Good morning. My name is Michelle, and I will be your conference call operator today. At this time, I would like to welcome everyone to Lundin Gold's third quarter 2022 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press Star, then the number one on your telephone keypad. If you'd like to withdraw your question, please press Star followed by the number two. Thank you. Mr. Hochstein, you may begin your conference.
Thank you, Michelle, and good morning everyone from Quito. Thank you for joining us on Lundin Gold's 2021 third quarter conference call, where Alessandro Bitelli, Executive Vice President and Chief Financial Officer, and myself are going to take you through our results for the third quarter and year to date. To begin with, I will provide an overview of several key milestones achieved in the third quarter and give an update on operations at Fruta del Norte and our exploration programs. I will also discuss several important value-driving catalysts to keep an eye out for as we end 2021 and move into 2022. After that, Alessandro will discuss our financial results in more detail before I finish things off with my concluding remarks. We will then open the call for questions. Please note Lundin Gold's disclaimers on this slide.
This discussion includes forward-looking information. Actual future results may differ from expected results for a variety of reasons described in the Caution Regarding Forward-Looking Information and Statements section of our press release. Lundin Gold is a U.S. dollar reporting entity, and all amounts in this presentation refer to U.S. dollars unless otherwise indicated. I'd like to kick off this conference call today by focusing on the vaccination campaigns led by Ecuador's Ministry of Public Health. Vaccinations began in late June and ramped up quickly. As of today, over 99% of Lundin Gold's employees and on-site contractors are vaccinated, and only seven employees are unvaccinated out of a total of 2,856. Of these seven employees, the majority are unable to get vaccinated as a result of underlying health issues.
Since Guillermo Lasso was sworn in as Ecuador's president in May of this year, his vaccination plan has been efficient and successful, reaching his goal of vaccinating over 50% of the country in his first 100 days in office. As of today, 68% of Ecuadorians are partially vaccinated and 58% are fully vaccinated. The health and safety of personnel at site will always be paramount, and as such, stringent procedures remain in place to minimize the impact of COVID-19 on the workforce. I'm pleased to announce that in the past month, Lundin Gold was recognized by IESS, the Ecuadorian Social Security Institute, for the development and implementation of strict COVID protocols, which provided excellent protection for our workforce during the height of the pandemic.
As an integral part of its sustainability program, Lundin Gold has long prioritized actions to improve the quality of local education, particularly in Fruta del Norte's area of influence. As such, I'm pleased to report that our initiative to provide critical access to online education for students in rural communities close to Fruta del Norte was completed in October. With this milestone achieved, teachers now have high-speed internet connection in the school. Students in local communities are equipped with a tablet and internet connection. Internet connection in 21 communities has been established or upgraded using fiber-optic infrastructure. Now let's turn our attention to Lundin Gold's results for the third quarter.
Operating results continued to be strong, highlighted by production of 107,663 ounces of gold, consisting of 76,837 ounces of concentrate and 30,826 ounces as doré. Sales were 111,605 ounces during the quarter, consisting of 78,251 ounces in concentrate and 33,354 ounces as doré. These robust operational results were achieved at a cash operating cost of $650 per ounce sold and all-in sustaining cost of $804 per ounce sold. In the third quarter, the mine op maintained its strong operating performance, mining a total of 382,667 tons.
Underground mine development also continued as planned with a total of 2,148 meters of development, completed with development rates averaging 23.3 meters per day during the quarter. On the processing side, Fruta del Norte advanced construction of the mill expansion and progressively increased mill throughput to an average of 3,971 tons per day during the third quarter. 365,316 tons of ore were processed in total. The average grade of ore milled was 10.3 grams per ton, and average recovery was 88.8%.
We continue to fine-tune the processing plant to improve recoveries as we mine and process different types of ore. Year-to-date, Lundin Gold has produced 320,599 ounces of gold at an average head grade of 10.9 grams per ton, an average recovery of 88.2%. The company's year-to-date average all-in sustaining cost is $778 per ounce sold. With the completion of the mill expansion early in the fourth quarter, the company remains on track to end the year at the upper end of its stated 2021 guidance of 380,000-420,000 ounces of gold produced, and the lower end of the AISC guidance of between $770 and $830 per ounce of gold sold.
Within the scope of our original construction plan, the South Ventilation Raise or SVR is the last remaining item. As previously disclosed, we decided early in the third quarter to revise the approach for the SVR. While the original plan involved a 5.1 m raise, the new plan involves a smaller 2.1 m raise, followed by slashing to 5.1 m, then shotcrete lining of the raise. The risks of continuing the 5.1 m approach were too great, and this alternative plan will reduce construction risks and longer-term maintenance of the raise. During the third quarter, the SVR progressed in accordance with the revised work plan, and the expected completion remains in the second quarter of 2022.
Raise boring of the 2.1-meter raise was completed near the end of the quarter, and shotcrete lining was completed shortly thereafter. The contractor has been selected and mobilization is underway. Importantly, there's no anticipated impact on production forecasts for the remainder of 2021 or 2022 as a result of the revised work plan. Operational excellence is only one of our four pillars of value creation. As such, during the third quarter, we continued to advance the throughput expansion project, the resource expansion, and our regional exploration programs. The throughput expansion project to increase the mill throughput from 3,500 to 4,200 ton per day continued on schedule and on budget during the quarter.
During the third quarter, the mine generally operated at the higher 4,200 tons per day, while the mill expansion advanced and was substantially completed early in the fourth quarter. Sustaining capital during the third quarter of 2021, mainly focused on the second raise of the Fruta del Norte tailings dam at the resource expansion drilling program. The second raise of the dam was completed shortly after quarter end. The planned 10,000-meter resource expansion drilling program continued to progress during the quarter, targeting conversion of a portion of the inferred resource at the south end of the deposit. The company's regional exploration drilling program began at the end of March of this year. This program focused on two high-priority targets, Barbasco and Puente Princesa, to test for buried mineralization in a geological setting similar to that of Fruta del Norte.
Drilling at the Barbasco target ended during the third quarter with the six holes plan completed, totaling 5,387 meters. An initial interpretation results suggested the drill holes intersected the late Fruta del Norte andesites, Suarez Basin fill sediments, and the Santiago Formation andesites and sediments, which are all the host rock for Fruta del Norte. Zones of epithermal related alteration were intersected in all three rock types, and multiple narrow, widely spaced epithermal quartz carbonate sulfide veins, and some broader intervals of epithermal crack or brecciation were intersected. Most of the veins are mildly anomalous gold, silver, and the epithermal pathfinder elements arsenic and antimony. The frequency of the veining and the intensity of the epithermal alteration increases to the south into an area completely covered by post-mineralization rocks.
Drilling at Barbasco will continue in 2022 once new access tracks are to reach the more remote and steep southern area of the target. In line with our original plan, the regional exploration program is now focused on the Puente Princesa target. Two drill holes have been completed on this target, and a further two are currently in progress. At Puente Princesa, a significant shear structure has been intersected at depth along the Santiago Formation and the Zamora Batholith. This structure contains epithermal silica-illite alteration and some quartz carbonate sulfide veining within mixed sediment and andesite. As a result of the initial findings from the drilling obtained at Puente Princesa, a decision is made to expand the 9,000-meter exploration program to 11,000 meters and drill an additional two holes at Puente -Princesa.
Assay results for these holes are expected in the first quarter of 2022. Now I'd like to turn the call over to Alessandro for a more detailed look at the financial results. Alessandro?
Thank you, Ron, and hello, everyone. I want to begin by referring to a couple of additions to our quarterly financial reporting. As a result of Lundin Gold's now well-established operations, we are beginning to report two additional non-IFRS measures. Earnings before interest, taxes, depreciation, and amortization or EBITDA and free cash flow. Not only will the company start paying taxes, but Lundin Gold is also generating significant amount of free cash flow, and we believe that these metrics allow for more insight into both our earnings and cash flow. I will comment on these two metrics a bit later. Now to our results. We achieved strong financial results this third quarter, and it is a result of sustained strong production and efficient operations.
In the third quarter of 2021, the company recognized revenues of $191 million from the sale of 111,000 ounces of gold, consisting of over 78,000 ounces of concentrate and over 33,000 ounces of gold at an average realized gold price of $1,769 per ounce. This is offset by cost of goods sold over $101 million, which is comprised of operating expenses of $61 million, royalties of $11 million, and depletion and depreciation of almost $29 million, resulting in $89 million of income from mining operations.
During the same period in 2020, following the restart of activities from the temporary suspension due to COVID, revenues of $119 million were recognized from the sale of 62,000 ounces of gold and were offset by cost of goods sold of $56 million. Lundin Gold generated net income of $57 million during the third quarter of 2021 compared to a net income of $28 million during the third quarter of 2020. Net income this quarter includes derivative losses of $600,000 as a result of an increase in the fair value of our gold prepay and stream loan facilities, driven by higher forward gold prices compared to June 30, 2021.
This is a non-cash item and the volatile nature of these derivative gains and losses also seen in prior quarters is expected to continue given the volatility of forward gold prices. The MD&A provides a detailed explanation of the impact of fair value accounting on these two credit facilities and the determination of derivative gains or losses. Deducted in arriving our net income for the quarter, our finance expense of $11 million, income tax expense of $16 million, and other expenses of $4.7 million. During the third quarter of 2020, net income was generated from income from mining operation of $63 million, offset by derivative losses of $18 million, finance expenses of $13 million, and other expenses totaling $3.6 million.
Income taxes of $16 million were accrued during the period, which is comprised of current income tax expense of $14.5 million and deferred income tax expense of $1.5 million. Deferred income tax expense relates to derivative loss in other comprehensive income as explained. An explanation of which can be found in the MD&A. Current income tax expense is generated from the net income for tax purposes in Ecuador relating to the operations at Fruta del Norte. In addition to corporate income taxes in Ecuador, which are levied at a rate of 22%, current income tax expense includes an accrual for the portion of profit-sharing payable to the government of Ecuador, which is calculated at the rate of 12% of the estimated net income for tax purposes for the quarter.
The employee portion of profit sharing payable, calculated at 3% of net income for tax purposes, is considered an employee benefit and is included in operating expenses. Together with the results for the first half of the year, the third quarter results confirm the company's strong financial performance on a year-to-date basis and can be seen on this slide showing key financial measures, including revenues, income, and all-in sustaining costs. During the third quarter, Lundin Gold generated EBITDA and adjusted EBITDA of $112.8 million and $113.5 million, respectively. EBITDA is a non-IFRS metric used to better understand the financial performance of the company by computing earnings from business operations without including the effects of its capital structure, taxes, or depreciation.
Adjusted EBITDA is EBITDA excluding items which are considered not indicative of the underlying business operations, and its adjustments are consistent with the adjustment made for adjusted earnings. The EBITDA and adjusted EBITDA generated in the first nine months of the year were $352.5 million and $327.2 million, respectively. Adjusted earnings exclude specific items that are significant but infrequent, or not reflective of the underlying operating activities of the company. For Lundin Gold, these include derivative gains or losses and related income tax effects. As a result, excluding the derivative loss of $600,000 and related income tax recovery of $1.5 million, adjusted earnings of $58.8 million were realized in the third quarter or $0.25 per share.
On the same basis, adjusted earnings achieved in the third quarter of 2020 were $45 million or $0.20 per share. Of note, during the first nine months of this year, adjusted earnings amounted to $171 million or $0.74 per share. Cash operating costs for the quarter were $650 per ounce of gold sold. Cash operating costs were slightly higher than the previous quarter, mainly due to a decrease in grade processed, which is in line with plan. That said, we are also starting to see some pressure on cost due to the persisting worldwide supply disruptions and inflationary pressure in general. To date, this has had little overall impact on our results, but we are monitoring this carefully as time progresses.
The higher cash operating costs, together with an increase in sustaining capital expenditures, mainly due to the tailings dam second raise, resulting in a higher AISC in the third quarter compared to the second quarter of 2021. All-in sustaining costs achieved in the third quarter total at $804 per ounce of gold sold, resulting in an AISC of $778 per ounce of gold sold for the first nine months of the year. We calculate these non-IFRS measures based on gold ounces sold. For reference, all-in sustaining costs include operating costs, royalties, corporate social responsibility costs, treatment and refining charges, accretion of restoration provision, and sustaining capital net of silver revenue. We believe that cash flow is now one of the key bases of Lundin Gold's value proposition.
Free cash flow is indicative of the company's ability to generate cash from operation. We define free cash flow as cash provided by operating activities, less cash used for investment activities and interest paid. During the third quarter, Lundin Gold generated free cash flow of $47 million or $0.20 per share. The total free cash flow generated in the first nine months of the year was $194 million or $0.84 per share. The company has generated strong free cash flow during 2021, and we expect to continue to do so for the remainder of the year and further into the future based on our production and AISC guidance and current gold prices. This strong free cash flow will support debt repayments, regional exploration, and underground expansion drilling at Fruta del Norte, as well as planned capital expenditures and future growth.
As of September 30, 2021, Lundin Gold had cash of $222 million and a working capital balance of $136 million, compared to cash of $192 million and a working capital balance of $109 million at the beginning of the quarter. The change in cash during the third quarter of 2021 was primarily due to the cash generated from operating activities of $92 million and proceeds from the exercise of option and anti-dilution right of $2.6 million. This is offset by principal and interest repayments under the loan facilities totaling $40 million and cash outflow of $24.7 million for capital expenditures, including costs for the remaining initial construction activities, the expansion project, and sustaining capital.
Monthly payments under the stream facility are based on 7.75% and 100% of gold and silver ounces sold respectively, calculated as the current gold and silver prices at the end of each month, less $404 per ounce respectively. Stream payments are calculated based on final assays from smelters and refinery. Therefore, there is not necessarily a direct correlation between stream repayments in ounces and gold ounces produced or sold in a given period, which are based on mine site assays. Quarterly payments under the gold prepay facility are based on current value of 9,775 ounces of gold at the end of each quarter. Scheduled variable quarterly principal repayments of the senior debt facilities will total $24.5 million during the fourth quarter of 2021.
The company is working towards achieving construction completion as defined under the senior debt facility before the end of 2021. Upon achieving this milestone, additional quarterly principal repayments based on 30% of Fruta del Norte's excess cash flow will commence. The current portion of long-term debt includes an estimate of additional quarterly principal repayments during the next 12 months as a result of reaching completion in 2021. In summary, yet another quarter of strong production further underpins our expectation of robust financial results for the full year. We are generating significant free cash flow and expect to continue to do so in the fourth quarter and for many years to come. A more detailed discussion of our financial results can be found in the MD&A, and I refer you to this document for more information.
Now I'd like to turn the call back over to Ron.
Thank you, Alessandro. Fruta del Norte continues to perform well, and I'm especially delighted that the throughput expansion project has now been substantially completed safely, on time, and on budget. I'd like to take this opportunity to recognize the very significant efforts by all involved in this expansion project, enabling the achievement of this milestone, a vital component of our growth strategy. This higher throughput will help to ensure our production profile remains strong for many years to come. I'm also particularly pleased about our continued strong free cash flow generation. In the first nine months of 2021, we've generated $194 million in free cash flow and ended the quarter with a cash balance of $222 million, which supports debt repayments, exploration, and planned capital expenditures.
The resulting strong treasury will also provide the opportunity to evaluate increased exploration activities, future potential expansion, and other growth opportunities. As we move into the fourth quarter, we are already looking ahead to 2022 with a focus on continuous improvement in our operations, increased exploration activity, and evaluation of future growth opportunities. As Alessandro alluded to earlier, we believe that one of the elements of Lundin Gold's investment proposition is its free cash flow potential. This free cash flow gives the company flexibility from a capital allocation standpoint and will be used to generate continued shareholder returns, be that in the form of dividends, M&A, or organic growth. For quite some time now, I've highlighted that we at Lundin Gold had identified four key pillars to drive shareholder value in 2021.
One of those is throughput expansion project has now been substantially completed, and now we will begin evaluating the merits to increase throughput further. The next pillar is operational excellence. Our guidance for 2021 remains unchanged, and with that, we continue to anticipate achieving gold production in the upper range of our 2021 guidance, while also expecting our 2021 all-in sustaining costs at the low end of guidance of $770-$830 per ounce sold. We do continue to target areas that can be improved and continue pushing and striving to be better. The company is also continuing with its planned 10,000 m underground resource expansion program. This program began in the first quarter and a second rig and started drilling in May.
Initial results for this program are expected during the first quarter of next year. Finally, drilling for this year ended at the Barbasco target in the third quarter. Our regional exploration program, which we have increased to 11,000 meters, is now focused on the Puente Princesa target. Initial interpretation of results obtained from Barbasco suggests broad propylitic alteration and narrower zones of proximal epithermal alteration intersected. Multiple narrow low-grade epithermal veins were intersected in the southern part of the anomaly, and our team will now further analyze results before deciding on our next steps on this target. Drilling continues at Puente Princesa, and we expect to have the results in the first quarter of next year. Fruta del Norte continues to show what a remarkable and world-class asset it is.
At current gold prices, we expect to generate significant amounts of free cash flow for years to come. I'm confident that our strategy is the right one to continue growing long-term value to all of our stakeholders. Thank you for your continued support. With that, operator, I'll now open the call to questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch tone phone. You will hear three tone prompts acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press star followed by the number two. If you are using a speaker phone, please lift the handset before pressing any keys. One moment for your first question. Your first question comes from Banu Nadarajah, CIBC. Please go ahead.
Good morning, guys. Congrats on the good results for the quarter and thanks for taking the time to answer a couple questions Bryce and I have. To start off, with the South Ventilation Raise on track to be completed in Q2 2022, what's the next critical step to push that forward? Is it the contractors being mobilized? Do you guys see any risk in the remaining project timeline that could push this further?
Yeah, thanks for the question. Yeah, you're right. The key thing right now is mobilization of the contractor. They essentially are already stacking stuff in containers. We have started putting in plans. A lot of the material is being fabricated in Canada that's needed or pulled together. We are booking or already have some containers moving by land to Houston or Miami. We're just kind of using both ports so that we don't have to worry about transshipments. We already have sailing spots booked. We're doing everything we can. Yes, we all know what's going on in the global shipping industry today, and so that is the risk of stabilization. Both teams are doing everything they can to stay on track for that.
Okay, perfect. That sounds good. The second question is on annual guidance. You guide to be on the top end of guidance for the year. While FDN output should beat guidance by about 10,000 ounces if Q4 were to deliver flat growth quarter-over-quarter, despite average throughput increasing. We note that grades are supposed to decrease towards reserve levels, and a 9.5 gram per ton assumption gets us to the top end of your guidance. Is that aligned with, like, the step down in grade that you're seeing to date in Q4, or is there a bit of conservatism built into that guidance?
No. We always have. Q4 was always gonna be a bit closer to resource reserve grades. You know, we're a good chunk of the way through the quarter, and that's what we are seeing. We always knew this Q4 was gonna be in some different areas with closer to reserve grades. Yeah, there's no conservatism in the guidance. We push ourselves, but this is what we expected for Q4.
Okay, perfect. Thanks for that, and I'll leave it there.
Thank you. Your next question comes from David Horton, Global Mining Research. Please go ahead.
Okay, Ron and Alessandro, thank you for hosting the call. I've noticed that your mining rates have been above the 4,200 tons a day kind of level for the last couple of quarters. In fact, for the last four quarters, your mining has exceeded your processing rates. You have a stockpile build there. When you do get to the 4,200 tons per day of the mill capacity, would you expect to see the mining rates still to exceed the milling rates?
Yeah. No. Yeah, the mine's done really well, David. Yeah, we do anticipate you know, the key is for us to get the south vent raise done. You know, once we get that south vent raise, that opens up a number of areas at depth for us. As I mentioned a little bit earlier, you know, we already are looking at debottlenecking to see whether we can push a little bit more both in the plant and the mine. But the key for us is getting that south vent raise done to really see what the mine potentially could do.
Yeah, that's kind of where my thinking was going, because with the SVR, I would have imagined that your mining rates could step up even from where we are today, so the whole process would be mill constrained rather than mine constrained. Is that a fair way to look at it?
Yeah, but even with the expansion, what we've seen and what the guys have done in the mill prior to getting the last few pieces of equipment in, we still think we have room to push in the mill as well.
Okay. In our modeling, we're assuming, for instance, without any additional disclosure from you guys, that your mining rates, mining grades are similar to your milling grades. Given that we have had excess of mining over milling, we're kind of looking at a stockpile that would be over 120,000 tons at the moment and 10-11 grams. Is that sort of in the right ballpark for where you see the stockpile?
Yeah, that's pretty well in the right ballpark. Yeah.
All right. I'll leave it there for now. Thank you, Ron.
Thanks, David. Good to hear from you.
Thank you. Your next question comes from Don DeMarco, National Bank. Please go ahead.
Well, I just wanted to follow up with regard to the mining rates and the potential opportunities for rather the throughput rates and any further optimization opportunities. Do you see visibility to now go beyond 4,200 tons per day in the future? And if so, what adjustments or spending might be needed for that? Or are there other optimization opportunities in the processing? Thank you.
Yeah. Hey, Don. Yeah, no, that's a good question. We are looking to debottlenecking. Based on some of the things we're seeing in the plant and in the mine, yes, we do think we can further increase tonnage. You know, we're just finishing up the 4,200. The last tie-ins are actually happening today as we speak. But yeah, there's opportunity. Let's not forget recovery. You know, we still are not happy. As you've seen, we've seen continued improvement in recovery. We also think now with the expansion done, and I was at site last week, and the team did a very thorough presentation on a number of areas we're looking at to further improve recovery.
You know, I think there's a double whammy in the process plant, the potential throughput, but also we still have many things we're working at to improve recovery and continue to keep pushing to get closer to that 90% level, which obviously adds increased throughput to, you know, quite a few additional ounces to be produced.
Yeah. Certainly. Okay. Thank you very much. That's all for me.
Thank you. Your next question comes from Terry Ostler, TSU and Associates. Please go ahead.
Thanks. Good morning, Ron and Alessandro. Quick questions.
Morning.
On the vent raise. Remind me, Ron, is that how many years is good enough for the volume and the depth that you're doing before you worry about going, expanding it again, the vent raise?
This is a one-time thing, Terry. This will give us enough ventilation for the current estimated mine life. Thank goodness we did put twin decline. They made the decision to go with the twin declines. Yeah, we're not gonna need to expand or deepen this or anything else. We'll handle the rest of it through internal raises and that which are all in our budgets.
Okay. Got it. Thanks, Ron, for that. Same question. Is that coming back to recoveries? Your tails are running about around the gram, which is some of the mines are mining somewhere else. Is that chemical still? Is that the grinding? What exactly is it? Do you think the fine-tuning gonna happen on the recoveries?
Yeah. There's a couple areas we're really focusing on, Terry. Yeah, and you're right, it pains me when I see our daily assays and where our tails are, you know, sometimes much higher than what others are mining. There's a number of areas. We're really focusing on flotation and CIL, and it's a balance of the two. The [uncertain] has turned out to be a little bit more complex to operate, and also we're seeing a lot more variation in ore types than what we'd anticipated. It's really focusing on flotation and CIL are the next steps.
Okay. Do you have a target, Ron? I know you talked about it before, but what would be a target that you think it's feasible, possible, probable? Is that 92%-94% as a recovery eventually?
[uncertain]. What we have based on the original feasibility study was just right around 92%. You know, that's what we're obviously continuing to push for. Realistically, I think what we should be targeting based on what we're seeing in the variability in the ore now that we see that was not anticipated is, I would say we've continued to push to 90%-91%.
Okay. Just coming back to the exploration, Ron. A few years ago, there was also a potential discovery in the Emperador, if my memory is correct. What happened to that in the exploration budget and the sequence?
I'm not sure of the discovery, because Aurelian, did you say Aurelian discovery?
Emperador.
Sorry.
Emperador.
Emperador? Yeah. No, we're the only ones who have done drilling there. We're the only ones that have done drilling other than Fruta del No rte, Aurelian or Kinross. Kinross was getting ready to do some drilling, but then they pulled out. We have done surface work and everything. Essentially Barbasco and part of Puente Princesa are on, you know, sort of the Emperador concessions now, Terry. It's all the same area we're working on, and it's, we're very encouraged by both Barbasco, but even more so on what we're seeing at Puente Princesa.
Okay. Remember Jackpot, we talked about a few years ago as well. What's the update on that, on the exploration presentation a couple of years ago from Newcrest?
Sorry, which? Which Newcrest?
Yeah.
Newcrest is farming in on eight concessions. This was part of the original agreement back in 2018. Actually they are mobilizing to start drilling on two concessions which are north of the Mirador mine, about 30+ km north of Fruta del Norte. They're mobilizing and anticipate starting drilling this quarter.
Okay. A little activity here. That's good.
Yeah.
I think, let me look at my notes here. Yeah. Treatment refining charges. Any changes we should expect, TCRCs for next year?
No. The majority of it's under long-term contract, Terry. The issue we are seeing is freight, particularly to Europe. We're not seeing any increase in freight to Asia. Yeah, it's transport issues, not the treatment and refining charges, just transport.
Got it. Thank you, Ron. Thank you, Alessandro. Thank you.
Thank you, Terry.
Thank you. Your next question comes from Kerry Smith, Haywood Securities. Please go ahead.
Thanks, operator. Ron, if I got this correct, you've added a couple thousand meters to the drill program at Puente Princesa, so that's another couple of holes. Is there also another couple of holes that you'll plan to drill at Barbasco in the new year, I guess, to get you up to that, to 12,000 meters?
The original was 9,000 meters, Kerry, and yeah, we've added a couple holes at Puente Princesa, which we anticipate getting done this year. The 2022 program, that's all been put together. We're presenting that to the board in a couple weeks, and we're looking at a larger program, and it'll be on focusing on Puente Princesa and Barbasco further, plus some other targets that we're looking at. Yeah, essentially what we're doing, Kerry, is keeping the two rigs going, and then we're looking at expanding the program for next year.
Okay. Copy that. Alessandro talked a little bit about the cost inflation. Are you seeing that across the board for all your consumables, I guess diesel and all your reagents and your steel consumption, or is it in one particular area that you're starting to see a bit of pressure?
It's really across the board, steel, drill strings, all that sort of thing, some reagents. A little bit on fuel, but not a lot. Nothing on wages. Wages still are. Our inflation rate here in Ecuador is less than 1%, so wage inflation and things like that, we're not seeing anything. It's mostly on the imports. The other area we're seeing significant increases, which we just mentioned, I mentioned to Kerry, is transport costs for concentrate to Europe.
Okay.
Canada.
To Canada. Okay. Then just on the realized gold price, the $1,769, that was, you know, a little bit below the average. I guess that was just timing of sales, was it?
Alessandro, do you want to take that one?
The average gold price is really driven by our offtake agreement and as well as the final settlement under the long-term contract for concentrate. The variation in the gold price between time of sale and the final settlement sometimes are four to five months, and the variation in gold price will affect the average gold price in a given quarter. Under the offtake, we are subject to a quotational period, and that sometimes, depending on the volatility of the gold price during that quotational period might affect a little bit the gold price some. We see those elements coming into that statistic.
Right. Okay. The QP is sort of 4-5 months, and that's so it's really just the impact of the timing of that quarter-over-quarter, provisional pricing versus final settlement then. Okay.
Right.
Gotcha.
Correct.
Yeah. Okay, great. Thank you.
Thanks, Kerry.
Thanks. Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the number one on your touch tone phone. Your next question comes from Arun Lamba, TD Securities. Please go ahead.
Hey, Ron. Just following up on Kerry's, sounds like you guys are gonna increase your exploration program, and that could be another significant catalyst for you guys. Wanna hear kind of your thoughts on how much you're thinking about M&A. Obviously you can't talk about you being acquired, but how active are you on trying to diversify from just being a single asset producer, given you're fully ramped up, you're pretty much done the expansion. Are you thinking about doing more M&A or are you focused on the exploration and kind of pushing the mill further?
Good question. Answer, all of the above. We talked about our pillars, our shareholder value. Organic growth is one of them. Yeah, we might keep pushing the mine and mill further. Again, I can't emphasize enough. Recovery, you know, one percent recovery, especially at our all-in sustaining cost, I guess, is a significant add to our cash flow generation. What we're seeing at Puente Princesa and Barbasco just make us more excited now that we've actually got drill holes into this regional exploration, so that's there. M&A, it's something that we hadn't really been focused on. We are focusing more on it now. You know, we've got to be selective, though.
We, you know, we can't grow for the sake of just adding ounces, that, you know, that's, I think a lot of CEOs talk about that in this industry now. We have to be selective and, yeah, we are looking at it and we're looking for opportunities for sure.
Great. Just, this is an accounting question. I normally don't ask, but just with the amount of free cash flow you're generating, taxes are starting to become some payments now. Should we expect tax payment quarterly, or is it gonna be kind of they're accrued and then they get kind of all paid in Q1? What's the way to think about kind of the majority of the tax? I know some of it's spread out, but thinking, does it get accrued, paid all in Q1 of the next year, or every quarter, should we expect some?
If I can answer that question. In Ecuador, taxes are paid once a year. They are paid around the end of the first quarter of the year for the previous year, upon filing of the tax returns. Therefore, we accrue throughout the year both the income taxes as well as the profit sharing, and they get settled that one time of the year.
Got it. Thanks a lot. Congrats again on continuing the successful ramp-up.
Thank you.
There are no further questions at this time. I will now turn it back to Mr. Hochstein. Please go ahead.
Thank you, Michelle, and thank you everyone for attending the call. We look forward to announcing further catalysts on exploration potential and obviously our 2022 guidance and some longer term guidance which we will be starting to issue here soon. Thank you everybody again, and have a great day. Be safe. Thank you.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.