Thank you for standing by. This is the conference operator. Welcome to the K92 Mining Third Quarter 2021 Financial Results Conference Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to David Medilek, Vice President, Business Development and Investor Relations. Please go ahead, sir.
Thank you, operator, and thanks everyone for attending K92 Mining's third quarter 2021 conference call. We hope you and your families are doing well. In addition to myself, we have on the line John Lewins, Chief Executive Officer and Director; and Justin Blanchet, Chief Financial Officer. I would also like to remind everyone that after the remarks from management, the call will be followed by a Q&A session. As we will be making forward-looking statements during the call, please refer to the cautionary notes and risk disclosure in our MD&A and slide two of the webcast presentation. Also, please bear in mind that all dollar amounts mentioned in the conference call are in United States dollars, unless otherwise noted. Now, I'll turn it over to John to provide you with an overview.
Thank you, David, and welcome everyone. The third quarter saw Kainantu Gold Mine take a number of major steps forward. These included achieving Stage 2 extension run rate, throughput in September, reporting extensive high-grade mineralization along the second sublevel at Judd, expanding Judd with more high-grade drill results, delivering some of the highest grade reported intersections at Kora, exceeding budget on the twin incline development m, deeper drilling progressing at Blue Lake, and then soon after the quarter ended, announcing board approval for the Stage 2 expansion, which increases existing plant throughput and mine production a further 25% to 500,000 tons per annum for an estimated cost of just, or CapEx of just $2.5 million.
On the safety front, the third quarter, we're pleased to report that there was zero lost time injuries as K92 continues to operate with one of the best safety records in the Australasia region. Something which we've done since the start of operations. We believe that we are relentless in our focus in occupational health and safety and continuously seeking to improve our safety systems. I'm pleased to report that K92 released its 2020 sustainability report. For the report, we completed a materiality assessment, listening to our various internal and external stakeholders to better appreciate what matters to them. This report incorporates their feedback, and more importantly, will influence our efforts going forward.
The report has also upgraded our disclosure, reporting to SASB Metals and Mining Standard. For the 2021 report, we're planning to have a major focus on carbon emissions.
A greenhouse gas emission audit is currently underway, and this will enhance our ESG reporting, our understanding of areas of improvement, and provide important information for developing corporate emissions goals and strategies. I think before moving to the next slide, I'd like to say that we're extremely proud of the positive impact that the operation has had on our communities, and we encourage you to read the report, which can be found on our website in the Responsible Mining section. During the quarter, we produced 24,122 gold equivalent oz, with the operation delivering a record mill throughput of 87,621 tons processed at a head grade of 9.82 g per ton gold equivalent. Compared to second quarter 2020, mill throughput increased 35%.
Gold grades once again delivered a positive reconciliation versus the resource model and partially offset below budget mine grades, which were due to the impact of COVID-19 in PNG, which we will discuss further in the presentation. A major positive for the quarter was achieving Stage 2 expansion run rate throughput in the month of September. In September, for 20 days, we actually processed more than 1,100 tons per day with the single day record of 1,408 tons processed on September 22. While delivering a strong throughput, the mill also produced a notably finer grind than is required, highlighting the potential for further throughput upside. We're pleased to report that in October, a new daily record was then set of 1,537 tons processed on October 24.
In terms of the key operation quarterly physicals, record material movements were achieved at both the process plant and the mine, increasing by 16% and 26% respectively. Development increased over 50% from the previous quarter. Despite record material movements achieved during the quarter, COVID-19 was certainly a major factor. In the first half of 2021, Papua New Guinea has experienced record levels of COVID-19 cases, resulting for us in significant short-staffing due to COVID-related absenteeism, in addition to requiring an increase in the quarantine control measures which we apply.
In addition, from mid-March through to mid-May, expatriate travel was suspended between Australia and Papua New Guinea, and this obviously had a notable impact on our underground development the first half of 2021, as shown in the middle chart, with delayed access to higher grade stoping then flowing through to Q3 for Kora. Well, these challenges have been significantly addressed via a 50% improvement in development m in the third quarter versus the second quarter, increasing access to stoping areas at Kora, plus mining ramping up at the new major front at Judd. We expect the fourth quarter to be the strongest quarter of the year. The impact of COVID, without question, has been significantly greater than we expected when we reported our guidance at the beginning of the year.
We responded to COVID this year with even stronger mitigation measures, driven by extensive quarantining and testing, which directly increased cash cost by between $60-$80 an oz, and all-in sustaining costs by between $70-$90 an oz. The impact of short staffing has impacted production by an estimated 25,000 oz-30,000 oz in 2021. COVID-19 is still a factor in the fourth quarter, and the country is going through a record surge due to the Delta variant since the second half of September. The mine has continuously operated, and our COVID-19 mitigation systems on site are working.
However, as a result of these impacts during the year, we are updating our operational guidance to 96,000 oz-102,000 oz gold equivalent production at a cash cost of between $670-$720 an oz, and an all-in sustaining cost between $920-$970 an oz. Growth capital, $20 million-$25 million, and exploration expenditure of $10 million-$13 million. In terms of investment bank research and analysts' average estimates, the updated guidance is in line for production and cash costs, and K92 all-in sustaining cost guidance is moderately better than the research consensus average. As noted earlier in the presentation, despite these challenges, 2021 has featured many major operational exploration accomplishments, and we also see several positive developments for 2022.
First, parts of Australia have already opened up for quarantine-free expatriate travel, with our workforce from New South Wales and Victoria no longer required to go through quarantine. Importantly, this means that many of our specialist Australian contractors are now available to travel the site, better supporting the operation and the near-term commencing work on several highly accretive projects, such as commissioning the Stage 2 gravity circuit.
The COVID-19 vaccination rollout on site is progressing, with some 55% of our workforce having received at least one dose. As COVID-19 cases improve in Papua New Guinea and our vaccination rates increase, we plan to progressively relax our quarantine and mitigation measures. In Q4, mine operations will receive a major short and long-term boost from Judd stoping coming online. The process plant will be bigger in 2022, with the Stage 2A commissioning planned for third quarter.
In exploration, our focus is shifting from infill drilling at Kora to resource growth initiatives at Kora South, Judd, Blue Lake, and eventually Kora Deeps as we advance the twin incline. I will now turn over to our Chief Financial Officer, Justin Blanchet, to discuss the financial results for the third quarter.
Thank you, John, and hello, everyone. During the third quarter, we had revenue of $35.3 million, which was comparable to 2020. We sold 21,675 gold oz during the quarter, compared to 19,625 oz in 2020. However, we had a lower realized selling price of $1,707 compared to $1,815 per oz in 2020. As of September 30, 2021, there are 4,469 oz of gold in concentrate inventory, a decrease of 986 gold oz when compared to June 30 due to timing of sales. The company recorded a loss on receivables at fair value charged against revenue of $3.5 million, which was partially attributable to gold prices decreasing during the third quarter and subsequently in October.
In the third quarter, cost of sales were $20.1 million compared to $15.9 million in 2020. The higher costs were primarily due to increased operational activity, as illustrated by the significant increase in tons mined and processed, and when broken down on a per ton basis, are lower than 2020, despite the company incurring costs related to the COVID-19 pandemic, including additional pay for employees completing longer rosters at site, additional costs related to the movement of personnel and supplies, quarantine costs, and additional safety and medical-related costs. Quarterly cash flows from operating activities before changes in working capital was $12.6 million, compared to $14.8 million in Q3 2020.
As of September 30, 2021, we had $54.6 million in cash and cash equivalents, while spending $7.3 million in expansion capital for the quarter and having our strongest working capital balance to date of $80.6 million. The company fully repaid the outstanding loan from Trafigura earlier in the year, leaving the company with no debt.
As John mentioned, for the quarter, the Kainantu Gold Operations produced 21,908 oz of gold, 802,545 lbs of copper, and 19,736 oz of silver, or 24,122 oz of gold equivalent. We sold 21,675 oz of gold, 868,175 lbs of copper, and 20,444 oz of silver, or 24,057 oz gold equivalent. We incurred a cash cost of $596 per oz and an all-in sustaining cost of $752 per oz, which was significantly lower than our realized gold selling price of $1,707 per oz.
Our Q3 2021 cash cost per oz decreased to $596 versus $700 in 2020. The decrease in cash cost was partially due to the successful ramp up of the 400k expansion, allowing the company to achieve better economies of scale, but offset by costs related to the COVID-19 pandemic. It is important to note that after commissioning the Stage 2 plant expansion in late third quarter, we've seen a significant compression in our total unit cost per ton processed. We continue to see downward pressure on costs via economies of scale as operations ramp up. I will now turn the call back to John to continue with the rest of the presentation.
Well, thank you, Justin. The exploration growth section of the call will begin with the Stage 2A expansion. As noted earlier in the presentation, this was approved by the board of directors in early October and increases throughput by 25%. The plant capital is very low, estimated to be $2.5 million, with the Stage 3 sustaining capital for development and mobile equipment for the underground being brought forward. As I noted, capital for the Stage 2A plant expansion is low, and that's really due to no additional milling capacity being required with only a small number of ancillary plant items needing to be installed. First of those, the filter press is already installed and being commissioned.
Second is the expansion of the crushing plant, and that's already designed to accommodate the additional TC-1000 that we plan to install and simply requires some refurbishment of steelwork, which is currently underway, the installation scheduled for the first quarter of 2022. The only other major item requirement is an additional two flotation cells, which test work has shown will increase our metallurgical recoveries. There will also be some minor upgrades of selected pipework and pumps in the existing circuit. The Stage 2A expansion is expected to meaningfully increase our free cash flow generation and strengthen our ability to self-fund a potentially larger Stage 3 expansion. Other factors, such as gold price being substantially higher than the $1,500 an oz we used in the economic study, will also improve our ability to self-fund.
Looking at the Twin Incline, development was 16% above budget for the quarter, and the furthest incline was advanced to approximately 680 m by the end of September. As the Twin Inclines advance towards Kora, we plan to begin utilizing them as a drill platform to target Kora Deeps and in fact, Judd Deeps as well. On the exploration front during the quarter, drilling was underway at Kora South, Judd, and also the Blue Lake Porphyry. At Kora, our latest drill results featured some of the highest grade holes drilled to date from both surface and underground. The hit rate continues to be very strong, with approximately 30% of holes at both K1 and K2 veins exceeding 10 g per ton to date. We expect to provide a new drilling update on Kora in the near term.
At Judd, we reported drilling results from 17 holes at the end of August, extending the J1 vein underground approximately 650 m along strike, while delivering a solid thickness and hit rate of 35% of holes exceeding 10 g per ton gold equivalent and 29% of holes exceeding 20 g per ton gold equivalent. Also on Judd, development has made considerable progress along the second sublevel at 1,265. Latest results reported near the end of October extended development by 211 m with an average of 3.9 m thickness at 21.7 g per ton gold equivalent reported. That level has now been developed along 294 m of development, averaging 3.8 m thickness at 20.3 g per ton gold equivalent.
Judd is still very much underexplored and has shown similar geology to that which we see at Kora with solid grade thickness and a max strike length on the surface of 2.5 km. The focus today has been on the J-one vein, but there are at least four known Judd veins to the south. Shallow artisanal mining and drilling near surface provides us some high-grade vectors. The majority of our underground drill rigs are actually now drilling Judd. They're leveraging the existing drill cuddy infrastructure, which was designed for Kora, but now that provides rapid, efficient exploration of the Judd system, allowing us to complete significant step out drilling. The commencement of production stoping at Judd represents an entirely new mining front, and that's expected to begin shortly with long-haul drilling currently underway.
On Kora South, I think we're particularly excited to have commenced step out drilling from surface. Drilling from surface will enable greater step outs to the south than from underground, obviously, as we advance towards the A1 Headwater, which is located about a km to the south of the existing Kora resource. We believe A1 Headwater is the major heat source for Kora, Judd, and a large portion of the nearby vein field. The exploration prog at Kora South also intends to target Judd South, which runs subparallel.
Lastly, we continue to advance our phase two drill prog at the copper gold Blue Lake porphyry target. Drilling during the quarter has focused on deeper drilling targets, looking for that potassic core as well as a southwestern extension. Core logging and assay backlog at Kora and Judd has now very much been caught up, and so we're now in a position to focus on getting through the backlog of drilling at Blue Lake. We plan to provide an update on this in the near term. In conclusion, the veinfield and porphyry exploration is very exciting. We've got significant large system near mine potential. I think it's important to highlight that approximately 20% of the veinfield strike has been drilled to date, with the majority of what has been drilled remaining open at depth.
With infill drilling at Kora complete, we're at what we would call a major inflection point, where the vast majority of our drilling will now focus on resource growth. With that, operator, I'd like to commence the Q&A session.
We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. Our first question is from Ralph Profiti with Eight Capital. Please go ahead.
Good day, everyone. John, two questions from me, please, if I can. Firstly is on maybe digging a little bit deeper into the grind size at the plant. Just wondering if you can maybe quantify the impact and are there any plans to perhaps coarsen it up, you know, back to design capacity? Under what conditions would you think about doing that?
Kora, we need a grind size of about 105 µm . We've still got quite a bit of spare capacity in the mill. You know, that in part I would say is that the Bond work index is obviously lower than has been allowed. That's really the main driver that allows us to look at this significant expansion of 25% throughput. Stage 2A is a direct response to the fact that we are actually getting a finer grind than we need to to optimize our recoveries. Our estimate at this point in time is that we can get an extra 25%+. As was mentioned, we've now done over a record.
It's now over 1,500 tons in a day, and that was still, grind size was still better than the 100 µm that we need to target. 25% is the number now, and then we'll see how things go from that point.
Fair enough. Yeah. I get it. Okay. John, I'm looking at the increase in, you know, productivity and development rates on the twin inclines. Just wondering how much of that is productivity related? How much of that is geotechnical conditions?
Okay. The Twin Incline, we haven't really had any significant geotechnical challenges on the Twin Incline. We are advancing and doing shotcreting on both declines as we or inclines rather, as we advance. That is our primary ground support. There are a few cross-cutting structures, which we pretty much know where they are because we are following the overall line of the existing single incline, although obviously we are actually significantly lower than it now. We've A, drilled ahead, and B, we are following the line of the existing incline. Therefore, we have a good picture of what is ahead of us in terms of geotechnical aspects. Really the main things are there are a number of cross-cutting structures. We've gone through a couple of them.
They have not given us any significant problems, challenges, call it what you will, to date. It's really been about we've had our expats back on site. That has been a major driver for the productivity. Remembering that, you know, when we are being impacted by some of these issues, we try and target to maintain production in the first instance. The first thing that generally will be impacted will be the twin incline development, because obviously that's not critical at this point in time to production.
Understood. Thanks for that, John. Well done.
Thanks.
Once again, if you have a question, please press star then one on your telephone. Our next question is from Don DeMarco with Bank Financial. Please go ahead.
Thank you, operator, and good morning, John and team. My first question has to do with the record throughput days. I'm seeing, you know, 1,400 in September, we knew that, and then 1,537 in October. Can you discuss the underlying factors that drove this throughput and whether or not you can replicate this over longer periods? Thank you.
Okay. Yeah, look, I mean, the expansion from 200,000 tons per annum to 400,000 tons per annum was based on our calculations, our consultants' calculations, and Outokumpu, who actually made the mill, of the throughput that we could achieve on Kora material, targeting our 105 µm. All of our work, all the calculations, everyone independently came up with around 400,000 tons per annum was the capacity of the mill. That obviously based on the Bond work index of Kora. As I mentioned earlier, what we found is that the Bond work index is a little bit lower, and we're actually achieving or able to achieve better throughputs.
The mill was always the constraining factor when we looked at our expansion because, you know, if you have to put another mill in, that is a major cost, whereas the other equipment tends to be more ancillary in nature and therefore lower cost. Having been able to achieve, as I said, a P80 of 75 µm at 1,100, 1,150 tons per day, we've then been looking at what can we achieve. I can certainly tell you that we've achieved over 1,400 tons per day on consecutive days. However, the areas that then give you a challenge are one, that you're pushing your production by 25%. You're producing your concentrate production by 25%.
Now, there we have or had a single pressure filter, and we'd already identified that as being a potential pinch point for us and had already acquired a second pressure filter. As I mentioned in the presentation, that is actually being commissioned as we speak. That takes care of a major issue for us, which is you're producing more concentrate, and you have to be able to obviously dry it so that you can ship it. The second issue we have is flotation capacity. To consistently treat 1,500 tons a day, let's say, we need more flotation capacity. Otherwise, when we get to higher grade days, we're going to see a drop-off in recovery. Hence, we're looking at adding additional capacity to the flotation.
We're looking at adding about over 30% capacity to the float. The third issue that we need to address to be able to consistently get the higher throughput is being able to crush enough tons to supply the mill. As part of the previous expansion, we put in a larger secondary crusher, a TC1000. The original crusher, as it was constructed, was actually a three-stage crusher. It had a primary, secondary, and tertiary. In the refurbishment, where we actually increased the capacity of the overall plant from 150,000 to 200,000 tons per annum when we first took it over, we converted it to a two-stage crushing, so it's just primary and secondary.
All of the infrastructure is there, the conveyor, et cetera, for three stages, or in fact, as we're now doing to put in a second secondary crusher, the TC1000, so that we're increasing our secondary capacity. We're doubling our secondary crushing capacity. So that then addresses the issue of providing enough crushed material to get through the mill. Outside of that, there are some pumps and pipes that need some upgrade, but they are generally pretty minor. So, that I think sort of hopefully explains what we need to do to be able to get it consistently.
Okay
Maintain our recoveries, importantly.
Okay. Thank you for that. My next question has to do with the cost. I see costs were significantly lower quarter-over-quarter. Of course, you mentioned that you expect some compression in unit processing costs as the ramp-up continues. Yet I'm looking at the guidance, and if we hit the midpoint of guidance, that would imply Q4 costs are gonna be higher than Q3. If you could just help me understand why Q3 costs were lower, and is that what you're kind of expecting, then we should see slightly higher costs in Q4 per the guidance?
Okay. In terms of our overall costs, obviously unit costs came down as a result of increasing throughput. We do anticipate seeing a bit more of an increase in our throughput in this current quarter. When we look at the drivers, I think for the costs, it was in part salaries were down, and that was because of difficulty in getting staff to site, et cetera, and some turnover as well. Next quarter, we've got a recruitment campaign planned because we're now looking to step up our production to this Stage 2A. That means we need to bring more people on, especially on the mining side of things.
In part, the increase is because we're looking at starting to man up for this 500,000 tonne p.a. Obviously you've got to lead up to that. You've got to do more development, et cetera, et cetera. We have got more mobile plant arrived in the last quarter. We've got more that's due to arrive in the first quarter of next year. Again, that helps us with that ramp up. Those are the, I guess, the major things that, A, have driven the cost down and, B, that we anticipate will pick up a little bit in the coming quarter.
Okay. That makes sense.
I'd also make the other-
Yeah.
The other point that-
Yeah.
What we've also been doing is very much building up inventory. As I think everyone is aware, you know, the whole supply chain thing is something that we're all very cognizant of. For instance, we have to hold a number of containers at site so we can ship our concentrate and we're not sort of held up by lack of containers. You know, you're also allowing for some of those potential challenges over the next three to six months. I think we're all expecting that 2022 will see an alleviation of some of these challenges. At the end of the day, you've got to make sure that you've allowed for them.
Okay. Yeah. Well, it's interesting to see the lower costs when the sector's facing these inflationary headwinds. Thanks for that color. My final question, I heard it mentioned that there's a record surge of the Delta variant in PNG right now. Does the updated guidance adequately address whatever contingencies on production and costs that this, you know, may result in?
Um.
As an investor.
Yes. Look, I mean.
How should we be concerned about this? Yeah.
Okay. Well, we certainly believe that it does. We've been relatively successful in getting our people to get vaccinated. There is undoubtedly a lot of vaccine hesitation in Papua New Guinea. We have been obviously actively seeking to get all of our employees vaccinated. We've got support from government to do that, who recognize that the resource industry is critical, and so we have access to vaccinations, et cetera. In addition to that, last year, we contributed PGK 1.5 million to central government and the two provincial governments where we operate to assist with COVID-related costs.
With the surge in Delta last month, we provided another million kina, about $300,000 of funding to the Eastern Highlands Province, which is the province where we operate in. That specifically has been used to construct an isolation ward for the major hospital in Goroka. We've been looking to contribute towards the challenge that COVID has presented. Certainly Delta has had far more impact than either of the previous two waves that have been in PNG. Although it still, relative to the rest of the world, still appears to be a lower impact than you've seen in countries such as India, for instance, and what have you. Undoubtedly, it's a lot more serious than anything we've seen in the other ones.
It is, as we know, far more transmittable. We have seen, you know, Delta has been equivalent to almost all the fatalities we saw last year. It does appear to be impacting those, again, with comorbidities, older people, and what have you. Younger people generally not seeing it. We believe that the Delta, this current Delta wave, will peak late November or early December. If you look at the other countries such as India, where you've had Delta go through, you get this massive spike and then a very rapid drop-off. Because it is so transmittable, it dramatically increases the number of people that have it, and then it drops off significantly.
That's certainly from our discussions with the Australian Health who are assisting in PNG, that is their expectation of what we're going to see in PNG as well. We have improved our COVID mitigation. We operate the mine as a bubble. If we've got anyone coming to site, any PNG national coming to site, whether they come from a km up the road, a village a kilometer up the road, or whether they come from Port Moresby, they go into quarantine for a week before coming to the mine. They're tested before going into quarantine, and then they're tested before they're allowed to come onto site. We have a whole lot of protocols in place for deliveries and all those sort of things. To date, that has been reasonably successful for us.
We have had occasional COVID on site, but we haven't had anything absolutely major occurring on site. We do random testing all of the time. At one point, we had done more testing on the mine than the whole of the province had done. We continue to do those things. We've beefed up our clinic. We've got more capacity for testing and all of those sort of things as well. I'm going into a bit of detail because it's really something that we've heavily focused on. You've got to, obviously. The positives that we're seeing, for instance, the first of November, first of our people going back to New South Wales and Victoria were able to fly back, get into Australia and not quarantine.
Over the next couple of months, that will extend to almost all the states, and that will significantly improve life for our expatriates, for instance, who've been operating on a six-week on, six-week off roster, where the six weeks off includes two weeks hotel quarantine on return to Australia. By the end of the year, that should pretty much be a thing of the past, and that certainly will help us as well.
Okay. Well, thanks for that, John. Good luck in Q4 and beyond. That's all for me.
Thanks, Don.
Our next question is from Andrew Mikitchook with BMO Capital Markets. Please go ahead.
Hi, John. Congrats on a good quarter. You've already partially answered my question with your comments about the ramp up in mining, but maybe I could ask you to just kinda frame the level of, you know, mining development you have, maybe in terms of weeks or stope development in weeks ahead of schedule, ahead of your current plan, and how you see that expanding over the balance of the year here and into next year as you ramp up to the mining rates required for Phase 2A.
Look, first off, I'd say in terms of development, I mean, we're behind budget right now. That's the impact of COVID. We are behind where we wanted to be at this point in time, and that's obviously impacted our production. One of the reasons that we've actually focused as well on Judd is that that gives us additional flexibility in terms of providing additional areas to mine with very limited development actually required to access those areas.
Because, as you'd be aware, Andrew, I mean, all of that development that we've been doing to open up Kora also opens up Judd and actually allows us to bring on some stopes with less development than we'd have to do if we were bringing in Kora areas vertically up and vertically down or further along strike. It gives us greater flexibility, and we're obviously, and you concentrate your mining more in the area-wise. Going forward next year, our development generally will be in the region of 650-750 m per month, which are the sort of figures that, for instance, we achieved last month. We have got additional equipment coming in as well.
We're not looking for a massive step up next year from what we have been able to achieve this year. We are looking to achieve it more consistently by not having all of the stoppages that we've had to endure, especially this year with two lots of suspension of our expats being able to fly in and out, which while we only have 5% of our workforce as expats, they're quite a key aspect of it, especially in things like the twin boom jumbos and therefore obviously the development.
I think we are, at this point in time, we're looking at third to fourth quarter before we get to our 500,000 tons per annum from underground. Commissioning of the plant third quarter, but underground will take a little bit longer to ramp up. The reality is that we averaged over 1,000 tons a day from the mine in September. The plan had been at the beginning of the year that we would have been 1,100 tons in that third quarter already. That's a sort of measure, I guess, of how far the impact of COVID has put us in terms of that ramp up of underground.
Kind of you've got about a year's runway here to get up to that 500,000 level.
Correct.
500 run rate, with.
As usual, the mining guys are telling us they'll get there quicker.
Yeah
We are, we're putting that into the context of some ongoing impact from COVID, et cetera, et cetera. You know, all of those other things that are coming through, such as, you know, some delays in delivery of equipment, shipping, et cetera, et cetera.
Okay. Well, thank you very much for that additional color, and I'll hand the microphone to the next question.
Thanks, Andrew.
Our next question is from Michael Gray with Agentis Capital. Please go ahead.
Yeah. Good morning, John. Thanks for taking my question. It's great to hear you're shifting focus from infill drilling to exploration-expansion drilling. First off, you mentioned greater step outs for Kora South drilling into ML 150. What is the scope of the step outs? Just a little bit more color on that.
Okay. Kora South, surface expression, and there's been very limited work done to the south of the mining lease, and there's been no drilling done to the south of the mining lease from surface. There is a bit of drilling that's been done from underground. We're looking to take basically 100-m step outs, and so have a series of fence lines approximately every 100 m. We believe from the information that we have that the Kora and Judd extend up to 1,000 m outside of the mining lease. And then of course you get into the A1 Headwater, which as you mentioned, we believe is the heat source of Kora, Judd, and Maniape, Arakompa, et cetera, et cetera.
Mm-hmm.
We're basically right now we have one rig operating. The intent is to go to two rigs operating on Kora South and that prog to continue all of next year. That will be the Kora focus. And Arakompa for that matter. It's not just Kora. It will also be drilling.
Mm-hmm
Judd to the south.
For Judd to the south, you mentioned the artisanal workings really being your vector or proxy. Can you provide any more insights as to the extent of the artisanal workings, whether they're, you know, surface, underground or both?
The artisanal workings certainly have little adits into them. They don't go down too far because the water table is quite high in that area. The ground is pretty hard as well, so they're actually quite limited. There is just to the south a little area to the south, a bit further than we are right now, there was actually a stamp mill put in.
Mm-hmm
In the 70s, I think, by an Australian. He came along, he married a local tribes person, which made him part of the tribe, and therefore he could do this informal artisanal mining, which included putting a stamp mill in. The stamp mill is actually still there, or part of it is still there. As we understand it, said Australian made his money and retired to the Gold Coast. He left behind the stamp mill, which is now, you know, you can see it's a stamp mill, but most of it's gone, so it's looking very old and tired. He also left behind the wife, and I believe some kids as well.
Sure.
I can't comment on how she's looking.
Oh, that's great. Appreciate that. Final question. You've disclosed a 1,400-m-long hole at Blue Lake in Q2, and I appreciate you mentioning that there'd be a Blue Lake update coming out soon. In this MD&A, you talk about laterally mineralization zoning towards a core potassic alteration zone, and there being widespread presence of bornite. Are you able to expand on that in relation to that longer hole, or we're gonna have to wait until you put out the news?
I think the long and short of it, you'll have to wait until we put out the news. We are behind, significantly behind in actually processing core from-
Yeah
Blue Lake because, basically again, impact of COVID. What we did was we kept the underground rigs running, and focused on drilling Kora because that was time critical for us in terms of getting a resource update for Kora to feed into our feasibility study. We actually took the surface exploration geos were also roped into catching up on the backlog. I think at the end of June, we had like 50-odd holes from underground that hadn't been processed.
Mm-hmm.
With a cutoff date at the end of October and six rigs still churning out. We had to focus on getting all of that. That has been caught up, and all of that's gone in and our consultant is busy with his core update. The exploration guys are now focused on catching up all of the backlog that we've got at Blue Lake. Remembering also that the exploration we're doing on the surface were in core, and they obviously took priority as well.
Okay. Thanks very much, John, and appreciate all the expanded insights on COVID-19 in your answers on previous questions. That's all.
Thanks, Michael.
Our next question is from Geordie Mark with Haywood Securities. Please go ahead.
Yeah, good day, John. Yeah, a lot of the questions have already been asked and answered. Maybe if we could talk a little bit on grade reconciliation and positive skewness that's commonly reported on quarters. Have you done any work to look at where particularly positive grade reconciliation is derived from? Can you look at any of the potential stope characteristics that generate that skewness? Are you able to kind of factor that into the modeling going forward? Does that impact at all recovery characteristics when you're looking through them all? Or are you looking at any modifications in the plant? I guess configuration to you know better recover gold, I guess.
If you get large skewness in grade, given what we're seeing around recent drilling at Judd, et cetera.
Okay. In terms of the modeling, certainly all of the information that we have has gone into the model in terms of those reconciliations. If you looked at our first model to the second model, certainly the reconciliations were closer with the second model that we had, the one that we currently use. The fact that we were getting a positive reconciliation was taken into account in the modeling and things like top cuts and what have you. We anticipate that again will go into the modeling process. In terms of the source, that remains from our perspective. First off, we're getting more oz. The oz come from grade rather than from additional tons. It is that we're getting higher grades than we anticipate.
Almost every quarter but one, I think we've got more oz than we projected. At the same time, as I say, it hasn't come from tonnage, it does appear to come from grade. What we do have, of course, is we've got a lot of water in the core itself. It is a very wet ore body, high pressure water. We think that there's some potential that you're getting some washout, although generally our core recovery is actually very good. But in some of those high grade areas, you do get crush zones and various other things. Part of it may relate to that.
Certainly when you've gone through Judd, you know, you can, you come up against a face that's, you know, 5 m at 100 g per ton, and, you know, the next face 4 m at 27. You do get variability along the strike. We've been doing significant test work as part of the feasibility study on K1, K2, and Judd in terms of flotation work and also gravity. That work is going into obviously the design that we come up with for the new plant, the Stage 3 plant. But that work, now the results of that work, is also going into what we are looking to do with the existing plant.
Hence, as I mentioned earlier, we are increasing our flotation capacity as we've shown that additional residence time is going to help improve our recoveries. Gravity will recover some of the gold. It is variable. K1 has lower gravity gold than K2 and Judd from the test work that we've done to date. We had started commissioning our gravity plant that we installed as part of the Stage 2 expansion. COVID put pretty much a stop to that. We are looking to get that gravity plant commissioned early next year. That, we believe, will assist with the recovery.
What we've also found from the test work that we've been doing, and that test work's been done primarily in Perth, the labs here, is a slight change to the reagent suite that we are using will improve recovery. We are looking to bring in some slightly different reagents and to trial those in the plant as well, as those have indicated that we can get a couple of percentage points, at least better recovery with a slightly different reagent mix. You know, we always viewed doing the metallurgical test work for the feasibility study would also feed into looking to optimize the performance of the existing plant, and that's certainly what we're doing.
The other thing is one of the reasons that you want that extra flotation capacity, and we also have a flash flotation as well, is that you want to be able to deal with that if you do get a spike or whatever in your grades. You wanna be able to deal with it. For instance, in the new plant, we will have, you know, real-time analysis so that we more quickly get indications of the grade that's going through the plant to deal with that variability.
The other point, of course, is, and it's something that we're trying to do right now, multiple stopes blending so that you reduce the likelihood of getting a high spike coming through because you're blending it.
Okay. Any thoughts on any modifications in sampling or face sampling, the practical approach to looking at what stope grades could be first as part of the chain between grade reconciliation, I guess, at the end of the plant and at the mine face? That'll round it out for me.
That, quite frankly, is an evolving process. We've looked at a couple of different methods of face sampling. I mean, basically, we've obviously got the drilling.
We've got face sampling on the development levels so that we have different sources obviously of our mine grade control. Also looking at how you're taking the face samples, two cuts across the face rather than one cut across the face so that you are seeing the variability from one being, say, one m above and the other one being three m above the floor. That just tightens up what you get in terms of variability and being able to identify what that variability is. It's still something that we are very much working on. I guess is the long and short of it.
Certainly, if you look over the last few quarters, overall the grades, you haven't seen the same variability as we were seeing earlier in the piece. I think we are getting better, especially from the underground grade control of what we call from what we actually produce.
Yeah. Thank you, John.
Once again, if you have a question, please press star then one on your telephone. Our next question is from Sean Ghosal with Stifel. Please go ahead.
Thanks, John, for taking this question. So my question is, we lowered the production guidance for Q4, and my question is, why now and not during the production release in October? Because is it because it incorporates the impact of COVID Delta variant, the impact of which was really understood after October?
I think the reality is that when you look at COVID and you look at the last couple of months in PNG, there's been a very significant increase in the amount of COVID that we've seen in PNG. It has been throughout the country. It's not just in one area. It is throughout the country. Eastern Highlands, where we are, was certainly one of the epicenters. The border area with Indonesia was the first epicenter probably because it was coming in primarily through Indonesia. Although the border is closed, it's a porous border. It's a jungle, so you can't stop people moving through. Undoubtedly that's where it came through, and from there it's got into the rest of the country.
It was always going to come in at some point. I mean, that's just how it is. Certainly what we've seen is the impact over the last two months within local communities has been quite significant. We've been looking to try and quantify what that was going to mean for our guidance. It's a moving feast because you are estimating what something is going to do to your operation, taking into account the various mitigation that you've put in place. You know, our mitigations that we had in place six months ago are not as strict as they are now because we find that we've had to tighten up our mitigation because of Delta and the fact that it is more transmittable, et cetera, et cetera.
You are trying to bring all of that in and give the market the best estimate that you can. Up until quite recently, we certainly had a view that we could get a higher production this year than we're now giving guidance on, because we had anticipated that we would get over COVID. We had things, I think, pretty well under control. The country had things pretty well under control. That's flared quite dramatically and we've had to look at what we could do, what we could achieve, and come out with numbers that took all of those things into account.
Yes, look, we potentially could have come out with those figures a few weeks ago. We also wanted to present them to our board and go through with the board on what we were achieving, what we were doing, what we were anticipating in terms of production, how the mitigation was going, and what we saw as the ongoing impacts.
Thanks, John. That was helpful.
This concludes the question and answer session. I would like to turn the conference back over to John Lewins for any closing remarks.
Oh, thank you, operator. Well, firstly, thanks for attending our conference call today. It's appreciated, the opportunity to give the feedback on what we've been doing and to get the questions and understand, you know, what are the areas of focus for people. We use that to hopefully try and come out with more information which addresses the sort of things that the market and analysts want to get from us. This has been a really challenging year, I think for everyone around the world. We've had a lot of challenges to deal with in this year.
I am really quite impressed with what our people on site have been able to achieve in such a challenging environment. I mean, the reality is that we have been able to expand our throughput. We've been able to ramp up commissioning and expansion, keep the exploration going, and come out with some great results in this tough environment. I think we are really pleased with what we've seen from our people on site.
I think we're all looking forward to 2022, where there hopefully will not be as many challenges as we've had to face in 2021, or those challenges are going to be more about things that are more to do with mining and less to do with COVID and all of the impacts that that has. That said, we are planning that COVID will be around, that we will have to deal with it, that we will have our mitigation processes in place so that no matter what, we're able to continue to deliver and to hopefully see ourselves going forward, getting into Stage 3 or Stage 2A first and then Stage 3 and onward and upward.
I'd like to again thank you all for attendance this morning your time, this evening my time. I wish you all the very best. Hopefully, quite a number of analysts on the call. We look forward to seeing you next year on site. Thank you very much.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.