Good afternoon, ladies and gentlemen. Welcome to the B2Gold Corp Second Quarter and First Half 2018 Financial Results conference call. I would now like to turn the call over to Mr. Clive Johnson, President and CEO. You may proceed, Mr. Johnson.
Thanks, operator. Welcome everyone to the conference call today, as the operator said, to discuss the second quarter 2018 financial results. We, as everyone knows, pre-released the production numbers. We put out the financials yesterday with extensive MD&A management discussion and analysis results, and the news release is quite detailed as well. Basically, I think the numbers and what we're doing should speak for itself. Today we'll have a brief discussion, perhaps a little bit of strategy and priorities from me, very briefly, and then Mike's going to take over and talk about the summary of the financials, and then Tom's going to talk a bit about the drilling we're doing at Fekola North, and Bill's going to talk about the expansion studies we're doing and the timing of those events of a new resource and the expansion study for Fekola.
Just in terms of the quarter, as I said, numbers speak for themselves. Another very strong quarter for us. Very good performance from the mines. In terms of strategically where we are, our strategy is as outlined in the news release on the MD&A. Briefly, it's to continue on what we've done for a while, which is to maximize production or operations, maintain our tremendous safety track record and environmental responsibility and social programs, and focus our focus to the future on maximizing cash flows, repaying debt, and also looking to grow through our pipeline of opportunities, which Fekola being probably the most in the forefront, which we'll talk about quite a bit as we go through this. The strategy is not looking at any significant M&A. Frankly, we don't like a lot of opportunities we see out there.
Obviously, we wouldn't be looking to use our shares as a currency anytime in this current environment. More importantly and significantly, it's because of the dramatic potential growth from within the pipeline, such as potential to make Fekola a substantially larger mine with a much larger resource, and ultimately reserves. Also looking at some of our other opportunities in the states of Fekola and also in things like Touéga in Burkina Faso and various other projects we're looking to do more work and drilling on. We have, as everyone is probably aware, we are doing very well, on schedule, a bit ahead on the Masbate mill expansion.
We also are going to come out soon with what we think will be a very positive study on the [inaudible] Central Zone, the impact that that large new resource has when we put the mine plan on it and apply cost, et cetera. We think it's going to be a game changer for [inaudible] in terms of mine life and also its profitability, et cetera. They're the main points. I guess there's some things I would like to talk about on the outset, just to deal with them. One of the things I'd like to point out is that we're hearing a lot of negativity in the sector, understandably, unfortunately, because of some pretty poor performance by too many companies.
When it comes to us, I guess what we're hearing a lot of is that political risk and West African political risk has become a theme, or African political risk. I think it's just really important to emphasize that when it comes to political risk between Bema and B2Gold, we've really spent the last 35 years showing how we deal with political risk, and often political risk in other's eyes has been opportunity in ours. I just think it's important that people realize that everyone has political risk everywhere, but it's how you deal with it, what you do about it. I look at political risk, when you just want to talk about B2Gold, as a positive because of the way we, and in the years before with Bema Gold, have dealt successfully with every imaginable political risk in all these different countries.
When people bring it up, I don't see it as a negative, I see it as a positive, because it's how you deal with political risk, which everyone has, which separates the successful companies from those that are less successful. We're very good at it. Specifically in West Africa, we have a great relationship with the governments. We've talked on this time and time again. Mali, South Tanzania, and every project in every country needs to be looked at in isolation. I know some people want to generalize, but that would be wrong. Specifically as well, we've just seen an announcement for Randgold that they've reached an agreement with the government of Mali to proceed with the expansion of their project, and they had, I guess, a previously existing agreement with the government for some lesser taxes if they expanded the operation.
I'm not going to comment on I don't know all the detail of that. What I will say is it's a positive sign of the government's, again, as we've always been saying, the government wants more gold mining in Mali. If you look at the speech the president made in February of this year, this development for Randgold is very positive for the government, it's very positive for the sector, and obviously for Randgold. It shows the government's serious about making sure other mines that can be economically expanded or built get done, and you couldn't have a better political environment from the point of view of the government wanting mining than Mali has shown for over 30 years. I really think when people want to throw around the political risk criticism or worry or fear, there's lots to be afraid of in life.
There's lots to be afraid of in the gold space these days in terms of poor performance, unfortunately. At the end of the day, if people want to throw around political risk, let's at least know what they're talking about. I would invite people to dig a little deeper if they want to talk about political risk and B2Gold. That's really all I wanted to say. I'll pass it over to Mike now, review the financials, then Tom will talk about the resource. Generally, as I said, Fekola, we'll talk about expansion space for Fekola, then we'll open it up for your questions, we'll try to be concise and brief. Over to you, Mike.
Okay, thanks, Clive. As Clive said, very positive quarter for the second quarter for B2. On the sales side, we sold 221,000 ounces, which was 89,000 more than the comparable quarter last year, that's driven almost exclusively by Fekola being online since the start of the year for full commercial production. We had sales for Fekola of 100,000 ounces. Overall, revenues increased to $285 million, which was driven 68% by an increase in ounces sold, a 3% increase in the gold price. On the production side, consolidated gold production for the Q was 240,000 ounces, which was 16,000 ounces higher than budget. That beat on budget comes from the outperformance of Fekola and Masbate, slightly offset by some minor shortfalls in the June Nicaragua production.
Breaking it down, Fekola had 113,000 ounces for the Q against a budget of 101,000, it beat it by 12,000 ounces. That came from the What do you call it, Bill?
The holy trinity.
The holy trinity of higher throughput. We were 8% over budget. I think the mill's now running comfortably at somewhere around 5.5 million tons per annum. We tested that now over a variety of ore types and rock types. It's also run higher recoveries, 95.3% against a budget of 92.7%. Otjikoto, 41,000 ounces, is basically in line. Masbate, 54,000 ounces, which was 11,000 ounces over budget. Masbate had higher recoveries and higher grades in the Q. That's mainly from unexpected higher grade in backfill ore that we actually took from old underground mine workings as we mined the Colorado pit. That backfill ore was higher grade than the original plan, in situ ore, that we were going to mine. Therefore, it increased the overall grade. Libertad, 21,000 ounces, which was about 3,000 ounces under budget.
Libertad was progressing well through the second quarter, through April and May, basically on budget. We had some roadblocks related to the current political unrest in Nicaragua, which restricted the supply of key consumables, mainly lime and fuel, in June. Therefore, in June, we actually ran some lower grade spent ore just to manage that supply issue and reduce lime and fuel consumption. Then Limon. Limon had 11,000 ounces in the Q, again, about 3,000 ounces under budget. It also was impacted by some blockades in June related to local employment issues, which have since been rectified and resolved. Limon in April and May was actually tracking slightly better than budget. Now with the resolution of the June issue, we've tracked back to budgeted levels again. Overall, 240,000 ounces for the Q.
With Fekola's continued outperformance, it's basically been beating budget by around about 10,000 ounces for the first couple of quarters. We've now re-guided up Fekola. We've now said its annual production is expected to be somewhere in the 420,000-430,000 ounce range. With the Nicaraguan production shortfalls in June, we've actually re-guided both Libertad and Limon down by 5,000 ounces each for the period, which results in an overall revised consolidated production forecast of between 920,000 and 960,000 ounces. We haven't re-guided anything on the cost side, just on the production side. Moving to the cost side. Cash cost for Q2. Consolidated cash cost, very healthy, $474 an ounce, which was $86 less than budget, driven mainly, again, by that higher production at Fekola and Masbate, along with other cost savings at those operations.
Fekola was $318 an ounce, $73 under budget. This benefited from, firstly, the higher gold production. Then also lower than budgeted mining costs. During the quarter, we were in a zone that was a near-surface weathered rock zone in Stage 4 of the Fekola pit, which didn't require drilling and blasting. Hence, we had lower operating and maintenance costs for the period. Otjikoto, $505 an ounce, almost pretty much on budget. We did have a strengthening in the rand in the period, but that was offset by other cost savings. I should also comment that we had Otjikoto's solar plant grand opening at the end of May 2018. That solar plant is expected to replace approximately 13% of the generator electricity needs at Otjikoto. We think overall it'll reduce operating costs by approximately 3%. Masbate for the Q, $531 an ounce.
$199, almost $200 an ounce less than budget. It beat the budgeted cost range, again, due to higher production and also significantly lower mining costs with cost savings in drilling, blasting, and grade control, and we also had some higher deferred strip adjustments than we had originally budgeted. Libertad was $875 an ounce, pretty much on budget. Although we had reduced production in June, aggressive cost control basically held Libertad's overall operating cost to budget. Limon, $893 an ounce, only marginally $33 an ounce over budget. Again, it outperformed budget in April and May, and then it pulled back some of that with the lower June production numbers. Overall, Limon pretty much on budget. As I said before, Limon's now returned to sort of steady state budgeted numbers as we move forward.
That all adds to consolidated cash cost $474 an ounce, which $86 under budget. When you translate that into the all-in sustaining cost, $721 an ounce, $146 under budget. That reflects the $86 beat on the cash cost side plus some lower CapEx at some of the operations. Fekola was $445 an ounce, $160 under budget, benefit from lower operating costs, and then it also had some mining costs and CapEx that were lower than budget, specifically some of it on the stripping side. Otjikoto, $824 an ounce, $58 over budget, and that's mainly a reflection of some CapEx that's a timing issue. Some of the CapEx we had in Q2 for fleet rebuilds was originally expected to happen later in the year, it happened in Q2, we should see that timing difference reverse later in the year.
Masbate, $727 an ounce, $270 under budget, that's just a function of the lower cash costs on the higher-than-budgeted production. Libertad and Limon. Libertad, $1,200, $27 under budget. That reflects slightly lower cash costs, also, it had some lower than budgeted pre-strip costs at San Juan. We think overall, with the final pit design at San Juan, we're going to have slightly lower overall CapEx there. Limon, $1,614 an ounce. It was $222 over budget. Higher cash costs, it also reflects some higher development costs in Santa Pancha, that was CapEx that we originally planned for Q1 that was actually done in Q2. A couple other general comments on the ops just before I move on to the cash flows. At Masbate, the expansion is progressing well. We're still scheduled to come online by the first quarter of 2019.
That expansion is to expand the mill from 6.8 to eight million tons per annum. It's on time and on budget. Nicaragua, we did have a delay in developing the Havili open pit with some of the social unrest that was there. We're now scheduling Havili and Tana open pit to come online in Q1 2019. We also had a couple months delay in furthering the Havili and Tana underground development. It was temporarily delayed in Q2, we now expect it to come online at the end of Q3. With Limon, with the resolution of the issues in June, Limon's returned to steady state, the big focus there now is on updating the Limon Central feasibility study. By in time, I think we'll hear more about that from Tom shortly.
I'd like to move on, just kind of a couple of things on the income statement. G&A was up marginally by about $1 million, and that really reflects the fact that Fekola is now online and its G&A costs are being expensed. They were previously capitalized. Derivative gains in the income statement, we saw realized and unrealized derivative gains of approximately $5 million. That reflects gains on fuel derivatives offset by smaller losses on Namibian go-forwards. Those Namibian go-forwards were contracts we put in place in an earlier version of the RCF a few years ago when Otjikoto was being built. We only have 21,000 ounces left on that to be delivered, and that will be delivered through the remainder of 2018.
On the fuel side, we're still following our hedging policy of hedging 50% of the next 12 months' production and 25% of the subsequent 12 months' production. We continue to watch gold prices and put on forwards when we think it makes sense. The other thing I'd comment on the income statement are income taxes. The significant increase in the quarter to $23 million from $2 million in the prior year quarter, and that almost exclusively reflects the fact that Fekola has come online. Of that $23 million, $19 million relates to Fekola. $14 million of that is Fekola corporate income taxes, and then $5 million of it is the Fekola government priority dividends. The first 10% of the government will hold in Fekola. They get a priority dividend which is equal to 10% of net earnings.
That's accounted for as a tax and flows through the tax line. We also saw a $1 million increase on Masbate taxes. Masbate previously had that income tax holiday, which expired in June of last year. For those of you that like deferred income taxes or care to know, there's a $27 million charge in the year, and that just relates to foreign exchange. We saw a strengthening of the CFA franc and the Namibian dollar. With that creates some timing differences that are reflected in deferred income taxes. Again, those will reverse over time. Net income for the quarter, $21 million, $0.02 a share. Adjusted net income for the quarter was $46 million or $0.05 per share. Two comments on the cash flows. Operating cash flow for the period, the quarter, was $86 million, $0.09 a share.
That did include just under $20 million of working capital inventory adjustments, where we built up some bullion at Fekola and Masbate, and we expect that we'll see that. That's just a timing and shipments issue, and we expect that we'll see that difference reverse in the third quarter. Year-to-date, we've generated $233 million or $0.24 a share of operating cash flow. On the financing side, we repaid a net $50 million on the revolver for the quarter. We paid it down again, and so far, through the end of June, we've paid down a net $125 million year-to-date.
Subsequent to the end of June, we repaid another $25 million. Total repayments on the RCF for the year are $150 million, and that takes our drawn balance, the amount that we've actually still owe under the RCF, down to $200 million at the current time, which means we have $300 million undrawn and available under the facility, and that facility runs to 2021. It's our intention at this point in time, the financing side, as we've said a few times before, the convert, the next bullet, our major debt item will be the maturity of the convert, $258 million on October 1st of this year, and it's our intention to repay that in cash unless those notes are converted, the conversion options are exercised. We have lots of liquidity.
We have $107 million at the end of the period in cash, and also now have $300 million available under our facility. We have lots of liquidity to deal with convert. On the investing side, just a quick comment. We spent $80 million in the period, pretty much on budget for most ops. We were under budget at La Libertad, which by approximately $12 million, and that relates to a couple of things. One is the Jabali lease development costs. We expect to push those out now into the end of the year, early next year, of $8 million, and then we were also under in San Juan, pre-stripping, as I mentioned earlier. Exploration for the period was $33 million, and that's for year-to-date. The total, that's pretty much right on budget.
We did increase exploration cost as a budget for exploration by $4 million this quarter, and that money's scheduled to go into the ground in the Fekola North extension exploration activity. Final comment, in 2019, as we move forward with reducing our debt load, which is part of our overall strategy, we intend to revisit the dividend discussion. We'll evaluate cash flows in 2019 and then potential for a dividend based on where the company is and what its current growth activities are at that time. I think those really were the main financial items I was planning to cover, but I'm happy to answer any questions.
Do you think you want Tom now to talk about
Let Tom.
Let Tom? Okay. I guess Tom's going to maybe talk about exploration right now, I guess we can take questions after that.
Thanks, Mike. Just good morning, everybody. Just for talk about the Fekola exploration. As Mike said, we've significantly expanded the budget at Fekola, largely to do the infill drilling in an area to the north of the current reserve pit. In fact, the area that we're covering with drilling right now is approximately a kilometer north of the pit and to a depth of just over 350 meters. This is the area we're doing infill drilling. By the end of the year, we'll have drilled about 25,000 meters of diamond drilling and 38,000 meters of RC. The area that we're drilling is to complete a resource by October. Once that infill drilling is done, we're going to continue drilling to the north of that because the deposit remains open in that direction.
We expect to have this resource out in October, there's a pretty good chance we'll have some drill results coming out in September to back that up. I will make a comment about this resource drilling. A lot of people will say, "Well, why are you going north?" Because it keeps on plunging down to the north. Well, what in fact has happened is, although it still plunges northwards, the main part of the ore body has come up towards surface, either a second shoot or the main shoot itself has expanded. Either way, with that coming closer to surface, it actually allows the pit to be driven out in that direction, and that's what's driving this larger resource that we're looking at. If there's any questions, just pass them on. Thanks.
Yeah. Tom, maybe just to add to what you were saying, Clive mentioned it. We talked a little bit about the expansion potential. We are currently looking at it from an engineering standpoint. John Rajala, the Vice President of Metallurgy, is currently working on a grinding study basically to figure out how much capacity we have in the mills and how big we can go there. In addition, he's just doing a debottlenecking study, which would give us an indication really what the largest we could make that mill is and what the cost would be. Associated with that, Dennis Stansbury, our Senior Vice President, Engineering & Project Evaluations, is leading a study which looks at both the infrastructure and the mining fleet. How big could we make the mining fleet? What's the optimal size based on the potential resource that Tom's developing?
In addition to that, he's looking at all the infrastructure things like tailings facilities and warehouses, HME shops, those types of things, just to make sure that by the end of the year, we have sufficient information internally to make some decisions on how big we really think this thing can get and how big we want it to be based on capital influx. I don't know if there's anything anyone wants to add to that. Okay, back to you, Clive
Okay. Well, I guess with that, we'll open it up to questions. Just one comment on the dividend that Mike talked about was looking at dividend policy next year. I just want to reiterate that we think that our shareholders want us to be a profitable company that continues to grow, as we've done successfully for 11 years so far. We hope that what they aspire to be is a good company, but they still a growth company. As Mike said, we'll start to look at that as we get into 2019. Part of it will be dependent upon cash flow, of course, and therefore that'll be partly dependent upon the gold price.
We see ourselves as wanting to be able to do both, aspire to getting to the point where we continue to grow, which we do well, but also get to a point where we can do both grow and pay a dividend to our shareholders as well. With that, I think we'll open it up to questions.
Ladies and gentlemen, to ask a question, please press *1 on your telephone keypad. We'll pause for a moment as the question is compiled. Your first question comes from Lawson Winder from Bank of America Merrill Lynch. Your line is open.
Hi, guys. Congratulations on a really great quarter. Just wanted to maybe start with Fekola. You mentioned that you were mining 20% above budget. I was just curious, is that being driven just by the softer rock that you're experiencing, or is there something else to that?
I'll take that one for sure, because it was in the press release, in discussion this morning with site, they actually chastised me a little bit. Certainly, obviously, we're in the honeymoon phase of our equipment, brand-new equipment. With that being said, we're seeing much higher productivities than we had anticipated. Certainly much higher availability. The fact is, we're not that deep in the pit, and we're in the upper zone for sure. We do think the costs are going to come up a little bit, but we don't think that they're going to approach what the feasibility costs were.
That's in 2018. Are you talking 2019, 2020 as well when you're looking out and saying that you don't think you'll approach those feasibility costs?
Going forward as well.
Okay. That's great. Are you able to share with us just what your mining cost per total ton moved was at Fekola then for Q2?
I can, for sure. Let me just roll it up here so I get the right number. For the current period, our cost for rock ton mined was $1.34.
$1.34. Then, just one more sort of follow-up then on that cost. It actually did come up a little bit versus Q1 just on a cost per ton, milled basis. Is that just the evolution of the pit as you do actually go a little bit lower?
Was your question on the mining side or on the processing side?
Just total costs. You just take the cash operating cost, convert that to a per ton processed basis.
Yeah. Maybe someone else can chime in after I answer if they have a different answer. The way I see it is, remember, we're still only in our second quarter of production, we still are testing some things. As you can see, like the mill cost is still kind of moving around a little bit as we look at reagent consumption and optimization. Mining cost for the year is kind of stuck right there at that kind of $1.35, $1.34 per ton. Site general is actually up for the half year, but down for the quarter. We continue just to optimize. I'd say we're still in Q2, and it's still too early to say where it's going to settle in, kind of steady state.
We're well under budget.
We're well under budget.
Yeah. No, definitely. Great. Absolutely amazing quarter, Fekola. Just one last one for me on Libertad. With Jabali Antena open pit now not included in the guidance, will the tons processed and the grade be materially different from what you originally guided to? Originally back in early 2018, you'd said 2.3 million tons at around 1.75, I believe. Is that still in line, or is?
Well, Lawson, recall in our stated guidance, we've dropped our ounce production forecast by 5,000 ounces and in the interim, developed our sources, basically remixed our existing mine sources, which will be heavily underground late in the third quarter, San Juan, San Diego, and Spindor.
Okay, gotcha. Okay, that's great. Thanks a lot, guys.
Your next question comes from Mick Stroba with Macquarie. Your line is open.
Good morning, Clive and team. A couple of questions on my end. Just at Fekola, do you foresee a decrease in recoveries from that 95% range as more fresh material is processed?
I'll answer it, John, then you can correct me if I'm wrong because we talked about it a little bit.
Yeah, go ahead.
The 95, we still haven't tested all the types of rock. What we can say, and I think we said it in the press releases, is we do believe we're going to be above the 92.7. Right now we're bracketing between that kind of 95.3 and the 92.7. We think it's going to be somewhere in between there. We don't think it's going to be ultimately 95.3, or we can't say that yet. We don't have enough information, but we think it's definitely higher than 92.7. John? Yeah, I agree with that, Bill. We'll exceed feasibility study recovery, but it's still too early to make a projection on where the recoveries will settle in for the future.
Okay. Thanks for that. On the processing side of things, you said that it has been shifting around the processing cost per ton. Are you able to provide us with an indicative, budgeted processing cost you're shooting for in 2018?
Want to try that, John?
I don't have those costs in front of me, but we've been below budget, and we expect to continue below budget for the remainder of the year. I believe we're averaging about $14-$15 a ton. Yeah. Go ahead.
Yeah. I'm just showing John. I've got some of the tables here from the variance report. As you said, we're kind of between $14 and $15, and we had $17 in the budget for 2018. We're going to be significantly below budget.
We're well below budget. Those $17 a ton costs were feasibility projected operating costs per process.
Okay, excellent. Thanks for that. Finally, we didn't see any mention of Anaconda, Adder, or Mamba. Is there any reason for lack of disclosure on the Fekola saprolite deposits?
Tom, you want to take a whack at that?
We'll have a little bit on it, but I think our disclosure is consistent with what's going on there. If you look back at what we said. Tom, go ahead.
We lost you, Clive.
I can answer. In terms of just the Anaconda area, it's not a question of not being something we're interested in. It's just that we're looking at expanding the Fekola pit by, could be up to a kilometer, maybe even a bit more. Why would we not focus on that right now? That's really what we're doing.
Okay, excellent.
Yeah, we are doing some internal test work on Anaconda, where we are advancing some things there with internal studies and things of that nature. We are working on it.
Todd, we are drilling there as well.
Yeah.
Todd, we're drilling there as well.
Are you still drilling at Anaconda?
Yes, we still have a rig working on Anaconda. It's slowed down a bit with the rainy season, but yeah, we'll be there in the back half of the year.
Okay, great. Thanks for that. That's it from me.
Yeah, just one comment from Mike. If you want some more detail on that, if you look at page 24 in the MD&A, there's a discussion about what we're currently doing there.
Still on the call.
Okay, thanks.
Your next question comes from the line of Matthew McPhail with Canaccord Genuity. Your line is open.
Hi, guys. Thanks for taking my questions and congrats again on the awesome quarter. Just talking about the Fekola throughput, you are saying you are comfortable with a 10% increase, long term over current nameplate. Just to confirm, that is with no incremental capital, correct? That is just based on the kind of experience you have had with the different ore sites?
That is 100% correct. If you remember, the feasibility was designed at, we went at 4 million tons per annum during construction due to the exploration success and the success we were having with the construction process. We went ahead and expanded to 5 million. They have now tested it and feel very comfortable that we could set the minimum that we can run at over a course of a year is 5.5 million.
Okay, is that, the 5.5, is that considered to be a little bit conservative or do you think you can go a little bit higher than that, or is that aggressive or conservative? What do you think?
That is exactly what we're testing right now.
Okay.
I'll just add, we have a grinding study in progress. We just completed a sampling and data collection program in July, that'll feed into the grinding study, which will be completed in about mid-September. At that time, we'll know a lot more about our expansion potential then.
Okay, great. Just to follow up on that, it may have been brought up previously, you're saying that recoveries, you're looking at sustainably above 95%. Are you comfortable with that number even at the higher throughput, the 5.5?
Well, what we said actually was that although we announced 95.3 or whatever it was for this quarter, the feasibility is 92.7, and we think it's going to fall somewhere in between there, and we're still doing the studies.
Okay. All right. Thanks for the clarification. Those are all the questions I had. Thanks, guys.
Your next question comes from Chris Thompson with PI Financial. Your line is open.
Good morning, guys. Congratulations on an absolutely fantastic quarter. Two quick questions. One on Masbate. Obviously, you explained that performance was very much on the back of high grade on the backfill from Fekola. Can you give us a sense of what the second half of this year looks like as you, I guess, prepare to enjoy the merits of the expanded mill?
Well
You want me to do it, or you want to?
Go ahead, John.
Okay. Hi, Chris. Yeah, what we see really is a continuance of the performance through July, August timeframe, and then we'll track closer to our budget forecast as we complete Colorado pit, which we anticipate doing in August.
We'll track close to budget for the remainder of the year, from September to the end of the year, with declining recoveries as we reduce the oxide content. Third quarter, 30%, final quarter of the year, closer to 5%-10% oxide.
Perfect. Thanks for that, John.
Chris, it almost sounded like you said something that you thought that the expansion would impact this year, but that only comes on next year.
Right. Okay, perfect. Thanks. Just the final question from me, just on Otjikoto. Again, I guess an asset in transition, high strip for this year. Looking at the grades, do we expect to see grades sort of improve towards the end of the year here? Head grade?
Well, maybe the geologists can answer that. The answer is, we've kind of tracked right on budget there. At the halfway point, we're kind of at exactly the halfway of where we thought we'd be for the year. I don't think they're going to change that much difference. As you know, this year, we're primarily in Otjikoto, except for a very little bit at the very end of the year. Then, of course, Wolfshag comes in for 2019, and we're currently looking at the resource model there and seeing if there's any changes that need to occur there and what that means for 2019.
All right, guys. That's it for me. Congratulations.
Your next question comes from Steven Butler with GMP Securities. Your line is open.
Thanks, operator. Hey, Mike, a question for you, or two. On the Fekola, the extra 10% that will go the government's way. I know they're waiting, that process is, I guess you'd say, imminent here, so we'll wait for that at some point. What is the level of the intercompany loans right now that exist at Fekola and the interest rate that you deem on those loans?
Well, we'll deal with the interest rate point first. Those loans, there's a West African sort of group estate rate, which I think is currently 4.5%, and then the loans themselves carry an additional incremental 2%. We're kind of looking at 6.5% on the loans.
Okay.
That's the rate. Then, the loans bounce around. Obviously, we're repaying them back now as we generate cash flow, but the number you probably want to work off is, what did they peak out at in terms of just when construction was complete and we went into operation? You're looking somewhere around $700 million. Because remember, there were historical loans-
Yeah
in the local entity, $700 million is roughly the number you should work off.
Okay. Mike, will that flow through the income tax line as well, or separately?
No, that'll be a separate line item. Now, remember as well, we have disclosed before, we haven't disclosed the final agreement yet because we're waiting for the ratification, which, as you rightly say, we think is imminent. When that does happen, any amount that the state is going to pay us for that second 10%, post-construction cost volume, that's going to be set up in the form of a loan, and we're going to receive those loan repayments until that loan plus interest is repaid. That's what you'll see, that's how it'll be reflected in the financials. There'll be a loan payable to us by the state of Mali for their purchase price, and you'll see that loan reduce over time as that dividend is paid.
Okay, I got it. Yeah. Mike, what's your hedging level of oil price on your hedges sit at, roughly?
You mean what are we actually-
Hedging at, I guess
the levels, the volumes, et cetera?
Yeah.
I think we'll probably go through it all on this call. I think if you look at note 11, the financials.
Okay.
We've laid it out in there for you, the volumes and the strike prices.
Okay, got it. We'll look for that, yeah. Lastly, Mike, maybe you could clarify a bit. I saw on the financial statements, of course, in the cash flow statement, that fairly large $14 odd million for interest and commitment fees on your debt as an additional, if you will, interest-related expense. Maybe you could elaborate a bit more on that. $14 million there plus the extra $8.5 million on the income statement is a hefty level of total interest and commitment fees. Maybe you could just elaborate a bit more.
No, you've got to remember that the way we show it on the cash flow is we show all interest payments as part of financing activities. Companies either decide they show it all as operating or financing. We show it as financing. The eight and a half you see on the income statement actually gets added back up top.
Oh, it does? Okay. It's up top.
Yeah.
It wasn't quite clear where that was, yeah.
You're not looking at a combination, you're looking at a total of 14.
Okay. It must be.
Those reflect fees on the revolver and on the convert and some lease-in trust, but the main ones are the revolver and the convert. You got to remember as well when you compare like for like on the income statement, that last year, we were capitalizing interest as part of Fekola's construction costs, which we no longer are.
Okay. On the operating activities adjustments up above, I guess it's under non-cash charges. It wasn't quite clear to me as to where it might be taken out of the operating activity line above.
If you go look in note 14, you'll see it getting added back.
It's in there. Okay. Got to look a little deeper. Okay. Thanks, guys.
Your next question comes from Chitimukulu Musonda from Global Mining Research. Your line is open.
Thank you. Hi, Clive and team. Thanks for taking the question. Just one quick follow-up on Fekola.
Did you say you're already at 5.5 million tons per year, or are the grinding studies looking to get you there?
We said absolutely that we are 5.5 million and comfortable saying we can sustain that over all rock types.
Okay, thank you. That's all for me.
Your next question comes from Don DeMarco with National Bank Financial. Your line is open.
Oh, hi there. Thanks for taking my call. I guess the last question, just to build on that. Regarding the 5.5, like I see in Q2, you're running at around 5.3 million annual run rate. Given the fact you're comfortable at 5.5, does that suggest that we might see a quarter-over-quarter increase in throughput in Q3?
I believe the answer is yes.
Okay. I was looking at the grades. The technical report calls for grades at Fekola to edge a little bit higher. I think it's 3.2 grams per ton in the second year of operations. That's the milled grade. Is that still a reasonable assumption to make?
Yes. What you have to remember is we did a little bit different than the feasibility. We actually started mining in March of last year, we have this very large stockpile that we've accumulated, like 3.7 million tons or something like that. We're actually being very selective right now, and we're actually mining, or we're managing our mill throughput as far as what we're actually putting into the mill. We have an interesting scenario where we're trying to blend this out over the next couple of years what our ounce production will be. The answer is yes, we could run at 3.2. We may run higher this year, we may run higher next year. We're still looking at what that looks like.
Okay. That's all for me. Thanks a lot, guys.
Your next question comes from Dan Rollins with RBC Capital Markets. Your line is open.
Yeah, just a question regarding the potential upcoming expansion at Fekola. Just given the fact that the throughput is running well above design capacity, your unit costs are trending well below expectations. Any thoughts about potentially dropping the cutoff grade when you move to reserves, given the improved economics of the ore body?
We're looking at it, yes.
Impact trade-off on grade, any thoughts, or is it really just more ounces of the same cost structure and just more free cash flow to you?
Too early to tell.
Okay. If we looked at one of the challenges we have in the gold sector versus other copper, other mines, is the sustainability of production. Are you looking at sort of a 10-year mine life with the expansion or are you thinking maybe push this out to 15, give yourself a 15-year cash flow cow in Fekola and then take the risk off having to chase 400,000, 500,000 plus ounces of production to replace every year?
Yeah, I'm sure Clive wants to answer that one, but from an operational standpoint, that's what we're looking at, right? That's what this expansion study does. We don't have a final resource yet, and we certainly don't know what our throughput's going to be.
Perfect.
I would just add to that we're going to obviously look at what the best economics are and think of what's in the best interest of our shareholders. The first next step is the resource. How much bigger does it get? In our view, this looks like we'll have a significantly longer mine life than the current, the 10-year mine life that we started with at 5 million tons. The question will be, do we want to expand, and there's just more gold, or do we want to have a longer mine life? You're right, those are always challenges in our sector, which way you go, and we'll be looking at that. By the end of the year, we'll have not only the new resource, we'll have ideas about what expansion looks like. It doesn't make sense, and what mine life doesn't get.
Don't forget, we have the stakes to the north, it's early days, but we're starting to see under the saprolite, with the material, we're starting to see some good hits early on, but good hits in the bedrock sulfides below, which is what we're looking for, another Fekola potential. There's 5 km by 1 km to drill there of saprolite material. We'll be looking at all that as we go forward this year and into next.
Much appreciated. Thanks for the color.
There are no further questions queued up at this time. Let's turn the call back over to Clive Johnson.
Okay, thanks everyone. Thanks for your interest and your good questions. We'll keep you posted and follow up at the end if you have any other questions that we didn't answer on the call. Thanks for your time.
This concludes today's conference call. You may now disconnect.