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Good morning. Welcome to Wesdome Gold Mines Second Quarter 2022 Financial Results Conference Call. I will now turn the call over to Heather Laxton to begin today.
Great. Thanks, operator, and good morning, everyone. Thanks for joining us today. Before we begin, we'd like to take this opportunity to remind everyone that during this call, we will discuss our business outlook and make forward-looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could cause outcomes to differ materially due to a number of risks and uncertainties, including those mentioned in the detailed cautionary note contained in yesterday's press release and in the company's management discussion and analysis dated August 10, 2022, both documents are available on our website and on SEDAR. Please note that all figures discussed on this call are in Canadian dollars unless otherwise stated. The slides used for this presentation and a recording of this call will be posted on the company's website.
And now over to Lindsay Dunlop, Vice President of Investor Relations.
Thanks, Heather. Speaking on the call today will be Duncan Middlemiss, President and CEO; Fred Langevin, Chief Operating Officer; Scott Gilbert, Chief Financial Officer; and Mike Michaud, Vice President, Exploration.
The agenda today is Fred leading off with the Q2 operations review, and then Scott will discuss the related financial results. Mike will then follow with an exploration update at both Eagle River and Kiena, and finally, a conclusion and outlook summary from Duncan. We will then open the call up for questions. Fred, please go ahead.
Thank you, Lindsay. Hi, everyone. Thank you for calling in this morning. Since I officially joined Wesdome on June 15, I've spent a lot of time with the teams at both sites, and I'm glad for the opportunity to provide an update on our Q2 operating results. At Eagle, the plan was for a lower grade cycle in the first half of the quarter with higher grades expected in the latter half, especially in June. Early into the month when performing a routine rope change and became apparent at the brand-new [indiscernible] we had on our hand and the manufacturing effect. While we were able to source a replacement rope, the time to do so coupled with the installation process and subsequent testing and validation resulted in 2 weeks of reduced productivity as we have to rely on trucking service. Secondly, we suffered a failure of one of our lead checks. The condition of this thing has been identified as problematic and were slated to be decommissioned and replaced later in 2022. This did further impact another week of hybrid milling during the quarter, however, as processing activities were suspended while we investigated this event. Finally, a very high-grade stope in the Falcon zone has come up with lower grades than expected impacting gold productions. As we continue to gain more experience in this new zone, rate assumptions for the second half of the year in the area of that zone have been revised to be more conservative.
At Kiena, the new equipment delivered in Q2 is performing well, and the overall reliability of the fleet is steadily improving. Development performances have been tracking up in Q2 and are expected to ramp up to full capacity in H2 as long awaited bolting equipment is delivered an improvements to the ventilation system at Kiena are put in place. But at the moment without the paste fill plant restrained from increasing mining rigs much beyond what has been achieved in Q2.
While most components of the new paste fill plant have arrived and are being installed certain electrical components have had delays in deliveries. For this reason, we're now looking at late Q4 for delivery and commissioning of the paste fill plant. Over to you, Scott.
Thanks, Fred. Quite the operational challenges at Eagle River regarding the growth and the leach tank failure and the supply chain challenges of Kiena, we generated $61.9 million of revenue in Q2 2022 from the sale of 26,000 ounces of gold, which generated a cash margin of $21.9 million. We invested $38.3 million in combined capital expenditures at Eagle River and Kiena in the quarter. Despite the lower cash margin and higher capital expenditures, we ended the quarter with a cash balance of $23.5 million with the full $45 million secured facility available.
Subsequent to the quarter end, we drew USD 16 million of the revolver as both operations are scheduled to be shut down for maintenance in July. Based on our most recent forecast, our cash position and revolver is sufficient to bring Kiena into commercial production. Cash costs and AIS fee per ounce sold increased from Q2 2021, primarily due to the 30% decrease in ounces sold, along with inflationary pressures for costs in consumables and maintenance. Over to you, Mike.
Thanks, Scott. At Eagle River, underground drilling is ongoing to upgrade and expand many of the non-mining zones at depth, including the 300 East, 711 and 8 zones. Additionally, drilling at the Falcon 7 Zone is ongoing with both underground and surface drilling to expand and better define the zone. The ongoing definition and expansion drilling at Falcon 7 zone has increased our confidence of the gold grade distribution and continues to show the high-grade nature of this zone.
Of significance, the ongoing drilling has also identified a number of thicker sections of the zones as well as splays and fold noses that have the potential to add significantly to the existing near-mine resource base. A new drift has now been established on a 355-meter level to drill the up plunge extension of this zone and provide access for mining. The results of the ongoing surface drilling at the Falcon 7 Zone as well as at the central portion of the mine diorite where the 7 Zone trend has been identified by drilling will be released shortly.
At Kiena, we continue to be pleased with the drilling results that have again expanded the high-grade A zones and foot wall zones. Most recently, drilling at the A Zone has discovered a new mineralized interval located 100 meters below the non-limit of the A Zone resource. This hole returned 13 grams over 83 meters. The hole was slightly down plunge so that's not the true thickness, and we're working on to identify that.
This highlights the potential at depth. The company plans to develop a hanging wall exploration drift from the 116 level to establish more optimal drill plan platforms. Of course, the most exciting news for the quarter is the discovery of a new zone namely the South limb. Up to this point, the vast majority of the exploration drilling at the A zone has focused on the North limb along the sub-vertical contact between mafic and ultramafic rocks. However, recent drilling was designed to test the lateral extension of the A Zone along with the South limb of the hole. Although early days, initial drilling returned 51 grams per tonne over 4.7 meter quarterly.
And this area remains open along strike and down dip, and could significantly add to the resource base. Just as the footwall zone discovery. This lateral extension of the A Zone will increase the number of ounces per vertical meter and has the potential to provide additional working faces during mining. It is evident that as we continue to explore, we discover new zones, demonstrating the prospectivity of this area and the entire property.
Meanwhile, on surface, we are drilling the Presqu'ile and Dubuisson zones to better define and expand these areas to upgrade the reserves in the future. Also drilling is ongoing at Shawkey and the recently discovered Bourgo zone along the southeastern part of property, and we expect to release these results in the near future.
Over to you, Duncan.
Great. Thanks, Mike. While the guidance reduction this year of both assets is disappointing, we believe the new conservative targets we have set forth are very achievable despite the stepbacks experienced earlier in the year. With the support of Fred now and the COO seat, we are quickly adapting to this challenging environment and making the necessary investments in human capital assessments. For the second half of 2022, we are forecasting sequentially higher production. Q3 will be lighter than Q4 due to the planned shutdowns for standard mill upgrades and the refurbishment of the thickener Eagle River. As well, Kiena also shut down for the refurbishment of the hoist braking system. As well the results from initial development in the Falcon zone are showing slightly lower grades than expected, which we are conservatively applying to our second half grade profile forecast. Early indications are showing that the high grade is more variable than initially thought. We are currently advancing plans to establish rigorous short-term block models and reconciliation procedures to improve near-term projections of high-grade zones.
Additional drilling and chip snapping within the ore development has already been implemented. At Kiena, the rate of mining high-grade stopes in the A Zone will be slower than originally planned until the paste fill plant is completed, thereby impacting the second half production.
Additionally, the development deficit incurred earlier in the year has also impacted stope availability. We will continue to provide updates on the progress of Kiena as they become available. We are taking proactive measures to mitigate cost overruns as a result of lower production and inflationary pressures, including deferment of capital expenditures wherever practical. We remain enthusiastic about the upside at each of our mines and expect to ramp up exploration results in the coming months. So stay tuned for that.
This concludes the formal portion of today's presentation. We will now open up the line for questions.
[Operator Instructions] And our first question comes from Andrew Mikitchook with BMO.
Thanks for the detailed rundown. I was just wondering if you could provide a little bit more sense of where you're seeing inflationary pressures at the 2 mines beyond kind of cost divided over lower production but actually kind of in terms of consumables or labor, where are you seeing more impact? And where are you kind of hoping better? Just we kind of have a sense of what the main drivers are.
Andrew, it's Scott. Thanks for the question. So we've done an analysis and at both of our studies when we look at it, we're actually very heavily dependent on labor costs and contractors. That's probably about 60% of our cost, 60% to 65%. We've also done an analysis on diesel fuel, cyanide propane, ground supports, and we're seeing probably approximately about 10%. But they don't have a significant impact on our overall cost because of our small size. So until the point it matches the having too small mine life.
And not the largest cost contributor on labor, any commentary on how that's retention costs essentially at this point in time or is that a thing?
I think really what we're seeing in the industry, Andrew, because it's been such a demand and low supply for qualified people and everything else, yes, we're definitely the industry is very competitive in terms of attracting and retaining. And certainly, it's a labor market, I would say right now as opposed to companies. So that's what we're faced with. So in order to get the proper resource in the door, to execute, you have to pay the going rate.
Great. One last question. Just looking beyond, call it, this year or even beginning of next year, is there any broad changes or long-term adjustments that you're seeing to how you have to mine Eagle or even Kiena once you're ramped up and have these new workplaces available to you? Or is that essentially on a medium to long term still completely intact?
Yes. I think that's the way to look at it medium, long term. I think it is really Kiena when we'd love to get our paste fill plant up and running and then see exactly how we'll be able to perform. What we're seeing right now is stope cycle being impacted by us having to mechanically place cemented rockfill into the open voids and that's a lot more arduous than what we had initially projected at this point, right, as opposed to a paste fill delivery. At Eagle River, I think that really what we've outlined, really, I think the identification of variability within the high grade.
Just to be clear, we're quite satisfied with the Falcon Zone, we just see some variability in it. We've had 2 production experiences there. One has been really positive, one has been less positive, but still a very high-grade zone. And so really, I think the more data that we can generate in the zone, the better predictability we're going to get. So for me, I think that's going to be the key for our production going forward.
[Operator Instructions] And our next question comes from Wayne Lam with RBC Capital Markets.
Maybe just wondering if you might be able to provide a bit more detail on the grade variability on the Falcon zone and how that might impact mine planning on a go-forward basis? And just curious what proportion ore you guys' kind of expect from the Falcon on a run rate basis?
Yes, it's Michael Michaud here. I mean, really, the Falcon Zone, it's the new zone, who's in the volcanics. We had quite a bit of drilling into the zone when we estimated the initial resources and reserves, and we're happy with that global estimate. And as we started developing that, we released this development in the latter part of last year of $622, $635 level. We certainly were getting more gold, higher grade out of that development then we though from the drilling. So now we've gone at a different level and went after really high-grade area that was in our plan about 49 grams, we ended up getting around 30-something grams. So still pretty good to hear about less than and we had sort of thought we might get there.
But I think the variability as ounce just a little bit more than we were expecting. So really, what we've done is we now getting more development in, of course, and that's the best we do our forecasting, but we've also drilled 80 holes into this Falcon zone since the resource estimate data cut off last year. So they really have shown that these holes result sometimes I think in earlier this year than May. And that data shows that the grade is there. It's high grade. It's just that information just helps us better understand where the high grade is and where the low grade is.
And I think what we're finding is when we went in mine this higher-grade area, it came back a little bit lower. But then in an area we thought we had waste, we went into that, we just developed another mine in that because it was higher than the low-grade hole. So with that variability, we know we need development done in front of us, certainly to do our forecasting that are budgeting and also with infill drilling, that helps. But we certainly still believe in the total ounces coming out of the zone. And we certainly believe on the extension of zone that we're trying to drill off right now. So I think we're still pretty comfortable with everything at the topic.
Okay. Got it. And then maybe at Kiena. Just looking at the guidance on the grade, it looks like the second half implies a bit of lower grade relative to the first half. So just wondering if that's correct or is that just a function of deferral of some of the higher-grade ore into 2023? And then just curious on your definition of commercial production there. Is it going to be, call it, 80% capacity of 850 tonnes per day? Or just wondering what run rate you need to achieve to declare commercial there?
Yes, I'll take that. So really, the grade function, what you see there, really, Wayne, is a function of, I think, the development deficit and the paste fill the way, I would say. So really, the -- we're not taking as much of the A Zone as initially predicted. For us, the commercial production really stemmed around the paste fill plant because at that point, we feel confident that we'll be able to cycle scopes in zone and bring it up to rate. So it's not really an 80%.
If you look at the PFS that we put out in 2021, really the first 2 years, the ramp-up here is, quite frankly, I mean, as we ramp down on the zone from 1,100 level on down, we don't get any enough reserves to get it up. 2024 is certainly the year where Kiena hit 100,000 ounces of production. And so really, it's a lot of, I would say, development dependency and the end phase really for us.
Okay. Got it. And maybe just the last one for me. Just curious on the funding capacity as you guys have drawn almost half the facility post quarter. Just wondering if there's any additional flexibility that you guys are looking into, given the delay in the ramp-up?
We're definitely looking at. But we've just completed our [ 2026 ] forecasting. But we're going to periodically be drawing on the revolver over the remainder of the year, but we seem to be well positioned with the cash balance and the revolver.
And our next question comes from Don DeMarco with National Bank.
Some of my questions have already been answered, but just looking at the CapEx spend for the balance of the year. At Kiena, in particular, do you expect it to tail off a little into Q3 and Q4? Or has it may be increased versus guidance given the various supply chain delays and so on?
It's Scott. So looking at it based on our [ 66 ] forecast, capital spend is going to be maybe a touch higher than the first half, but basically consistent. A little bit higher in Q3 and then it tails off a little bit Q4.
And the next question comes from Ryan Walker with Echelon Partners.
So I appreciate the additional color on the Falcon zone what I was mostly waiting for. Can I maybe just verify the pace plan at Kiena. So did you say that, that will be up and running in late Q4 or there will be the electrical equipment required will be delivered by them?
Yes. This is Fred. Yes, we expect that late in Q4, the paste fill plant will be fully commissioned and working.
Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Everyone, have a wonderful day.