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 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 Gabriela Sanchez, Vice President of Investor Relations.
Thank you, Ariel, and good morning, everyone. On behalf of the Torex team, welcome to our first quarter 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. Please refer to our detailed cautionary note in today's press release. We have in the room Fred Stanford, President and CEO, and Steven 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&A are posted on our website and have been filed on SEDAR. Also note all amounts mentioned in this call are US 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 two injuries per million 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 the rainy season.
On the restart of operations, the processing plant and Guajes open pit ran continuously with skeleton crews from mid-January onward. Reconciliation of the reserve model was positive at 106% for ounces and 96% for grade. SART 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. Sub-Sill 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 doré and additional 8,800 ounces of gold in carbon fines. At the end of the quarter, without access to El Limon pit, we were effectively out of ore. Guajes East pit had been mined out, and the Waha stockpiles had all been processed.
The blockade ending in the first week of April was timely. Looking beyond Q1, gold production in doré 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. We are guiding to a production rate averaging 12,500 tons 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 325,000 and 350,000 ounces of gold sold from 4,200,000 tons processed at an average grade of 2.95 grams per ton and recoveries averaging 87%. Cash costs are expected to average between $620 and $640 per gold ounce sold. All-in sustaining costs are expected to average between $940 and $975 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 million. Development CapEx is expected to be $67 million. 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. To do so have five projects in play. The simplest is installing a cooler on the SAG motor, and this is expected to be completed in May. More complicated will 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 SART plant at the beginning of Q3 2018 will also help to lower costs. We look forward to completing the commissioning this quarter. Underground mining and mine projects. Sub-Sill continues to advance. We anticipate collaring the second portal into the deposit early next quarter. This second portal will complete the ventilation circuit, provide a second means of egress. It will simplify material handling by providing one-way traffic 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 as 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 Media Luna PEA, will be 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 a disruptive action would be accepted by the communities. All services have returned to normal; access, water, et cetera. 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 one 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 Steven Thomas, our new CFO, who has been drinking from a fire hose to come up to speed over the last four weeks. I welcome him to his inaugural conference call.
Thank you, Fred, and good morning, ladies and gentlemen. I am 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 first quarter of 2018.
Although there were some specific accounting and cost impacts in this quarter in respect of treatment of the blockade cost, 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 CAD 60 million in January 2018, continued to meet its covenant tests per the term loan throughout the period, paid down $11 million of debt principal under the term and equipment loan, invested in the underground development for ELG and the SART 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 two back to full operational capacity.
This is particularly important when we consider that 40%-50% of operating costs in Q1 2018 were incurred in Mexican pesos, the peso has strengthened some 10% from the same period last year. Inflation has averaged 5% across the major cost categories of labor, contractors, reagents, power, and diesel. Specifically in quarter one 2018, $4.1 million 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 AISC and total cash cost. The company incurred increased costs of $7 million in the quarter in respect of a new bonus structure, applying to both uplift for the 2017 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 first quarter due to the blockade, limiting purchasing, and drawing down more on our consumable inventory balances, mining higher grade ore from the Guajes East 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 one 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 two 2018. During quarter one 2018, we realized an average gold price of $1,331 as compared to $1,284 for quarter four 2017 and $1,227 for quarter one 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 $1,100 gold price. The company's cash balance grew by $66 million during the quarter, in large part due to the net proceeds from the bought deal of $48.1 million. Net cash generated from operating activities at $52 million reflects the success of continuing operations during quarter one, 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 in respect of Sub-Sill 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 million VAT receivable. Whilst approximately $9 million 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 million of the $47 million 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. 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. 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. 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 pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. Our first question comes from Rahul Paul 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. Should we expect meaningful contribution from the underground in Q2, or are you expecting more of a step change in the second half of the year?
At the current time, Rahul, we're running about three rounds of waste development for about every round of ore as we complete the installation of the ventilation system and such infrastructure creation. I would expect that production to be weighted to the second half.
Okay, thanks. 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 years. In the last three quarters, open pit grades have been very strong, around three and a half grams. With mining moving mostly to the El Limon pit from Guajes, should we expect open pit grade to go down sharply into Q2?
No, should not expect. Some of the early production in Q2 was from the stockpiles up on El Limon, and those were noticeably lower grade. Normally, throughout the year, the grade from the El Limon B pit is quite good. I don't anticipate a noticeable drop except when we pull down from stockpile.
Thanks, Fred. That's all that I had.
Thanks, Rahul.
Once again, if you have a question, please press star, then one. Our next question comes from Dan Rollins of RBC Capital Markets.
Yeah. 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 million. That's a significant uptick, what we have seen the last couple of years. I was 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. 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?
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 three pieces. About a third of it goes into the mine. Some of it goes for new equipment and an increase in the spare parts inventory. Some of it's preparation for new technology to try and 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, 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.
There's also a whole bunch of littler projects which are basically just designed to optimize the circuits to a small degree. As we go through the ramp up, I would expect that sustaining capital to drop significantly in the future. The third 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. I don't have exact number. You'll see it in the LOM plan when it comes out at the end of June, I would see a fairly significant drop in the non-stripping component moving forward.
That non-stripping this year is roughly about $40 million. Do you expect to see about a 50% haircut on that, or would you with a $30 million run rate more realistic for this asset? Do you see it going lower?
I don't have the numbers hard in front of me, Dan, I would expect about a 50% haircut's close.
Perfect. 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? Is it really just cooling the motors down on the SAG and then potentially going to the pit for greater blasting?
Well, there's five projects. They have different cost profiles to them. You mentioned two, and yes, we did test during the first quarter, 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 crush pebbles weren't returning. Though the numbers received there were encouraging, but during the blockade, we didn't have the resources to do a proper, meaningful test. The SAG cooler is one. The other thing is we can just crush some from the finer stockpile, crush it a bit finer with a portable crusher, and then 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.
The other issues are manipulating the steel ball load in the mill, and those are just operating efficiencies. There's about five 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. One last question for me. Last year, when there was discussions about installing the SART plant, you had guided to about $100 an ounce of cost savings from the lower consumables. Post the blockade and potential for increased security and potentially higher bonus payments, 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 from the $100?
Yeah. If you said you had 100 to start, now you've got additional costs, is it $80 you could see the cost going down relative to original expectations, 60? Do you have an estimate of that?
Ooh. I think in some ways it'll probably be less than 50 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.
Once again, if you have a question, please press star then one. We currently have no questioners in the queue on the phone line. This concludes the question and answer session. I would like to turn the conference back over to Ms. Sanchez for any closing remarks.
Thank you, Ariel, and on behalf of the Torex team, thank you for joining us and have a great day.
Thanks all.
Thank you.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.