Thank you for standing by. This is the conference operator. Welcome to Torex Gold Resources Inc. 2nd Quarter 2018 Conference Call and Webcast. 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. I would now like to turn the conference over to Gabriela Sanchez, Vice President, Investor Relations. Please go ahead.
Thank you, operator, and good morning, everyone. On behalf of the Torex team, welcome to our Q2 2018 conference call. Before we begin the presentation, please note that certain statements to be made today by the management team will contain forward looking information, so please refer to our detailed cautionary note in today's press release and MD and A. We have in the room Fred Stanford, President and CEO Jason Simpson, COO and Stephen 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 and A are posted on our website and have been filed on SEDAR. Also note that all amounts mentioned in this call are U. S. Dollars unless otherwise stated.
I will now turn the call over to Fred.
Thank you, Gabriela, and welcome to all on the line. I'll start with an update on safety and environmental protection. Lost time injury frequency in Q2 tracked slightly above the goal of less than 2 injuries per 1000000 hours worked. After July, it was back on target. There were no reportable environmental incidents in the quarter and we are now in the latter half of the rainy season and water management has been well conducted.
Turning to the restart of operations, the restart has gone very well across the board. The employee turnover as a result of the blockade has been managed and recruitment of local employees has progressed well. Morale is high and the performance of the employee team was evidenced in the numbers. The open pit mining team has ramped up and delivered planned numbers for ore and waste stripping in June and above planned performance in July. The processing plants steadily improved performance throughout the quarter and afterwards.
They have demonstrated what the plant can do with a record breaking day of 16,000 500 tonnes processed and performance at design levels of 14,000 tonnes per day for the latter half of July. They are well on their way to being able to meet the year end goal of consistent production of 14,000 tonnes per day. The underground operations are also advancing well. In Q2, as planned, the bulk of the mining activities in Sub Sill were focused on excavating for infrastructure in waste. Subsequent to the quarter, the full Sub Sill mining permit was received and the 2nd portal to access the mine was collared.
The 2 portals are expected to be connected by year end, which will facilitate flow through ventilation and enhanced logistics. Ore production in Q2 from Sub Sill was minimal and will ramp up significantly in the second half. Exploration and infill drilling continue in El Limon Deep and Sub Sill. There will be drilling results to share in the second half and an updated resource estimate is expected by year end. Turning to the Saar plant, as scheduled the first copper precipitate was produced by the Saar plant in late Q2.
The team has ramped up the plant quickly and by the end of July in excess of 24 tons of copper was shipped off-site. This is copper that we're very happy not to have circulating through our plant. We are seeing meaningful reductions in reagent usage, but it's only been operating for a little over a month and there is more to learn about how it deals with differing inputs. By the end of Q3, we should have a good sense of the cost reduction performance and can report on it then. Turning to Media Luna, the infill drill program has resumed with the goal of updating 25% of the current inferred resource to the measured and indicated categories.
There are 175 targets to be hit to achieve the desired drill density. There are currently 4 diamond drills working on the project and 19 targets have been intersected to date. More drills will be added as water supply becomes available. Results will be made available periodically as assays are received and interpretations completed. It is good to be back working on this project as a platform for our next stage of growth.
Now turning to the technical reports, a technical report is being prepared that deals with all of the deposits on the property and it is a bit of a handful at over 500 pages long. It is undergoing the final reviews now and publication is expected before the end of August. The technical report will include an updated PEA for Media Luna. None of the recent drilling will be incorporated into the design. The resource will be identical to that used in the previous PEA.
There will be proposed changes in how the deposit is accessed and serviced. There will also be updates to the processing flow sheet. The PEA economics will be based on conventional mining methods. However, included in the PEA is an assessment of the benefits to Mediolota of an innovative new underground mining system that Torex is developing. The new mining system is called Maca High and while not yet tested in proven underground, it has the potential to materially reduce CapEx, OpEx and mine build schedule.
Manufacturing of the first of the prototypes for the Muckahi system is expected to get underway in Q3 of this year with testing at EOG underground scheduled for early next year. These are exciting times as we test a mining systemtechnology that has the potential to disrupt an industry and provide Torex with many strategic advantages on the Morales property and elsewhere. The floor will now be turned over to Steve Thomas, our CFO, who will review the numbers and can tell you everything that you might want to know about the foreign exchange impact on deferred tax expense and the subsequent impact on IFRS earnings. Steve?
Thank you, Fred, and thank you for that opportunity. Good morning, ladies and gentlemen. I'm pleased to be able to present our results for the 3 and 6 months ended 30th June 2018. This has been a significant quarter for the company with the operation ramping up after cessation of the blockade and the company exceeding financial performance seen in previous comparable periods. Turning to our financial results for the Q2 of 2018.
The key financial themes for the company are that year to date, we have sold 141,000 ounces in line with full year guidance. Earnings from operations for Q2 were $23,500,000 are strong and have grown steadily throughout 2017 2018, reflecting continued maturing of the operation. The net loss in Q2 compared to net income in Q1 is driven in large part by the 8% depreciation in the value of peso compared to U. S. Dollar at the Q2 period end compared to Q1.
Total cash costs at $6.80 per ounce for Q2 are lower than the previous four quarters. During Q2, investment in sustaining capital increased $20,000,000 and in respect of our growth projects by $7,000,000 across ELG Subseal, Media Luna and the Saar plant. During quarter 2 and quarter 3 year to date, significant receipts have been received in respect of the VAT receivable balance at Q1 end. The company met the covenant tests for the term loan agreement throughout the period and has paid down $25,500,000 of debt principal under the term and equipment loan and finance fees. Lastly, our audit review has confirmed that there are no going concern issues or impairment triggers arising as our financial outlook remains strong.
I would expand upon the impact of the 8% depreciation in the closing rate of the Mexican peso as this explains the deterioration in our after tax position between the quarters despite having similar pretax balances. So now turning to earnings from operations. Quarter 2 earnings from operations at 23 5% above quarter 1, reflecting the continued ramp up towards full production. G and A, exploration and evaluation and loan interest expense together totaling $13,800,000 in Q2 are similar to that incurred in quarter 1 at 13,400,000 dollars Where a difference arises within other expenses across the quarters is in respect of foreign exchange loss and loss on derivative contracts, which equal $4,300,000 in quarter 2 compared to a combined gain of $5,000,000 in quarter 1. Of this $9,000,000 swing, dollars 5,500,000 is due to the 8% depreciation in the value of the peso at Q2 closing rate compared to Q1.
Where this 8% depreciation has had a further and more significant impact on the company's results is in calculating the deferred tax liability for quarter 2, which is $35,000,000 compared to net $21,000,000 for quarter 1. This increase in the calculated liability results in an equivalent $14,000,000 deferred tax expense for quarter 2. This $14,000,000 expense in quarter 2 compares to a deferred tax strengthening of the peso closing rate by 7% in quarter 1 compared to its opening rate. As a result, despite a similar pretax position in quarter 2 and quarter 1, the swing in the tax charge largely driven by FX explains the net loss of $12,300,000 in quarter 2 versus the net income of $10,200,000 in quarter 1. It's worth noting that if we had reported results at the end of July, given that the peso U.
S. Dollar exchange rate at 18 0.55 had returned to where it was at the end of Q1, this deferred tax will be substantially eliminated. Recognizing the sensitivity of the company's earnings to foreign exchange issue, we have now incorporated this adjustment into our adjusted earnings calculation. This approach results in a Q2 adjusted net income figure of $10,600,000 compared to quarter 1's revised adjusted loss of 11,700,000 dollars Now turning to consider the company's liquidity position. Excluding restricted funds, the company's cash near cash balance at Q2 end is $91,000,000 compared to $111,000,000 at Q1 2018.
And the cash balance since grown to approximately $118,000,000 During Q2, cash generated from operating activities was $37,000,000 enabling our investment in sustaining capital, growth capital and debt repayment. During Q2, we made the 2nd tranche of debt repayments, paying a further $14,500,000 in addition to the $11,000,000 paid in Q1 towards the total of $57,000,000 due in 2018. As mentioned, the company has continued its positive progress with the Mexican tax authorities receiving $9,000,000 of VAT during Q1 and $10,000,000 in Q2. A further $18,000,000 was received in quarter 3 year to date, effectively halving the current VAT receivable balance at the end of 2017 compared to now. The company also submitted an updated life of mine plan to the lenders based on 1100 gold as required under the credit agreement.
The plan was compliant with all covenants and met the cash flow available for debt service threshold test. In closing, quarter 2 operational performance has delivered increased earnings from operations and a strengthened balance sheet compared to quarter 1, while successfully delivering on the ramp up to full capacity. Thank you for listening. And with that, I will turn the mic back to Fred.
Thank you, Steve. In summary, the team has done a superb job of managing the many challenges of ramping the operations back up after the blockade. From a standing start, they produced 80,000 ounces of gold, our 2nd best quarterly production to date. They also finished the Saar plant and successfully brought it online. The exploration programs and technical report work were also successfully restarted and advanced.
In conclusion, if you know anyone or even a computer that might buy a gold mining stock, please put in a good word for Torex. The quality of this asset, the strong operating performance of the team, the many upcoming catalysts and the game changing potential of the new technology all suggest that it is time for a new look at a company that has rebounded very well from a Black Swan event and is looking forward to a prosperous future. Thank you all. And I will now open the floor for questions.
Certainly. We will now begin the question and answer session. Our first question comes from Matthew McPhail with Canaccord Genuity. Please go ahead.
Hi, guys. Thanks for taking my question. Just a question surrounding costs in the quarter. You expect cost to trend lower into the second half of the year. Would you attribute that to the increasing denominator, more ounces produced and sold or more reduction in costs after fewer costs related to ramping up after the blockade?
It would be all of the above. The denominator certainly helps a great deal. The SARC plant will reduce costs as well. And then the restart activities cost some money and that will help as well.
All right, guys. Thanks. That's the only question I had.
Thanks,
Our next question comes from Craig Stanley with 8 Capital. Please go ahead.
Thank you and thanks for taking my call. Quickly CapEx, do you expect it to increase here in the second half of the year given to sort of get in line with what your previous guidance was?
Yes, we do. Okay. Like the CapEx is one of the latter things that ramps back up after the blockage. So that will pick up in the second half.
Okay. And then on the underground mining rates, I mean, do you see a big step up change in Q3 or it will be more slated to the end of Q4?
The so the underground mining rates, a mixture of ore and waste are up over 300 meters a month now. But the actual production rate of ore will kick up more weighted to Q4 than Q3. But Q3 will be helpful.
Okay. And then just finally, as you mentioned, you said the upcoming Media Luna PA, you will have an assessment of the Muckahi system in there. So is the idea to present say like the NPV and IRR both using conventional mining and the Muckahi system?
So the PEA, the formal PEA document will have the conventional mining as the proper case. That's the we're using the opportunity to showcase the technology against that case. So there will be economics associated with that. But the PEA formal numbers will be the conventional mining.
All right. And then and just finally, when would you hope to actually have a feasibility for Media Luna? Or I assume that's the plan for financing purposes?
Well, absolutely. The plan is to put out a feasibility study, but we need to complete the drilling of the upgrade the resources to measure and indicated before we can put out a feasibility study, then that drilling isn't scheduled to complete until late 2019. So it will be after that.
All right. Thank you.
Thanks,
Greg. Our next question comes from Josh Wolfson with Desjardins. Please go ahead.
Thank you. Just in terms of the outlook for me, Luna, I was wondering if you could comment on maybe financial resource management in light of balancing both the debt and the capital?
Well, that's a bit of a tricky question at the moment, Josh. At the moment, it doesn't look like we can finance it out of cash flow. It all depends on what the gold price does. But that's 2 or 3 years out before that call gets made.
Okay. And you're saying 2 or 3 years, is that because the bulk of capital still weighted towards the 3rd and 4th year of development or that's because the decision to start the advancement is likely going to take a year or 2?
Both of those are correct. But we have to finish drilling it, which goes out to the end of 2019, finish the feasibility and make all those other arrangements. So that'll take us into 2020. And then it's still bulk it's still loaded to
the back end. Got it. And then on the comments of the changes for the updated PEA, is there any additional information you could provide on the design changes and the process changes or should we just hold steady?
It's mostly the access changes. If you recall in the beginning, we had a tunnel coming in from the south side of the mountain. That's been changed to the north side. The tunnel under the river has been removed. The access is now with twin tunnels in from the north side.
There's some changes like that that reduced risk of schedule and cost and have reduced the environmental footprint and made the social environment simpler. The best place to put the portal on the south side of the mountain was exactly where the one village on that side of the mountain is. So we avoided that social disruption by putting the tunnel anywhere close to them, moved it to the north side and got some efficiencies in the process.
Got it. That's it for my questions. Thank you very much.
Thank you, Josh.
Our next question comes from Chris Bier with RBC. Please go ahead.
Good morning, Brad and Gabriela. Just wondering on the new Mexican government, are there any signs different, good, bad or indifferent? Or is it still too early? Just broadly speaking, are there anything you're seeing happening differently?
Thanks, Chris. So it's still very much too early and nothing has changed to date. We are encouraged by the fact that the new President is very focused on increasing the economic success of the southern half of the country. And so that would likely put mining as a way of generating wealth in that part of the country. Mining will very likely fit strongly into that.
So we see that as encouraging.
This concludes question and answer session. I would like to turn the conference back over to Gabriela Sanchez for any closing remarks.
Thank you. On behalf of the Torex team, thank you for joining us, and have all a great day.
Thanks
all. This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.