Earnings Call Transcript - AGI Q2 2023

Scott Parsons, Senior Vice President of Investor Relations

Good morning. I will now turn the call over to Scott Parsons, Alamos' Senior Vice President of Investor Relations. Please go ahead. Thank you, operator, and thanks to everybody for attending Alamos' Second Quarter 2023 Conference Call. In addition to myself, we have on the line today John McCluskey, President and Chief Executive Officer; Greg Fisher, Chief Financial Officer; Luc Guimond, Chief Operating Officer; and Scott R.G. Parsons, our Vice President of Exploration. We will be referring to a presentation during the conference call that is available through the webcast and on our website. I would also like to remind everybody that our presentation will be followed by a Q&A session. As we will be making forward-looking statements during the call, please refer to the cautionary notes included in the presentation, news release and MD&A as well as the risk factors set out in our annual information form. Technical information in this presentation has been reviewed and approved by Chris Bostwick, our Senior Vice President, Technical Services and a qualified person. Also, please bear in mind that all the dollar amounts mentioned in this conference call are in U.S. dollars unless otherwise noted. Now John will provide you with an overview.

John McCluskey, President and CEO

Thank you, Scott. Starting with Slide 3. We delivered an outstanding performance in the second quarter, achieving a number of operational and financial records. Production increased to a record 136,000 ounces, exceeding our guidance for the quarter while all-in sustaining costs decreased below our annual guidance. This was driven by another exceptional performance from La Yaqui Grande, which contributed to the strongest quarter from Mulatos district in more than a decade. With production totaling 264,000 ounces through the first half of the year and costs well within guidance, we may remain on track to achieve full-year production and cost guidance. Financially, we broke a number of records, including revenue and cash flow from operations, which increased for the fifth consecutive quarter to $138 million. We also generated a record $62 million of free cash flow, marking the fifth consecutive quarter of positive free cash flow as we continue to fully fund our growth projects and build our financial capacity. Now turning to Slide 4. We're making excellent progress across our growth initiatives. We expect to release the results of an updated feasibility study on our Lynn Lake project in the next few weeks. Work on the Phase 3 expansion continues to progress, and we continue to have exploration success at PDA in advance of a development plan that we expect to release in the latter part of the year. As we announced early in the year, we defined 1 million ounces of higher grade reserves and resources at PDA over the last two years. As demonstrated through our exploration update in May, we expect PDA to continue to grow and support a significantly longer life mine at Mulatos. At Island Gold, we are making significant progress on the Phase 3+ expansion. With the Galloway recently lowered into the shaft, construction of the hoist house substantially completed and head frame erection well underway. We are on track to begin shaft sinking in the fourth quarter and deliver initial production from the shaft and expanded mill in the first quarter of 2026. We continue to have tremendous exploration success across the Island Gold deposit. As highlighted in our June news release, and we're just scratching the surface of the regional potential across a much larger land package. This is highlighted by the photo at the bottom of the slide of a recently drilled core with significant visible gold from the Pine-Breccia regional target, which is only four kilometers from the Island Gold mill. We also released our inaugural Climate Change Report in the quarter, a significant milestone in our sustainability journey, which among other things, outlines further details on our 30% reduction target in greenhouse gas emissions by 2030. Now turning to Slide 5. The key drivers of our strong outlook are all on track, as guided and seen through the first half of this year, low cost production growth from La Yaqui Grande is taking our production higher and costs lower. Through the Phase 3+ Expansion at Island Gold, we expect production will grow to 600,000 ounces per year with all in sustaining costs decreasing below the $1,000 per ounce level. Longer-term, to the development of Lynn Lake, we have the potential to increase production to 800,000 ounces of gold per year. All of this growth is in Canada. It’s all lower cost and we can fund it internally, providing one of the strongest outlooks in our sector.

Greg Fisher, Chief Financial Officer

Thank you, John. This is my first quarterly conference call as Chief Financial Officer, and I am thrilled to report several new financial records. I have been with Alamos for over 13 years, most recently serving as Senior Vice President of Finance, and I can confidently say that the company's outlook has never been better. I am excited about the growth ahead and anticipate continued strong financial results in the coming years. Moving to Slide 6, we sold 132,000 ounces of gold in the second quarter at an average realized price of $1,978 per ounce, which is $2 above the London PM fix, leading to record revenues of $261 million. Our total cash cost was $847 per ounce, aligning with our annual guidance, and the all-in sustaining cost was $1,112 per ounce, below the lower end of our range. In the first half of the year, total cash costs decreased by 12% from the previous year, and all-in sustaining costs fell by 9%, thanks to low-cost growth at La Yaqui Grande. We are among the few companies to meet our cost guidance in 2022 and are on track to do so again in 2023. Our reported net earnings for the second quarter were $75 million or $0.19 per share, which included unrealized foreign exchange gains of $13 million and foreign exchange and other gains of $2 million. Excluding these items, our adjusted net earnings were $59 million or $0.15 per share. Our strong operating results and expanding margins contributed to a 9% increase in operating cash flow, reaching a record $138 million or $0.35 per share. Free cash flow also saw significant growth from the first quarter, totaling a record $62 million, driven primarily by strong operating results and margin expansion, along with the collection of $20 million in deferred sales tax receivables in Canada. Capital spending reached $80 million this quarter, with $23 million allocated to sustaining capital, $50 million to growth capital, and $7 million to capitalized exploration. In the first half of the year, total capital spending was $164 million, consistent with our annual guidance. Our balance sheet is strengthening with no debt and $189 million in cash at the end of the second quarter, up from $134 million in the previous quarter, reflecting our robust free cash flow generation. We foresee this trend continuing as we fund our high return growth projects internally while generating significant free cash flow and delivering strong ongoing returns to our shareholders. I will now hand the call over to our COO, Luc Guimond, to provide an overview of our operations.

Luc Guimond, Chief Operating Officer

Moving to Slide 7. Young-Davidson produced 45,200 ounces, consistent with the first quarter, reflecting similar grades and processing rigs. Costs in the quarter and through the first half of the year were in line with the upper end of guidance. Grades mined and processed were at the low end of the annual guidance range and are expected to increase in the second half of this year as previously guided. Milling rates were below mining rates, reflecting a scheduled liner change and weather-related power outages in the region. Milling rates are expected to return to guided levels for the rest of the year. Combined with higher grades, this is expected to drive higher production and lower costs in the second half of the year, putting the operation on track to achieve full-year guidance. Mine site free cash flow increased to a record $35 million in the quarter, bringing the first half total to $52 million. With a stronger second half expected, Young-Davidson is on pace to generate over $100 million in free cash flow for the third consecutive year. Over to Slide 8. Island Gold produced 30,500 ounces in the quarter. Grades were in line with guidance. However, milling rates were impacted by lower mining rates as well as downtime for maintenance on fine ore bin, and weather-related power outages. Mining rates were also impacted by the power outages as well as some lost shifts due to smoke from wildfires in Northern Ontario. Both mining and milling rates have returned to normal levels in July and are expected to average 1200 tonnes per day through the remainder of the year. This is expected to drive higher production and lower costs in the second half of the year, putting Island Gold on track to meet full-year guidance. Over to Slide 9. We made considerable progress on the Phase 3+ Expansion in the second quarter with mechanical installation of the production and service hoist completed and the hoist house substantially complete. The Galloway that will be used for shaft sinking was lowered into the shaft and is being outfitted with the required mechanical and electrical components. Over 90% of the buried services required to start shaft sinking are now complete, and the erection of the head frame is well underway, as seen in the photos on the slide. Shaft sinking is on schedule to commence in the fourth quarter. Over to Slide 10. A total of $41 million of capital related to the Phase 3+ Expansion and capital development was spent in the quarter. The expansion remains on budget with 36% of the total initial capital of $756 million spent and committed to the end of June. Most of the capital spent and committed to date has been focused on the shaft site area with spending on the mill expansion and Paste Plant expected to ramp up next year. The expansion is on track to be completed in 2026 and will create among the largest, lowest cost and most profitable mines in Canada. Moving to Slide 11. Mulatos district production totaled 60,300 ounces, an impressive 19% increase over the previous quarter and the highest production rate in the past 10 years. Costs were below full-year guidance for the quarter and through the first half of the year, driven by strong results from La Yaqui Grande with grades and stacking rates both above full-year guidance. Mine-site free cash flow increased to $47 million also the highest level for Mulatos in over 10 years. As previously guided, production rates are expected to decrease in the second half of the year and costs increase. This reflects the end of mining in the main Mulatos pit as well as the decrease in stacking rates and grades at La Yaqui Grande to levels consistent with full-year guidance. With a very strong start to the year, the Mulatos district is well positioned to achieve full-year guidance. I will now turn the call over to our VP of Exploration, Scott R.G. Parsons.

Scott R.G. Parsons, Vice President of Exploration

Thank you, Luc. Over to Slide 12. As John noted, we continue to have exploration success across several areas, most notably in Mulatos and Island Gold. In May, we announced an exploration update at the higher grade underground PDA deposit within Mulatos District, where we continue to extend high grade gold mineralization outside of currently defined reserves and resources. At 1 million ounces of combined reserves and resources, PDA has already grown larger than La Yaqui Grande. Given the number of high grade step out holes intersected already this year, we expect that growth will continue. Based on the success to date, we have doubled the size of our exploration drilling program at PDA and we'll be completing it, we expanded 35,000-meter program in the third quarter. The results will be incorporated into the development plan for PDA expected to be completed in the fourth quarter. We expect that this development plan will align a significant mine life extension of Mulatos. We also announced a wide interval of gold mineralization at 2 grams per tonne of 82 meters in a breccia along the Capulin Fault. The Capulin target is located four kilometers east of the Mulatos pit in an area that has seen limited historical exploration. We've completed several follow-up drill holes stepping out in this area with assays expanding. Thus far, I'm pleased to report that we're seeing similar lithologies, alteration, and styles of mineralization as the first hole, highlighting the significant potential of the Capulin target and within the Mulatos district. Over to Slide 13. At Island Gold, as highlighted in our June update, underground drilling continues to extend high grade mineralization across Island Gold deposit. While this has been a consistent theme since we acquired Island Gold Mine in 2017, a more recent focus over the past year is an expanded underground exploration drilling program in the hanging wall and footwall of Island Gold deposit. Exploration to date has defined and expanded on several higher grade zones in the hanging wall footwall structures. These zones are in proximity to existing underground infrastructure highlighting the significant potential to add near mine, high grade reserves and resources that will be low cost to develop. An excellent example of this is a newly defined perpendicular structure, the NS1 zone. We defined the zone earlier this year, and we're currently developing it, and we'll be mining it over the coming quarters. Highlight the fuel development material we've already processed this 3,100 tonnes grading 15.2 grams per tonne. This zone was not factored into our reserves and resources nor our 2023 mine plan, but is already contributing to our production. With over 7,000 gold composites historically and recently intersected in the Hanging wall and footwall structures, there are numerous opportunities for the definition of additional high grade zones in the Hanging wall and footwall across the Island Gold deposit, which has the potential to greatly increase our ounces per vertical meter. At 5.3 million ounces of combined reserves and resources, Island Gold has already tripled in size since we acquired it. We see excellent potential for that growth to continue, that's not even factoring in the significant regional potential that we're only just starting to test. And with that, I'll turn the call back to John.

John McCluskey, President and CEO

Thank you, Scott. That concludes our formal presentation. I'll now turn the call back to the operator to open the call for your questions. Operator?

Operator, Operator

We will now take questions from the telephone lines. Your first question is from Cosmos Chiu from CIBC. Please go ahead.

Cosmos Chiu, Analyst

Thank you John, Greg, Luc, and Scott. Congratulations on a very strong Q2. And on that, as we talked about, you had a very strong first half. You've maintained your guidance for the year. But if I have done my math correctly, you've done about 53% of the full-year targeted guidance at the midpoint. I guess my question is, with Young-Davidson and Island Gold expected to be even better in the second half, is there a potential for you to exceed your current guidance for the year?

Greg Fisher, Chief Financial Officer

Hey Cosmos, it's Greg here.

Cosmos Chiu, Analyst

Hi, Greg.

Greg Fisher, Chief Financial Officer

I mean there is a potential. We're sticking with our guidance because at Mulatos, and we've highlighted that at El Salto, we've completed mining in September. So we'll be relying on some stockpiles for the second half of the year. But you can certainly know that production is going to go down at Mulatos portion of the pit. And then at La Yaqui Grande, we were producing some pretty high grades in the first half of the year, that’s also going to come back down to guided levels in the second half of the year. So the offset to the better production at both Island and YG would be lower production at Mulatos.

Cosmos Chiu, Analyst

Of course. And maybe a little bit deeper at the La Yaqui Grande. As you mentioned, Q1 or Q2, sorry, was really good. I read that there was a positive grade reconciliation. Could you maybe give us a bit more color on that? Was it confined to a certain area? What was your understanding behind the positive grade by reconciliation? And on that, could it happen again?

Luc Guimond, Chief Operating Officer

Hi, Cosmos. Yes, it's Luc here. It's really a function of the drill density with regards to the early stages of the pit. And as we get deeper into the pit, the drill density is more defined, so part of it is just a wider spacing of the drill density at the top of the pit. The other aspect of it as well is that we were actually getting some ore outside of the block model with pretty strong grades as well, which was not identified in the original block model. So that also helped in the overperformance. I mean, for the quarter, I think we were about 7% above our expected block model grade. But as we get lower into the pit, what I can say with the current benches that we're mining relative to the tonnes and grade model from our block model, we're very tight as far as the actual results relative to the block model as we continue to move deeper into the pit.

Cosmos Chiu, Analyst

Of course. Maybe switching gears a little bit. As you mentioned, the PDA development plan is coming out before the end of 2023 in Q4 2023. As you mentioned, May 15, mid-May, the exploration results came out, we're very good. If I look at it correctly, there were some holes that returned 21-gram per tonne, 3-gram per tonne, 14.8 grams per tonne, uncut or even cut, it was still very good; and certainly higher than the current reserve grade, which is 4.84 gram per tonne. I guess my question is, number one, can you remind us what is being included in that development plan in terms of the timing in terms of cutoff? And number two, what's the potential for even higher grade being incorporated into this deposit?

Scott R.G. Parsons, Vice President of Exploration

Cosmos, I can take that. It's Scott R.G. We're in the midst of that expanded drill program. So I guess the first point is we look to be defining an internal mid-year resource update towards the end of the program, probably mid-Q3, which we would use for the updated development plan. I will say that that doesn't mean that the drilling will stop at that point in time. I mean, we're continuing to expand the deposit in multiple directions. We focused around PDA 1 and 2 zone so far and these are part of that reserve and resource and represent significant upside in terms of exploration when we start expanding on those as they are open as well. In terms of higher grades, the more drilling we're doing, the more predictive we're getting with targeting higher-grade structures within the PDA deposit. So there is a strong Northeast control to high grade mineralization, and as we continue to expand out from the existing mineralization, we are strategically targeting those structures that we know are control on some of the higher grades there.

Cosmos Chiu, Analyst

Great. Maybe one last question as we switch topics a bit. Lynn Lake, your updated feasibility study is expected next month in August. John, you've made significant progress with the asset, especially with the EIS signed with the First Nation's group. What's the next step? I realize you can't share too much, but looking back at the 2018 feasibility study, which is now outdated, the IRR was 12.5%, based on a significantly lower gold price. While you can't reveal the upcoming IRR, could you remind us how you establish your hurdle rates for these projects? What can we expect, to the extent you're able to share?

Scott R.G. Parsons, Vice President of Exploration

Cosmos, maybe I'll start on what we can expect. I mean, yes, we are putting out our updated feasibility in a couple of weeks. So we can't speak to any specifics. But I mean, you can expect that capital is going to go up. We released that in 2017, the end of 2017. So there's been years of inflation in some of the highest inflationary periods that we've seen over the last 30 years in that period. So capital is going to go up from that perspective. But also we have a bigger resource. And as a result of the bigger resource, we have the ability to potentially increase the mill throughput that we're putting through, so it's just increasing the size and base of the plant. And both of those would contribute to a larger operation and, as a result, higher capital.

John McCluskey, President and CEO

Hi, Cosmos, it's John here.

Cosmos Chiu, Analyst

Hi, John.

John McCluskey, President and CEO

I would like to mention that we typically consider mergers and acquisitions when gold prices are low, allowing us to make purchases at a reduced cost. When we finalized the acquisition of Carlisle Goldfields, the gold price was below $1,100 an ounce, which was around the lowest point in January 2016. The aim of acquiring it then was to secure those ounces at a lower price; we spent approximately $22 million for about a 1.6 million ounce resource. We conducted a brief preliminary study to estimate potential economics, which, based on a $1,250 gold price assumption, indicated an internal rate of return of around 11% or 12%, without using any creative financing to enhance that IRR. Now that gold is at $1,900 an ounce, we can apply a significantly higher gold price assumption for our upcoming economic evaluations, which will be a critical factor. Additionally, we've increased our resource base since acquiring the deposit and we expect even more growth. We have always envisioned this as a district-scale project, with about 80 kilometers of strike in a largely unexplored greenstone belt; the market has largely overlooked its real potential. Our preliminary regional studies have only increased our optimism about the long-term possibilities for this area. For us, developing the two pits marks just the beginning, serving as an entry point into what we believe is a substantial long-term opportunity for the company. As with our acquisition of Island Gold, which was a strategic decision, we see plenty of justification for the exploration efforts we have made. This has led to significant success, and we plan to replicate our approach as we did with Mulatos. We will continue exploring and, over time, add more deposits, optimistic about the future of this region and committed to aggressively pursuing its potential. Regarding the development timeline, we will release a study, but based on previous guidance, we do not intend to rush into mine development. That would be better timed concerning capital allocation and management resources, as our skilled personnel are currently focused on the Phase 3+ Expansion of Island Gold. We aim to significantly de-risk the Phase 3 expansion to optimize capital expenditures, and by then, there will be a natural transition to move staff from Island Gold to the Lynn Lake project. We are sticking to this plan, and while we are currently generating substantial free cash and are capable of moving forward, we intend to advance detailed engineering. Therefore, our upcoming estimates will be precise, highly reliable, and we believe the internal rate of return will be worth modeling. The valuation we place on this project will genuinely add value to our asset base.

Cosmos Chiu, Analyst

Great. Thanks again, John and team for answering all my questions. That's all I have. Thank you.

Operator, Operator

Thank you. The next question is from Ovais Habib from Scotiabank. Please go ahead.

Ovais Habib, Analyst

Thanks, operator. Hi, John and Alamos team. And yes, congrats on the Q2 beat. Just a couple of questions from me. My first question is in regards to the NS1 zone. I did miss some of the comments made by Scott R.G. So I apologize if you have to repeat some of your comments here. At the recent Island Gold site at NS1 Zone was discussed pretty well in-depth, and there was a potential to commence production from the zone in the second-half. Again, even though the zone is not even in the reserves or resources. Is this still the case? Is that still the plan? And what potential do you see across the Island Gold deposit to discover similar zones?

Scott R.G. Parsons, Vice President of Exploration

Yes, it's Scott R.G. I can address the question. The NS1 zone was discovered earlier this year, and we have been able to quickly adapt and progress it in line with this year's mine plan. We have drilled it off, and I mentioned that we have already put 3,100 tonnes from exploration at 15 grams per tonne into production. We will be developing stopes on the NS1 zone in the second half of this year. The zone remains open both up and down dip, and we are currently drilling it. The real opportunity extends beyond just this zone; it serves as a good example of the numerous zones at Island that we are now prepared to drill from underground. These perpendicular structures occur periodically across the mine, and it is essential to drill them in advance of our mine development, which we are doing now, while also exploring these sub-parallel zones.

Ovais Habib, Analyst

So this 3,100 tonnes was that already produced in Q2 or would that be kind of coming in Q3?

Scott R.G. Parsons, Vice President of Exploration

No, that's in mine. So that was sort of an exploration still that we put in on the NS1 zone.

Ovais Habib, Analyst

Got it. Okay. And just switching to Mexico. In regards to PDA, just some thoughts on permits. So what kind of permits would be required? Would it just be an addendum to the existing Mulatos permit? Or would you have to apply for a full permit over there?

Luc Guimond, Chief Operating Officer

Yes, it's Luc here. Regarding the PDA permitting, with the recent changes in Mexican mining regulations, we don't foresee any challenges in obtaining mining permits for PDA from both the mining and milling perspectives, as this falls within our current concessions. Our history of operating underground mines in the area will support our existing permits, allowing us to continue mining activities, and the same applies to the milling aspect of our plans. We previously had a small mill complex from past underground mining operations that will need to be upgraded once we finalize our mine and mill designs. This will also be within our existing concessions, and we will seek amendments to our current permits.

Ovais Habib, Analyst

Excellent. Okay. That's it for me. And thanks for taking my questions.

Operator, Operator

Thank you. The next question is from Fahad Tariq from Credit Suisse. Please go ahead.

Fahad Tariq, Analyst

Hi, good morning. Thanks for taking my question. Just something maybe we haven't talked about in a while, the Turkish assets, has there been any update on that front, whether the arbitration process or potentially finding a local partner and/or selling those assets altogether? Any color on that would be really helpful. Thanks.

John McCluskey, President and CEO

Yes. We haven't provided an update on it, because there really is nothing to update when there is, you'll hear from us.

Fahad Tariq, Analyst

Okay. I'd like to shift topics and ask a modeling question about La Yaqui. With the grades in Q3 and Q4 declining sequentially, can you provide any insight? Specifically, should we expect grades to drop to the lower end of the annual guidance range in Q3 and Q4? Any information to assist us in modeling those grades would be appreciated.

Luc Guimond, Chief Operating Officer

Yes. Well, as per our mine plan for this year, we were expecting grades to drop in the second half of the year as per our guidance. So in the second half of the year, we'll be more in line with our reserve grade of about 1.25.

Fahad Tariq, Analyst

Is there a difference between Q3 and Q4 or can we assume they are similar?

Luc Guimond, Chief Operating Officer

Pretty consistent in the second half of the year. And as I touched on with regards to our overperformance certainly from the first half of the year, based on what we're seeing with the benches that we're currently mining, they're aligning with the block model from our actual results. So we're not expecting any overperformance in the second half of the year. We should be more in line with our reserve grade of 1.25.

Fahad Tariq, Analyst

Okay, great. That's super clear. Thank you.

Operator, Operator

Thank you. The next question is from Mike Parkin from National Bank. Please go ahead.

Michael Parkin, Analyst

Thanks guys. And Greg congrats on your first call and nice quarter too. Just most of my questions have been answered. But with Lynn Lake, I think you've set a good tone on what to expect in terms of scale and CapEx. Can you remind me again, power costs? I remember we've chatted about it in the past. But from what I recall, I think the power cost for the asset with grid power is extremely low. I just don't remember what the number is on top of my head.

Greg Fisher, Chief Financial Officer

Yes, Mike, it's Greg here. It's about 4.5 tonne kilowatt hour.

Michael Parkin, Analyst

It seems like the challenges related to smoke in the area are mostly behind you. Can you provide some additional insight into that? Have you noticed that current days are, on average, better than what you experienced in June?

Luc Guimond, Chief Operating Officer

Yes, Mike, it's Luc here. Forest fires are a regular occurrence that we manage during our operations in Northern Ontario, especially in the summer. In this instance, the fires in the region did not impact our assets; the main issue was actually smoke. The wind direction plays a crucial role here, as these fires can be quite far from our infrastructure, but winds can carry the smoke into our operational area. Our fresh air fans are responsible for ensuring proper ventilation in the underground areas where smoke can accumulate, making it hard for our workforce to differentiate between actual fire and smoke from forest fires. Consequently, we had to cancel shifts intermittently. There might be one or two shifts canceled, but if the wind direction changes and clears the smoke, we can operate again for several days. However, with another change in wind direction, smoke may return to the region. In this case, the increased prevalence of smoke around our assets led to the cancellation of shifts, which is something we encounter every year.

Michael Parkin, Analyst

Okay. And then for Scott R.G. Parsons. The Capulin drill results, you noted that you've got a number of additional assays pending. Do you have a sense of when you might be able to release those?

Scott R.G. Parsons, Vice President of Exploration

Yes. We want the story to continue developing based on what we are seeing visually. We aim to have a significant number of holes to release. As we move forward with the first hole we mentioned, we are continuing to drill there now. We have just added a third drill, so we expect more results from that area in the coming months, likely with results in September.

Michael Parkin, Analyst

Okay. So kind of ahead at Denver Gold Show we could probably see something?

Scott R.G. Parsons, Vice President of Exploration

It could be around that time, yes, again, results dependent as we get them in. Yes.

Operator, Operator

Thank you. And the next question is from Kerry Smith from Haywood Securities. Please go ahead.

Kerry Smith, Analyst

Thanks, operator. Luc, just on the guidance for La Yaqui Grande, you talk about lower stacking rates in the second half. Are you tailing back the stacking rates because of the rains that usually come in Q3? Or is there no reason why the de-stacking rates will be lower than what you've done in Q2?

Luc Guimond, Chief Operating Officer

Hi, Kerry. No, it's really linked to the seasonal impact from the rains we experience in Mexico. It slows down our overall operations in terms of productivity. Consequently, our stacking rates tend to be lower during the rainy season.

Kerry Smith, Analyst

We anticipate that in Q3 and possibly the latter part of Q4, there may be lower rates due to the impact of the rains.

Luc Guimond, Chief Operating Officer

Yes. It's primarily related to Q3. But again, it's always a function that depending on how long the rains last. But usually, by Q4, things start to return to more normal levels.

Kerry Smith, Analyst

Right. Okay. And for the recovery at La Yaqui Grande. How have the leach curves been tracking with the ore that you've been leaching when you run your leach curves in the La Yaqui ore? How have they been looking relative to your overall recovery curve that you've got for the project? Are they tracking in line or are they tracking better or worse?

Luc Guimond, Chief Operating Officer

Yes, they're tracking in line. They've been very solid, Kerry. I mean, recoveries are plus 80%, certainly on the La Yaqui ore.

Kerry Smith, Analyst

Okay. Okay. And Scott R.G., just on Capulin, how many holes do you think you might have drilled and with three rigs running now by the time we get to September?

Scott R.G. Parsons, Vice President of Exploration

Probably an additional somewhere in the ballpark of 4,000 to 5,000 meters. Obviously, we're exploring a large area there. We're moving drills between holes as we continue to step out from what we know. So yes, likely an additional 4,000 to 5,000 meters by then.

Kerry Smith, Analyst

How many holes do you currently have with assays pending?

Scott R.G. Parsons, Vice President of Exploration

We have, from the second quarter, nine additional holes at the end of the second quarter.

Kerry Smith, Analyst

Okay. And then the 4,000 to 5,000 meters is including the nine holes, is it?

Scott R.G. Parsons, Vice President of Exploration

I believe it's too early to provide an expectation before the next news release. Excluding those nine holes, we anticipate drilling an additional 4,000 to 5,000 meters by the end of September.

Kerry Smith, Analyst

Okay. Got it. Okay. Great. Thank you.

Operator, Operator

Thank you. There are no further questions registered at this time. This concludes this morning's call. If you have any further questions that have not been answered, please feel free to contact Mr. Scott Parsons at 416-368-9932 extension 5439. Thank you for your participation, and you may now disconnect your lines.