatering as well. How serious is this, and will it impact next year's production guidance at 2.7 ±5%?
Yeah. Anita, I'll probably give a really long answer here, anticipating that there are quite a few questions on Round Mountain. Round Mountain, if I were in your shoes, is actually a very difficult asset to model because there are very many processing flow streams, and I'll try to provide some context on that. I'll lead with our production guidance for this year and the next two years. The range of impact we expect at Round Mountain is within that plus/minus 5% range. I want to make that clear, that our guidance holds for the year and for the three-year timeframe. Round Mountain context, it's a prolific mineralized system. It's produced well over 17 million ounces in the several decades that it's operated, and our current aspirational goal is to get that to 20 million. We see a forward pipeline that will add significant production.
The other thing that characterizes Round Mountain is pretty significant historical positive reconciliation. Certainly in the first couple of decades at Round Mountain, the actual grades were much higher than the model grades. We have situations where a lot of our heaps contain amounts of gold that are well in excess of previous estimates. I have to say truthfully, we don't even know how much gold remains in those heaps. Since we approved the Phase W study, we've actually added quite a lot of production into Round Mountain's profile that often goes unheralded. For example, this year and next year, about a quarter of our production at Round Mountain actually comes from the heaps, really legacy ounces in some cases we're leaching a third and fourth time. We've also added, since the Phase W study, other mining areas.
There's a part of the main pit called North Fairview, which had previously experienced geotechnical issues. We've gone back in there, and we're mining it. We've got a satellite pit called Gold Hill, where we've approved a couple extra pushbacks. The reason I'm going into all this detail is to show that Round Mountain isn't just Phase W. There's quite a lot of sources of ore that we rely upon. For example, we also have mill stockpiles. Another example of outperformance over the last four or five years at Round is, in the initial concept of Phase W, we had to move a waste dump similar to what we're having to do now. That waste dump was, as it turns out, mineralized. Those are ounces that were, in effect, bonus. We ended up putting them on the heaps.
An important point of contact at Round has yielded, since the Phase W approval, bonus ounces from these different sources of ore and opportunity really arising from historical grades and even in situ grades being better than even what we're currently modeling. Now, to your specific question on the geotech issues, we have a clay unit at depth at Round Mountain, which we know about. It was considered in the Phase W study, but in hindsight, our assumption didn't take into account just how significant the presence of that clay layer was. What we're doing right now, as a result of the early detection of movement, is we are going to unload the rim of the pit, and there's a waste dump up there, and there's going to be 20, 30 million tons of waste dump that need to be moved there.
In addition to that, we are going to have to make the pit wall in that area, on the north portion of the pit, more shallow. We don't quite know exactly where that will land because we're carrying out, as you'd expect, Anita, a very extensive dewatering program over and above what was contemplated in the Phase W study, and we're putting in a number of geotech holes. We won't have the results of that, and we'll have a better idea of the water drawdown performance by September, which is why it'll take us several months to work through putting more fine detail on the impact here.
What we're looking at, what we do know is that the wall angle will have to become shallower, and as a result of the fleet being tied up in incremental mining activity for this remediation, we are deferring the access to the higher-grade portion of Phase W ore body, but not all production in Phase W, just the higher-grade portion, by two years. In the Phase W study, we saw ourselves ramping up to the four to 450 ounce range in 2023 and 2024. Those high production years are now deferred to 2025, 2026. We know that based on a conservative first guess at where the slopes may land.
Because of the other sources of ore that I've described, we still expect to maintain production in the 250 to the high 200s range over the next several years at Round while we wait for the higher grade portion of Phase W. The silver lining here is that the combination of these bonus ounces in the near term and this pit wall layback actually extends mine life at Round Mountain at a substantial production level by two years. What's made that possible is the sum total of these, what I would call bonus ounces, in the near term. In our re-optimization, this will be my final point, is we were going to release the results of the Phase S study now, but obviously, the fleet will now be tied up doing other things.
We are going to defer the release of the Phase S study for about a year and pull it into a holistic re-optimization of the entire pit. We have about 1 million ounces there at Phase S. In addition to that, we have other opportunities at Round Mountain. For example, we recently approved an expansion to the flotation plant there, which will add a couple of points of recovery to all gold that goes through the mill at Round Mountain. We intend to complete the geotech program, complete the dewatering, do the Phase S optimization, construct the flotation plant, pull in potential incremental pushbacks at Gold Hill, and come to the market with a comprehensive view on Round Mountain a year from now. I've deliberately been more detailed in anticipation of further questions on Round Mountain, Anita, I hope that answers your question.
I do have one or two more follow-ups. I happen to have our mine tour booklet from 2016 when we visited Bald and Round, after you guys bought that. I'm looking at the pit wall slope. As I can tell, it looked like it was supposed to be around a 45-degree angle. Is that correct overall?
That's right. Our current view, what we base our comments on meeting production guides for the next three years, are based on softening that slope to 30 degrees.
30 is pretty shallow.
It is pretty shallow, which is why we think that there's opportunity to claw some of this back. What we've done here is, because we don't have the results of the geotech drilling, we're laying the slope quite far back, and depending on the outcome of that program, we may end up steepening them back from 30, but I don't know yet where that will land.
The last question would be, the higher grade portion of the ore, as I recall, or as I've been modeling, has been somewhere in the range of 7.6 to 8 gram per ton material that would have gone through the mill, and then some of it was like 0.6 going through the heap leaches, I think it was. Just in general, was that what we were thinking about when we think about the higher grade portion of the Phase W?
Yeah. The IR team will get back to you, but the mill portion is definitely high grade. It's maybe not as high as you're saying, but certainly the average grades are in line with what you're implying, where we've got a reserve grade of 0.7.
Yeah.
The IR team will get back to you on a breakdown, but you're not far off the mark.
Okay.
Thanks. I'll leave it there.
The mill grades are lower.
Okay. I'll leave it there and let other people ask questions. Thanks.
Okay.
Your next question will come from Carey MacRury from Canaccord Genuity. Your line is open.
Good morning, everyone. Maybe just to help us model out the quarters, I know you're expecting sequential improvements for the year, but can you give us sort of an H2 H1 split in terms of production?
Well, why don't I actually take you through each site? It's probably easier to do that way. We are ramping up to higher production in the Q2. At Fort Knox, you saw it had higher costs in this quarter. It is ramping up. We were at around the mid-50s, and we expect to ramp up to high 60s and 70s, in the subsequent quarter. Basically, Fort Knox has an increasing profile from the 55 we just put out in the Q1 up into the high 70s, in the fourth quarter. At Paracatu, as I indicated, the 126 in the quarter, moving more up to the 150 range for the next couple, and then dropping off in the fourth quarter. I think that's an important one.
Round Mountain, our initial view is we're seeing a 50,000-70,000 ounce impact this year as a result of this geotech issue. We still expect Round to be in the 50-60 range, per quarter. Probably the biggest mover is actually Tasiast. As you know, we're mining in stockpiles right now. We're processing stockpiles right now. The stripping campaign for the next West Branch principal phase is proceeding well, and we expect to get into high grades there in the fourth quarter. Tasiast will have the biggest upswing in the last quarter. At Kupol, Chirano are steady for the balance of the year. Fort Knox, Tasiast, Paracatu are going to see increases, and roughly the rest of the portfolio is about flat. I hope that gives some context. Russia's flat as well.
That's helpful. Maybe just on Tasiast, what sort of grade level should we assume for Q4?
We're in about 1.8, 1.9 now. We'll be well over 2 in Q4. In some cases, depending on the day, pushing up towards 3.
Okay, great. Maybe just on Paracatu, 170,000 tons per day in the quarter, pretty big jump. Is that just due to where you are in the pit or hardness, or have you guys been doing something else there?
It's just a really solid operating performance. Paracatu has become a truly world-class asset in all regards. We have a phenomenal team down there. We have great technical understanding. It's a huge mill. I don't know if you've been there, but huge, complex mill. I think still the largest throughput gold mill on Earth, and it takes years to get a handle on something that big, and the team has really gotten to know it really well, and they're just continuously improving. Now, we will have setbacks here and there. You may have downtime events, but the Q1 was just a confluence of really solid operating performance and no unplanned downtime.
Just one last one, again, on Fort Knox. I know you said the appendix, there's some detail on the Gill expansion there, what does Fort Knox look like in 2022 as a whole? Can we get some guidance on that versus 2020? Sorry, 2021?
Yeah, we're expecting this year will be in the 270 range, and it'll be slightly higher next year, going forward as Gill comes into the plan. We'll be pulling these Gill high-grade ounces, and Fort Knox, we're now looking at actually as Kinross Alaska. We've got the main Fort Knox pit. We're pulling in these Gill satellites, and of course, as you know, Manh Choh will be trucking high grade to Fort Knox. We're starting to look at Fort Knox from an Alaska perspective, and it's going to have a good production profile as we get Gill into the plan and as we get Manh Choh in the plan. The other thing that we can do at Fort Knox, taking advantage of high gold prices, we can make almost game time decisions on cutover grade.
Good gold day, we send material preferentially to the mill and make more money on it. It's sort of a riskless way to take advantage of higher gold prices. We've got that benefit at Fort Knox as well. In general, a trending upward production plan to over 300 next year.
Great. That's it for me. Thanks. Thanks, everyone.
Your next question will come from Mike Parkin from National Bank. Your line is open.
Hi, guys. Thanks for the detail on Round Mountain. That's been very helpful. Just really one question left. On Udinsk, you mentioned the exploration programs underway. When could we expect the initial results, assuming you're hitting stuff? I know from past discussions, I believe you're focusing on kind of step-out drilling from the main pit resource shell. Is that still the plan and could we possibly see some results with Q2 earnings?
You've described the program basically perfectly. We typically put out our results at year-end, and we'll have a more modest update with Q2. We typically do that for exploration.
Great. That's it for me, guys. Thanks very much.
Your next question will come from Tanya Jakusconek from Scotiabank. Your line is open.
Great. Thank you. Good morning, everybody. Paul T., I just wanted to come back to Round Mountain, if I could, appreciate the color on all of the ore sources that you can get more of production and sort of get the production profiles to stay as you mentioned. We didn't touch on the additional costs. It looks like there's going to be more stripping that needs to be done, that waste dump that needs to be moved 20 million-30 million tons. Can you just give us some color on what sort of additional costs we're going to have to incur just in the short term?
Yes. That's the short-term impact, is we have to move this waste dump. We don't exactly know just how far back we have to cut it. That's the question Anita was asking on the slopes. We're looking at 20 million-30 million tons in the waste dump and at least that amount again in the pit wall. There is going to be a cost impact. We can move that waste dump for, let's call it $0.70-$0.80 a ton. As you get deeper into the pit wall layback, it will obviously go up in cost. When Paul commented earlier on the NPV neutral comment, we are looking for ways to offset the NPV impact of those additional stripping dollars through things like the flotation expansion that I talked about at the plant and potentially incremental pushbacks at Gold Hill.
Andrea will talk about some of the accounting implications.
Yeah. I think one of the points that is worth making is, it's the same amount of mining activity that we were planning to do this year, just without the ounces coming in and production revenue. From an accounting perspective, the costs are more closer to probably $2 a ton in terms of what we're moving.
Okay, so-
Tanya, definitely a cost impact from a life and mine point of view in the additional stripping and the waste dump movement. As I said, we expect to offset that with other opportunities.
Okay. If I was to just take that 20 million-30 million tons and times two, for the layback too, and multiply it by the cost of movement and put it over the next two years, that would be a reasonable assumption?
That is pretty reasonable, yes.
Okay, perfect. Paul, maybe just to follow through, I just wanted to touch on Paracatu and inflation in general, and then, Paul Rollinson on dividend and share buyback. Just on Paracatu, I saw that you put the thickeners in. Everything looks like you're on track to get to that 21. Anything else critical that you need to do to get to 21,000 tons a day by year-end, except for the pre-stripping or the stripping?
It's the final tie-ins on the thickener. Thickener construction is complete, but we have to tie it in. We are going to have a very busy fourth quarter and Q1 next year doing all the mechanical electrical flowsheet tie-ins. As you see from the pictures, we've actually had a really good run of construction over the last seven, eight weeks. I don't want to say we're out of the woods yet, but we're certainly heading to the finish line in pretty strong fashion, and it'll be right at the wire at the end of this year. Yeah, all the key elements are well in place. It's just now tie-ins and commissioning.
Okay. Just on inflation, and I appreciate that you gave us some clarity on where you're seeing some of those inflationary pressures. Just wanted to ask one area, which is labor, which is a big component of the cost structure. You didn't mention anything there. Are we seeing any inflation in labor?
It's a good question, and it starts to tie into macro factors. For example, Brazil. We do a refresh on the labor agreement there, and this year we saw, call it a 5% increase in labor there, which is I always like to compare things to, say, 12, 13 years ago. Back then, and Paracatu's a really good example because it can get whipsawed by the combination of labor rates, FX rates, gold price, local costs. The equation in Brazil is still very positive for us. In other words, weakness in the real, which is a byproduct of everything else going on from a macro point of view, continues to be a tailwind. We are seeing labor cost inflation in Brazil, but principally driven by local input cost inflation. The equation is still quite net positive.
I suppose if we were to really wrap our heads around it and start thinking about it, could this be a repeat of what we saw 12, 13 years ago? Tough to say. There are some early indications of that, and, depending on where things go in local economies, now, of course, everything is COVID impacted right now and the recovery there, it's a very complex equation. Just to answer your question, we are seeing some labor cost increases, particularly in places like Russia, Brazil, and to a lesser extent in Chile. Those numbers are still tame, but slightly higher than the normal run-of-the-mill yearly increases we've been seeing for the last decade. Yes, there are early indicators of an inflationary environment in the labor market.
Okay. Thank you. Maybe, just for Paul, just after you've paid your debt in June and we're ramping up at Paracatu, and we're going to start generating a lot of free cash flow, can you talk about this allocation of this free cash flow? How do you see dividends and/or share buyback?
Sure. Tanya, thanks. Yeah, you're right. Whilst cash flow is good this year, we do have some non-recurring cash items, whether it's the final installment on Chulbatkan, obviously we're redeeming the note. As is our style, we're sort of watching the gold price very carefully, watching our balance sheet, and looking through the windshield to the balance of the year and next year. We agree that, not so much this year in terms of those non-recurring cash payments, but certainly as we go into next year, and the year after, we predict fairly dramatic growth in both production and cash flow. Yes, we are hearing it from investors, and we are thinking about it.
I think we want to just get to the Q2 here, get the note out of the way, see where we've gone on the gold price, and come out with more of a plan at that point. I would say anecdotally, as we go through our investor meetings, the pendulum has swung a little bit more to, I would say, a desire for buyback on top of the dividend. That's been a theme through all of our IR, I would say, this year. We're taking that on board. We see our dividend as a baseline forever, a sustainable dividend, sustainable at lower gold prices. We're thinking, but haven't finalized, that the right sort of enhancement, the layering on top of that dividend would potentially be buybacks. We want to just give it another quarter to see how the macro all shakes out this year.
Okay. From that, I take that you're leaning more towards the buyback versus enhancing the dividend at this point.
I would say, again, it's not a scientific poll, but I think given we're listening to our investors, that I think would work and be well-received. We are, yes, leaning a bit more to the buyback.
Okay. Thank you. You should. The stock's trading at a discount to bullion, so you should buy it back. Thank you.
Thanks, Tanya Jakusconek.
Your next question will come from Jackie Przybylowski from BMO Capital Markets. Your line is open.
Thanks very much. Sorry, I want to go back to Round Mountain just for a minute. You noted that you've got a Mine Optimization Program, that you're going to be looking at this on a more bigger picture, I guess, and reviewing the opportunities for Phase S. I just had a question about that. Back in October, when you did the investor update, you talked about Phase S and a potential for a Phase X, which sounded like it was maybe not economic at the time. You had more study and more drilling to do for that Phase X. Is this a two-year or one and a half year evaluation going to contemplate that Phase X as well? What do you need to see on that to get more optimistic on that bigger Phase X project? Thanks.
Yes. Thanks, Jackie, for bringing that up. In this optimization that we're going to put out, Phase X will be mentioned conceptually, but it won't be part of the formal life of mine plan. We continue to explore and drill at Phase X. There are high grades of depth. If anything, this current geotechnical issue with Phase W, just a quick reminder, Phase X would have been the next pushback in Phase W. When we built the Phase W project, we made accommodation for a pit wall pushback that could accommodate Phase X. I'm just going to guess here, but I think that with this geotechnical issue, Phase X is probably not going to be an open pit at this stage. What we're looking at in our conceptual studies is an underground there. Drilling is ongoing. We're doing exploration down there.
We know there are high grades down there. If we like what we see, we would consider putting in an exploration decline, like we are at Curlew in Washington State, to do more detailed high-grade exploration. We are ramping up on our underground capability for that potential. The first step is surface drilling, and then if we like what we see in terms of grade, we will consider putting in a decline.
Generally, we're seeing grades increase at depth.
At depth, yes.
We see that feeder source coming from depth in the west.
Yes. There's a lot of gold down there, but it's under a lot of cover. The question is, could you get underground mining shapes that hold together at a given cutoff to make them economic at $1,200 or $1,400? In this optimization we're doing, just to sum it up, we will have a perspective on Phase X, but it won't be part of the formal life of mine plan.
Maybe just on the point about going underground, is the underlying issue that's causing the pit wall instability, is that something that you would need to be concerned about as you go underground, or are you probably able to manage?
No.
around those issues?
No. The real issue is a clay layer known as the Stebbis Hill Formation, and that is located within the strata of the pit. The underground would be below that. It's not that we're dealing with highly fractured rock. We're dealing with a very greasy clay surface in that north wall.
Down west.
Okay. That's really helpful.
That's right, yes.
Thank you very much.
Yes.
Your next question comes from Greg Barnes from TD Securities. Your line is open.
Yes. Thank you. BMO. I'm going to flog a really dead horse here. On Round Mountain.
I expected it.
Closer clean getaway, please.
That's what I did while shaving this morning, is I practiced all the questions you guys would send at me on Round Mountain. Log away.
Net, after everything I'm hearing is, you expect an improved mine plan, life of mine at Round Mountain with higher production and longer life coming out of all this?
If you include the flotation expansion that I've been talking about, the Phase S expansion and continued outperformance on the heaps, yes, definitely. That is what we hope to be able to deliver a year from now. Like I said, the real silver lining here is this deferral of Phase W actually pushes substantial production at Round Mountain out a further two years, and we've been able to, at least in part, backfill the near term with the myriad of these other opportunities I've talked about. Yes, we expect to come out with an optimized plan that you guys will like. We have a lot of work to do, and that's why it's a year from now, but we certainly have high hopes for Round Mountain and ultimately pushing the 17 million ounces that have been recovered there, the project to date, upwards to 20 million.
We have this 20 million ounce target for Round Mountain.
Okay. On the flotation expansion, I'm not sure I was aware of that. Maybe I missed it.
This is the first you're hearing of it. Yeah, no, this is the first I'm talking about it. The mill, as you know, mills the high-grade sulfides, and we just approved an expansion of the flotation to increase recoveries there. It's a modest project, but it's an example of a good little continuous improvement project where we can deploy a little bit of capital to increase recovery on all of the life of mine mill material to come.
Yeah.
Basically, sorry, go ahead.
No, I was just going to say, as Paul and I were talking earlier, what you're seeing here is with this situation at Bald Mountain, it's caused us to kind of rotate the flashlight a bit to a bunch of things we've been working on that we refer to all the time. We constantly talk about CI initiatives at all of our operations. I use the word again, the silver lining here is we just kind of opened up the kimono a little bit so that you guys know specifically there's a bunch of stuff here that we would be working on anyway, as we do at many other of our sites. There's lots of stuff here to work on, and we're feeling pretty confident. We call it turning lemons into lemonade here.
We've had a setback, but we can dial back, and we see lots of opportunities, and we think we can come through with an improved situation.
Okay, great. That's all for me. Thanks.
Your next question will come from Anita Soni from CIBC World Markets.
Hi, Paul. Back to that horse again. That clay layer, can you tell me how thick it is and if it's below the bottom of the pit? Is that what you're saying?
It's near the bottom of the Phase W pushback, a little bit higher though. Basically, the ultimate pit bottom gets below the clay layer. Once you're through the clay layer, you're back into pretty competent ground. You'll remember from the tour.
Yep.
That north wall of the pit where Phase W is, it’s principally alluvium. It’s highly competent alluvium sitting on top of a couple other strata below, under which lies the Stevinson clay formation. I can’t tell you exactly how thick it is, but it’s not very thick. It’s basically a clay layer that retains water and reduces the effect of stresses down there, and it causes that instability. What we’re doing right now is we’re putting in quite a lot of incremental dewatering capacity, both right down in the lower part of the pit, more proximal to the clay layer, but also broader, more regional level dewatering wells. We’re putting in a bunch more geotech holes to really better understand this Stevinson layer.
Okay. Thank you.
This brings us to the end of our Q&A session for today. I turn the call back over the presenters for closing remarks.
Great. Thank you, operator, and thanks everyone for joining us today. I look forward to catching up in the coming weeks and months. Thank you.
Thank you, everyone. This will conclude today's conference call. You may now disconnect.