Thank you for standing by. This is the conference operator. Welcome to the Torex Gold Resources Inc. third quarter 2020 results conference call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there'll 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 Dan Rollins, Vice President, Corporate Development and Investor Relations. Please go ahead.
Thank you, operator, and good morning, everyone. On behalf of the Torex team, welcome to our third quarter 2020 conference call. Before we begin the presentation, please note that certain statements to be made today by the management team may contain forward-looking information. Please refer to the detailed cautionary note in today's MD&A. On the call today, we have Jody Kuzenko, President and CEO, as well as Steven Thomas, CFO. Following the presentation, they will be available for the question and answer period. This conference call is being webcast and will be available for replay on our website. This morning's press release and the accompanying financial statements and MD&A are posted on our website and have been filed on SEDAR. Please note that all amounts mentioned in this call are US dollars, unless otherwise stated. I'll now turn the call over to Jody.
Thank you, Dan, and good morning to all on the line. Welcome to the Torex Gold Q3 results release. Given the results of the quarter, it's most fitting that this call is happening on a Super Tuesday. Q3 was undoubtedly a memorable one as we rebounded from our government-mandated COVID shutdown in Q2, and we rebounded in an impressive fashion, achieving record-worthy performance on a number of facets of the business. Our record-breaking performance on safety continues. We produced more than 131,000 ounces of gold, our second-highest producing quarter ever. That production performance, coupled with a strong gold price, effectively broke all quarterly financial records that we have achieved as a company, including record gold sales, realized gold price, EBITDA and adjusted EBITDA, record realized margins, record net income and adjusted net income, and importantly, record operating cash flow and free cash flow.
At the same time, we deleveraged our balance sheet further by paying down $72 million of debt, concluding the quarter in a net cash position for the first time since commercial production. Importantly, we did all of these things while maintaining strict adherence with our COVID controls and all of the challenges that came along with that, truly demonstrating that the team can thrive in the face of adversity. Clearly, this quarter is one for the history books on many counts. In terms of the agenda for the call, I'll start with a word about COVID, then provide you with a brief ESG update, followed by commentary on our operational performance. After that, Steve Thomas will step you through the detailed financial results.
Finally, I will update you on some of the work we are doing around the future of the company, including a progress report on our exploration and optimization of ELG underground, a quick report out on Media Luna, and a status update on Muckahi. Starting with commentary around COVID. It really is hard to believe that we have been in some form of a COVID control environment for nine months now with no apparent end in sight anywhere in the world. At the operations, we continued to produce with the enhanced COVID protocols and the multilayered screening approach to employee symptom screening that was implemented early on. Importantly, our supply chain remains robust. As at the end of the third quarter, there were 43 confirmed cases of COVID within our workforce. Of these, 40 individuals displayed symptoms and tested positive at home.
The three individuals who tested positive at site were quarantined, and we completed contact tracing to isolate anyone potentially at risk. Ongoing support has been provided for COVID management in neighboring communities, including the continuation of education campaigns and the donation of medical equipment to mitigate the spread of the virus. In light of all of this effort, I'm proud to report that just this past week, we were recognized by the Mexican Institute of Social Security for our leadership on the development of COVID-19 precautionary measures and the protocols implemented to mitigate the risks of contagion at the workplace. Not at all why we designed and implemented all of the controls, but nice to be recognized nonetheless. In terms of ESG, our discipline in adhering to COVID protocols continues to extend to our approach to safety at all levels of our organization.
As of today, our lost time injury frequency continues to sit at zero, and we have operated more than nine million hours without a lost time injury. This is industry-leading performance and really a credit to the strong safety culture built within our workforce, supported by robust systems and thoughtful rules. Further on the ESG front, there were no reportable environmental spills in the quarter, and our relationships with the local communities and ejidos remains positive and mutually productive. Of note, a post-quarter event of significance was the negotiation of a new two-year collective bargaining agreement with the CTM Union in Mexico for our unionized employees at ELG. While the norm in the country is for mining companies and unions to negotiate CBAs on an annual basis, the company and the union came together to sign a two-year agreement.
This sets a new standard and will take us out to the end of 2022. At a time when Mexico, like many countries around the world, is facing significant economic turbulence in the wake of COVID, this collective bargaining agreement provides longer-term certainty for our business, in turn providing additional certainty for our employees, their families, and the surrounding communities. Turning now to production. Coming out of our government-declared shutdown in Q2, the return to production has been exceptional. In spite of all of the complexity associated with our strict COVID protocols and battling wet season rainfall events, our open pits did not disappoint and produced over 15,000 tons per day of ore at an average mine grade of 2.86 grams per ton.
Not to be outdone, our underground mines had a very strong quarter as well, achieving an average of more than 1,200 tons per day at an average grade of 6.76 grams per ton. Note on the underground that I used the word mines, plural. This is because, as planned, we are now into the first stages of production out of the lower levels of El Limon Deep, below the area where Muckahi is being tested. In the quarter, we produced 1,700 ounces out of El Limon Deep to complement sub-sill production. Moving forward, we expect more out of ELD and to continue to actively mine in both areas in order to achieve our target of 20,000 ounces per quarter from the underground assets.
The dominant production story for the quarter has been the improvement in uptime through the grinding circuit of the process plant, achieving a record 92% availability in Q3. This includes a planned 78-hour shutdown through the month of August to change the liners on both the SAG and the ball mills. This performance is a testament to our planning, scheduling, and execution systems and our preventative and predictive maintenance work coming together to realize the full potential of our assets. It positions us nicely to deliver the top end of production guidance at the end of the year. With gold prices at their current levels, producing this amount of gold has allowed us to generate a significant amount of cash, which Steve Thomas will take you through now.
Thank you, Jody, and good morning, everyone. Today is a significant day in the North American calendar, with millions anticipating what the outcome will be. Without further ado, here are Torex's Q3 financial results. Q3 saw excellent operational and financial performance, and the company turned net cash positive, finishing the quarter with a net cash position of $77 million. This is an impressive increase of $130 million since Q2 and an increase of $174 million compared to one year ago. This pivotal financial milestone emphasizes the capability of the operational team in managing the operations and the added COVID-19 challenges and the quality of the asset, which combined to enable the company to capitalize on the current robust gold market. This significant strengthening in our financial profile is driven by record gold sold for a quarter at an average realized price of $1,884 per ounce after hedges.
Underpinned by ongoing cost management efforts, this resulted in a record realized margin of $1,251 per ounce and generated $173 million of cash from operating activities. The quarter closed with over $204 million of cash in the bank and a further $32 million in short-term investments taken out during the quarter. With this scale of cash generation, in addition to the scheduled term loan repayment, the company paid down $50 million against the revolver. This leaves the company with only $156 million of debt payments outstanding at the quarter end, comprising $66 million of term loan and $90 million of revolver. Since the quarter end, we have paid down a further $50 million against the revolver, which now sits at only $40 million. This means that we have more than repaid the $90 million, which was drawn down in Q2 as a prudent measure during the COVID-19 related suspension.
Subject to continued financial performance during Q4, we will consider whether further payments of the revolver take place before the year end. Q3's closing position and our forecast production targets leave us confident that we are well-placed to meet future operating and capital obligations and meet the financial covenant tests under the credit agreement. Beyond the cash held, the balance sheet continues to exhibit a healthy working capital balance at $187 million. The primary change is that Q3 has a $4 million income tax payable balance compared to a $20 million receivable balance at the end of Q2. This arises as Q3 generated a sizable income tax expense compared to a zero at the mid-year. The expense now slightly exceeds the tax installments made year to date.
Additionally, the 7.5% royalty increased by $13 million during the quarter, reflective of the significant earnings before interest, tax, and depreciation of $163 million compared to $45 million in Q2. Q3 has also seen working capital changes as follows: a $59 million increase in the balance of cash and short-term investments. Continued progress in collecting VAT balances as they fall due, which for the quarter was $18 million and leaves no VAT outstanding in respect of 2019. The increase in AP and accrued liabilities of $30 million during the quarter reflects a full quarter of activity compared to Q2, along with the continued growth in the site-based profit share plan as taxable profit increased substantially in the quarter.
Outside of working capital changes, Q3 saw a further $25 million invested across deferred stripping activities and sustaining capital programs, a further $22 million across our non-sustaining capital growth projects relating to Muckahi, El Limon Deep, Sub-Sill, and the Media Luna project. These projects continue to progress in line with plan and provide the foundation for future sustained production for 2021 and beyond. Turning to the deferred income tax liabilities. They have reduced by $25 million during the quarter, which is largely due to the increase in depreciation, which exceeds the allowance for tax purposes. This has arisen as previously capitalized waste in respect of El Limón C and Guajes West is released in Q3 as we mined ore from those pits. Secondly, ounces produced in Q3 were more than double Q2, which releases more depreciation into the quarter.
Lastly, the slight strengthening of the peso by 2% over the Q3 period also contributes a $4 million reduction in the deferred tax liability. With regards to our hedge program, for the peso currency hedges, with the slight strengthening in peso, we have seen a net gain of $3.7 million, comprising a realized loss of $2.2 million on contracts settled in Q3, offset by the unrealized gain of $5.9 million. Conversely, for the commodity hedges, the net loss of $6.3 million comprises a realized loss on settled contracts of $4 million and an increase in the unrealized loss of $2.3 million, which itself reflects the sustained projected gold price. Turning now to operating costs and total cash cost and AISC per ounce.
For Q3, TCC has reduced to $633 per ounce for the quarter and $712 for the first nine months, compared to $774 per ounce for the first six months ending Q2. Similarly, AISC at $877 for the quarter and $941 for the nine months compares to $990 for the six months ending Q2. This ongoing reduction in unit costs indicates that we are on track to meet the targets per our revised guidance. The above operational performance results in net income of $60 million for the quarter and $17 million year to date. On an adjusted basis, net earnings are $51 million for the quarter or $0.60 a share on a basic basis and $0.59 per share on a diluted basis.
For the year to date, adjusted net earnings are $75 million, equaling $0.88 per share on a basic basis and $0.87 per share on a diluted basis. In summary, in Q3, we have transitioned into a significant net cash position, seeing the company further strengthen the financial capacity and liquidity in the balance sheet, providing the financial foundation for the future investment in underground operations and the Media Luna project and improve the opportunities for debt management and capital allocation options. Thank you for listening. With that, I will turn the mic back over to Jody.
Thank you, Steve. Turning now to the work we are doing to set up for the future. I'd like to quickly take you through three key areas of focus. Exploration results and the work to optimize our ELG underground, a progress update on Media Luna, and finally, a status update on Muckahi. You may have seen that we recently released some impressive drill results at our ELG underground. You will recall that we said we would invest more money in exploration drilling in the underground with a view to extending reserve life and to maintaining production at current levels through the transition period between ELG and Media Luna and beyond. In 2020, we plan to drill approximately 65,000 meters in this area, and given the ongoing positive results, you can expect to see a further increase in 2021.
The hole-by-hole details are set out in last week's exploration press release, but in short, we're seeing good grades and thickness as we head deeper into the ore bodies, which will make for very efficient mining. Both Sub-Sill and ELG remain open at depth and may even join deeper into the system. In terms of accessing the underground ore bodies, we've now taken the first blast at Portal 3, which has a number of benefits, including the fact that it's much closer to the process plant, cuts our haul distances by approximately half, improves operating costs, and literally opens up a new frontier for us for underground exploration. The Portal 3 tunnel itself is just over a kilometer long, and we expect to arrive at the bottom of Sub-Sill by Q3 of 2021.
With respect to Media Luna, work has been progressing in four key areas. The feasibility study continues in two streams, one looking at conventional mining and the other at advancing the Muckahi case. Both remain on track. With our infill drill program, we are looking to upgrade an additional seven to nine million tons from inferred to indicated. This program was suspended for most of Q2 for COVID, but resumed full speed this quarter. We remain on track to take the first blast at the Guajes Tunnel this quarter, which is the seven-kilometer long tunnel needed to access the Media Luna ore body from the north. In terms of the south portal, at the top of the Media Luna ore body on the south side of the river, our permit to amend the MIA will be submitted to the authorities this week.
The CUS, or change in land use permit, has been granted, and we expect to mobilize to start earthworks in November. All of that to say, our next mine is very much on track. This brings me to the Muckahi update. Process and equipment testing in Mexico continue with the excavation of a 30-degree steep ramp, blasting and mucking of a long-hole open stope, and drilling out the next long-hole stope for further testing of slusher mucking. During the third quarter, the steep ramp conveyor arrived at site for installation and testing at El Limon Deep. We also progressed on the Muck Box container design, fabrication, and testing in Canada to determine how quickly 15-ton muck containers could be filled with a slusher at 0 degrees, 7 degrees, and 30-degree angles.
Important, we're working on the testing plan for the next six months that will support the Muckahi case and the Media Luna feasibility study and are now mapping out the commercialization strategy for the technology. In closing, we said going into COVID and coming out of Q2 that we believed we'd come out stronger on the other side, and this quarter certainly demonstrates that. It's been record-breaking all around, positioning us for a very strong close to 2020 as we continue to deliver on our commitments as a safe, consistent, and reliable operator supported by a very healthy balance sheet. All of which sets us up quite nicely for the future. Thank you for taking your time to listen in. This concludes our remarks, and I will now turn the call back over to Ariel.
Thank you. 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 are using a speakerphone, please pickup your handset before pressing any keys. To withdraw your question, please press star then two. To join the question queue, please press star then one now. Our first question comes from Trevor Turnbull of Scotiabank. Please go ahead.
Yeah. Thank you, Jody. I just had a couple of questions about the grades for the quarter. We were looking at the mined grades that you had coming from the underground, and I assume those are fairly representative of what actually got processed. Those appear to be some of the lower grades that you've had to date from underground, although throughput was the tons mined seemed to be quite high. When I look at the open pit, trying to arrive at full production, it looks like the open pit probably had conversely higher grades than they've had in a while, and I just wondered if you could comment maybe a bit on that and talk a little bit about how that carries into Q4.
I do know that you're going to be expanding more of the El Limon Deep production into Q4, and I just wondered if that was going to have an impact on grades as well?
Sure, Trevor. Thanks for the question. There are actually a couple of questions in there. The mined grade for the underground came in for the quarter at 6.76 grams per ton, and you're right, that's a little bit lower than we had been seeing quarter-on-quarter. The reason for this is that there was more incremental ore in the quarter than has been the case in the past. Incremental ore is the ore that we don't plan to process. It's below underground cut-off grade, but if we are moving through it and it's above the open pit cut-off grade, we take it and we process it. Think about more tons, lower grade for the incremental impact in the underground mine as we move into new zones. The open pit grade was pretty much on pace, 2.85 grams per ton for the quarter, which is consistent with what we have been seeing.
Moving forward into Q4, we expect to have reserve grades both out of the open pits and underground and don't really expect any surprises there. In terms of the processed grade, the head grade to the mill was 3.83 grams per ton for the quarter, and this reflects the fact that we blend for gold grade as we blend for iron and copper, and lower grade material moves to the stockpiles as we put through higher grade material to the process plant.
Does that indicate that potentially the contribution from the open pits that got processed was, given that you're segregating some of the lower grade, was probably a fair bit higher than the actual mined grade in the period?
It would be a little bit higher, Trevor, but nothing remarkable. There was nothing outstanding in the way that we blended and moved the material to the mill.
Okay. Just a quick question. You mentioned a couple of times that you're looking at getting to a run rate of about 20,000 ounces of gold from the underground. That's in total from all the underground operations. That's not just related to, say, El Limon Deep. Is that right?
That's in total, on a quarter-by-quarter basis.
Do you know how long it'll take you to get to that run rate?
We're there now, Trevor, and have been for some time. As we move into 2021, we're fully expected to be at that run rate on a quarter-by-quarter basis.
Right. Okay, sorry. Yes, just sustaining that rate. That's right. You've been there for the better part of a year. Just one last question. You talked about having a two-year labor agreement. Can you make any comment about what the trends are with labor? Obviously, you've just gone through negotiations, and it's hard to understand, given what's happened with the Corona Virus in Mexico, what impact that might be having on labor and the economy. Can you talk a little bit about what kind of issues and what kind of directionally things were looking like in terms of your negotiation?
Yeah, sure. Happy to. The labor landscape in Mexico has changed materially over the course of the last year. For the first time in Mexican history, starting next year, employees will have the right to vote for their unions and the right to vote on an agreement. This CBA is really remarkable in a couple of ways. Consistently in Mexico, they are negotiated on an annual basis, with one year being wages, the next year being wages and benefits. We were in that pattern and decided this year to break through it. Our employees were looking for some additional time for certainty with the labor agreement. COVID has been devastating to the Mexican economy, and so we were looking to provide that certainty, and our employees were looking for it. It came together as a real win-win solution.
Is there a fair bit of pressure on labor rates given where the economy's at, or is it nothing out of the ordinary relative to other periods you've seen?
Nothing out of the ordinary. The increases we offered to our employee over the two years were quite in line with what we have done in the past and in line with inflation.
Understood. Okay, great. Thank you very much.
Our next question comes from Bryce Adams of CIBC. Please go ahead.
Good morning, Jody and Dan. Thanks for taking my question. Just a question, actually, Trevor snaked me on a couple there. One question on the plant performance. With improved plant performance this quarter, I was just wondering how the plant performed on a cost per ton basis.
Thanks for the question, Bryce. On a cost per ton basis, processing cost was $31.77 a ton. In that number, $2.20 was attributable to PTU. Our cyanide consumption, which is the key driver for cost per ton at the plant, was a healthy three kilograms a ton, which is consistent with what we've been seeing since we implemented the oxidation program in the leach circuit. The increase in costs, or one of the contributors to the higher costs, were the maintenance costs for the August shutdown, where we changed out both liners in the ball mill and the SAG mill.
Okay. In Q4 and in 2021, we should still expect costs to be in and around that $30-$31 per ton range?
In and around the $30 per ton range would be a reasonable expectation.
Thank you.
Once again, if you have a question, please press star then one. Our next question comes from Mark Mihaljevic of RBC Capital Markets. Please go ahead.
Hey, thanks, and good morning, guys. Excellent quarter. Nice cash build here. I guess, given the cash build, and obviously your outlook's looking a lot better at these prices. You guys have been saying that you're comfortable funding everything internally down to $1,400. Once you get the feasibility out, have you started to think about what you do with that excess cash or how much excess cash you'd like beyond that, quote-unquote, "$1,400 gold price floor" and what you'd think about doing with that excess cash?
First of all, Mark, thanks for the compliment on the quarter. We thought it was excellent as well. You're quite right that we feel very comfortable at $1,400 gold funding the Media Luna build. The plan for capital allocation and cash allocation remains the same. We're looking to pay down debt. We are looking to put $100 million in the bank to make sure that we have a healthy balance sheet moving forward, fund Media Luna, put money back into the development of the underground on the ELG side. Once we do all of that, we will look further to see what next steps are on capital allocation.
Okay, perfect. Then, I guess somewhat in that vein, obviously you guys have had a lot of success with the underground exploration program. What are your thoughts on the broader exploration package and opportunities to start spending a bit more money now, again, given the cash flow that you're generating?
The focus on exploration up until about this year had been predominantly on sub-sill and infill drilling in the pits. As I said on the call, we're planning to spend more money on exploration at the ELG underground, and the team has also prepared for me a budget submission for next year that we're calling Greenfield Light. It is time to put some money on the drill bit. Not a lot, but maybe in the order of $2 million a year moving forward, all with a view to enhancing that production profile from the ELG side or even further on the Media Luna side. Money will be spent on greenfield exploration moving forward.
Okay, perfect. I guess my brain just froze for a second there. In terms of the Muckahi testing, you mentioned that you guys are planning out what else you want to test out over the next few months. Can you allude to what your early thoughts are and what you still want to be testing out before you're comfortable with the feasibility outlook there?
Sure. Happy to expand on that a little bit. We're going to continue to test the Muck Box, which is the latest innovation for essentially containerized muck transport. We will test out the steep ramp conveyor at ELD. I would say the really important parts of testing over the next six months will be testing Muckahi as an integrated system. How fast does it go and how expensive is it? Those will be the areas of focus as we move to put that case into the Media Luna feasibility study.
Okay, perfect. That's it for me. Thanks.
Thanks, Mark.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.