Thank you for standing by. This is the conference operator. Welcome to the Torex Gold Resources First 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 I would now like to turn the conference over to Gabriela Sanchez, Vice President of Investor Relations.
Thank you, Ariel, and good morning, everyone. On behalf of the Torex team, welcome to our Q1 2018 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, so please refer to our detailed cautionary note in today's press release. We have in the room Fred Stanford, President and CEO and Steve Thomas, CFO. Also joining us on the phone is Jason Simpson, COO, who is currently at the site.
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, 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. The lost time injury frequency in Q1 tracked to the goal of less than 2 injuries per 1000000 hours worked. We are pleased with this result given the difficult operating environment and the many team members that returned after an extended absence. There were no reportable environmental incidents in the quarter.
The rainy season has since started and in preparation the containment ponds have been brought down to minimal levels to provide capacity for the coming rains. The tailings disposal area has also been prepared for the less than optimal compaction conditions during the rainy season. Under less than ideal conditions, the team has done an excellent job of maintaining a focus on safety and preparing the site for rainy season. On the restart of operations, the processing plant and Juarez open pit ran continuously with skeleton crews from mid January onward. Reconciliations, the reserve model was positive at 106% for ounces and 96% for grade.
SARC plant construction restarted shortly after the restart of the plant and is now in the commissioning phase. It is expected to be producing copper precipitate by the beginning of July. Subsoil development restarted a month ahead of schedule at the beginning of March. Diamond drilling for exploration and definition has also restarted. The team with Skeleton Resources did an excellent job of production in Q1 delivering 67,000 gold ounces in dore and additional 8,800 ounces of gold and copper fines carbon fines, sorry.
At the end of the quarter, without access to El Limon pit, we were effectively out of war. Juarez East pit had been mined out and the Juarez stockpiles had all been processed. The blockade ending in the 1st week of April was timely. Looking beyond Q1, gold production in Doray in April was 22,000 ounces. Throughput in April was uneven as we reestablished the mine operations in El Limon.
Production has since settled into a routine and we are guiding to a production rate averaging 12,500 tonnes per day for the remainder of the year and this will be weighted to the second half. Guidance for the year is established as between 300 and 25,350,000 ounces of gold sold from 4,200,000 tons processed at an average grade of 2.95 grams per tonne and recoveries averaging 87%. Cash costs are expected to average between $6.20 $6.40 per gold ounce sold. All in sustaining costs are expected to average between $9.40 $9.75 per gold ounce sold. This number has been increased by the current union negotiations that are expected to increase the bonus paid in 2018 for the 2017 year and to accrue in 2018 for payment in 2019.
Sustaining CapEx is expected to be $84,000,000 and development CapEx is expected to be $67,000,000 dollars Operational improvements in 2018. In Q1, we fixed the issue that was affecting recoveries in the CIP circuit in Q3 2017. With this bottleneck resolved, the SAG mill presents the last bottleneck to close the 10% gap to achieving design throughput levels. We anticipate having the SAG bottleneck resolved by year end and to do so have 5 projects in play. The simplest is installing a cooler on the SAG motor and this is expected to be completed in May.
More complicated, we'll be altering the blasting patterns in the pit to produce more fines without causing increased dilution. The SAG mill bottleneck is solvable. It will be a process of working through the options to solve it at the lowest cost. Starting the SARC plant at the beginning of Q3 2018 will also help to lower costs and we look forward to completing the commissioning this quarter. Underground mining and mine projects, subsill continues to advance and we anticipate coloring the 2nd portal into the deposit early next quarter.
This second quarter will complete the ventilation circuit, provide a second means of aggress and will simplify material handling by providing one way traffic through one going in one portal and out the other. Until we get more experience with the grade variability of this deposit, we will report what has been achieved rather than reporting a forward look is what we plan to achieve. Underground drilling has resumed, exploration drilling has resumed and will be reported at various times throughout the year. The site technical report including an updated medium completed in the next couple of months. Infill drilling on Media Luna will resume on a similar schedule and there will be news flow related to this during the year.
Turning to social conditions, the site team is energized and proud of what they have accomplished in Q1 under difficult conditions. The general feedback from the communities is that people just want to get back to normal. No doubt there will be some that are unhappy with the blockade ending without achieving the objective of a change in union, but there is no evidence of that translating into a disruptive action. Given that a great number of local people were negatively affected by the blockade and the desire to get back to normal, it seems unlikely that this disruptive action would be accepted by the communities. All services have returned to normal, access, water, etcetera.
The accommodation facilities were damaged and the repairs are well underway. Team members are starting to move back in and the full scope of repairs should be completed by month end or shortly thereafter. Currently approximately 70% of employees have been called back to work and with the exception of those terminated for their excesses during the blockade, the rest of the team should be back on-site within a month. Personnel turnover during the blockade stayed at normal levels of approximately 1% per month. Private security is scheduled to begin on-site by the end of the quarter.
Community projects funded by the mining royalty have commenced and this will help. Our outreach programs are in full swing and there is a new foundation upon which to advance community relations to the next level. The floor will now be turned over to Steve Thomas, our new CFO who has been drinking from a fire hose to come up to speed over the last 4 weeks. I welcome him to his inaugural conference call.
Thank you, Fred, and good morning, ladies and gentlemen. I'm delighted to join you for my first conference call as CFO, having been appointed in early April. Fred and his team and our partners in Mexico and here in Canada have shown remarkable resolve to come through this challenge successfully and in the way they went about it. I feel privileged to join them as we drive the company forward in 2018 and beyond. Turning to our financial results for the Q1 of 2018.
Although there were some specific accounting and cost impacts in this quarter in respect to treatment of blockade costs, revised bonus scheme and adoption of IFRS 9 that I will address shortly, the prevailing financial themes are that the company successfully sourced new capital funds with a bought deal raising CAD60 1,000,000 in January 2018, continued to meet its covenant tests per the term loan throughout the period and paid down $11,000,000 of debt principal under the term and equipment loan, invested in the underground development for ELG and the SARP plant and Media Luna and necessarily managed operating and corporate costs tightly throughout the quarter. Now turning to cost management. The focus on financial and operational efficiency will continue as we ramp up through quarter 2 back to full operational capacity. This is particularly important when we consider that 40% to 50% of operating costs in Q1 2018 were incurred in Mexican pesos and the peso strengthened some 10% from the same period last year. And inflation has averaged 5% across the major cost categories of labor, contractors, reagents, power and diesel.
Specifically in quarter 1 2018, $4,100,000 of costs incurred in January when the operation was operating at less than 60% capacity were removed from production costs, but included as an operating cost that sits outside of ASIC and total cash cost. The company incurred increased costs of $7,000,000 in the quarter in respect to the new bonus structure applying to both uplift the 27 year to be paid and accruing for 2018. This has had a marked impact of approximately $100 on our quarter one AISC and total cash cost numbers per ounce. These impacts on operating costs were countered by lower operating activity during the Q1 due to the blockade, pit and the growth of ounces as finished goods and goods in circuit. Turning to revenue.
In respect of revenue, although ounces sold at 63,000 or 11% below the same period last year, Gold produced including in carbon fines was 76,000 ounces about 7% above Q1, 2017. For quarter 1, 2018, we end with 23,000 ounces in inventory in circuit and finished goods compared to 11,000 ounces in Q1, 2017, providing a positive starting balance for quarter 2, 2018. During quarter 1, 2018, we realized an average gold price of US13.31 dollars as compared to US12.84 dollars for quarter 4, 2017 and US12.27 dollars for quarter 1, 2017. Now turning to liquidity management. The company was fully compliant with all financial covenants and is forecast to remain so throughout 2018 per the lenders model, which is run at 1100 gold price.
The company's cash balance grew by $66,000,000 during the quarter, in large part due to the net proceeds from the bought deal of US48.1 million dollars Net cash generated from operating activities of US52 million dollars reflects the success of continuing operations during quarter 1, despite the constraints of the blockade, plus the management of payments in conjunction with our vendor partners and taking account of the bonus accrual. As mentioned earlier, we continue to invest in the property with respect to Subsill, Media Luna Development, the SART Plant and El Limon Deep. We expect to ramp up this investment in ELG underground and Media Luna during the remainder of the year. The company has made positive progress with the SAT to effectively manage the collection of the 56 $1,000,000 VAT receivable. And whilst approximately $9,000,000 of VAT was recovered and offset during Q1 and a similar value received in April, we expect to receive a significant proportion of the year end balance during Q2 and Q3.
During Q1, we also made the first tranche of our debt repayment paying $11,000,000 of $47,000,000 due in 2018 across the term loan and corresponding equipment loan and lease payments. We have been commended for the frank continuous dialogue we maintained with our banking partners, and I look forward to keeping those channels open as we progress through the exciting year of growth ahead. With that, I will turn the floor back to Fred.
Thanks, Steve, and thank you all for your patience and support through a challenging year. We look forward to a productive 2018. We'll now open the floor to questions.
Thank you. We will now begin the question and answer session. Our first question comes from Raul Pal of Canaccord Genuity.
Hi, everyone. Fred, looks like you're expecting the underground to ramp up quickly to average 850 tons per day by year end? And should we expect meaningful contribution from the underground in Q2? Or are we going to see are you
waste development for about every round of ore as of waste development for about every round of ore as we complete the installation of the ventilation system and such infrastructure creation. So I would expect that production to be weighted to the second half.
Okay, thanks. And then you've mentioned that you're expecting head grade to average 2.95 grams overall for the year. Presumably that impacts the contribution from the underground as well. I'm wondering if you could provide a bit more color on how you expect open pit grade to vary through the year. I mean in the last three quarters, open pit grades have been very strong, around 3.5 grams.
Now with mining moving mostly to the El Limon pit from Guajas, should we expect open pit grade to go down sharply into Q2?
No, we should not expect some of the early production in Q2 was from the stockpiles up on El Limon and those were noticeably lower grade. But normally throughout the year, the grade from the El Limon B pit is quite good. So I don't anticipate a noticeable drop except when we pull down from stockpile.
Thanks, Fred. That's all that I had.
Thanks,
Our next question comes from Dan Rollins of RBC Capital Markets.
Yes, thanks very much. Fred, I'm wondering if you could give us a little bit of color on the sustaining capital expenditure. Obviously, the guidance is for less than $84,000,000 That's a significant uptick what we have seen in the last couple of years. Just wondering if you could provide a little bit of color on what's driving the uptick this year, specifically on how much is actually true sustaining versus how much is capitalized waste? And also if you could give us some color on should we expect a similar run rate going forward or what's a more normalized run rate for this asset?
So the sustaining capital, it's about half deferred waste stripping and that changes year on year depending how quickly we're going to mine the ore that we expose. That's about half of it. The other half is you could really divide it into 3 pieces. About a third of it goes into the mine. Some of them some of it goes for new equipment and an increase in the spare parts inventory.
And some of it's preparation for trying to new technology to try and reduce the or increase the fines in the blast processes, right? We're going to be more sophisticated in how we blast and there's going to be some additional technology that's gone into doing that. About a third goes into the surface operations and some of that's the POND 9 extra pond that we have to build to protect the river from sediment accumulating coming down the hill. But there's also a whole bunch of littler projects, which are basically just designed to optimize the circuit to a small degree. And once as we go through the ramp up, I would expect that sustaining capital to drop significantly in the future.
The 3rd chunk goes really into the site. And that's largely based on there's some security costs associated with that, there's some IT costs associated with that, just things to stabilize the infrastructure for moving forward as well. So I have exact number, you'll see it in the LOI plan when it comes out at the end of June, but I would see a fairly significant drop in the non stripping component moving forward.
Okay. So that non stripping this year is roughly about 40,000,000 Do you expect to see about a 50% haircut on that or would you is a 30,000,000 run rate more realistic for this asset or do you see it going lower?
Mike, I don't have the numbers hard in front of me, Dan, but I would expect about a 50% haircut is close.
Okay, perfect. And then with respect to the mill ramp up, you're going to be putting in the coolers here in May. Did you test the ability to start to try to balance the different flows through the SAG, the ball and the pebbles to get a better throughput or is it really just cooling the motors down on the sag and then potentially going to the pit for greater blasting?
Well, there's 5 projects. They have different cost profiles to them. You mentioned 2. And yes, we did test during the Q1. We did a kind of an impromptu test of just putting the pebbles to ground to understand how much additional throughput we could get through the SAG if the SAG crushed pebbles weren't returning.
The numbers received there were encouraging, but during the blockade, we didn't have the resources to do a proper meaningful test. So the side cooler is 1. The other thing is we can just crush some of the from the fine ore stockpile crush it a bit finer with a portable crusher and then so basically reduce the size of what's going into the mill. There's some money in the sustaining capital for that and some money in the budget to try that as well. And then the other issues are manipulating the steel ball load in the mill and those are just operating efficiencies.
So there's about 5 different choices. I don't see it as an issue. It's just figuring out which one we can do it for the cheapest.
Okay, that's perfect. And one last question for me. Last year when there was discussions about installing the Saar plant, you had guided to about $100 an ounce of cost savings from the lower if you were to deduct that from that $100 an ounce savings, what would If you were to deduct that from that $100 an ounce savings, what would the typical savings now be?
If you deduct all those other costs, I mean, $100?
Yes. If you said you had $100 to start now, we've got additional cost. Is it $80 you could see the cost going down relative to original expectations, $60,000,000 Do you have an estimate of that?
We've got to get the I think in some ways it'll probably be less than $50,000,000 by the time we take the additional bonus costs in and some of the security costs.
Okay, that's great. Thanks very much. Appreciate it.
Thanks, Dan.
Thank you for joining us and have a great day.
Thanks, Al. Thank you.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.