Earnings Call Transcript - EQX Q2 2021

Operator, Operator

Welcome to the Equinox Gold Second Quarter 2021 Financial Results and Corporate Update Conference Call and Webcast. I would now like to turn the conference over to Rhylin Bailie, Vice President of Investor Relations for Equinox Gold. Please go ahead.

Rhylin Bailie, Vice President, Investor Relations

Thank you, operator, and thank you, everybody, for joining us this morning. We will, of course, be making a number of forward-looking statements today. So please do take the time to visit our website, SEDAR, and EDGAR to download our continuous disclosure documents. I will now turn the conference call over to Christian Milau, CEO for opening remarks.

Christian Milau, CEO

Thanks, Rhylin, and welcome, everyone, to the Quarter 2 results call. We're pleased with the quarter. And as usual, there's been no shortage of news and activity. The company has just been so active in the first half of the year and really pleased to get to this point where we said this was a year of big investment. As we invested in our mines, we look to get projects ready to build or continue building them, to explore our assets and to keep investing money in to build the future of this company. And we have a long-term vision that's in place here. And things basically ended this quarter as expected. It was a quarter very similar to quarter 1. We produced about 125,000 ounces of gold, and we had a good safety record for the quarter. Pleased with that performance. COVID continues to moderate. Obviously, the new Delta variant does seem to peek its head a little bit in various locations, although it's had minimal impact on the operations. And really pleased with how the operations have adapted to the new environment with COVID there. We've probably hit that trough, which we thought we would do around midyear this year, where we said the first couple of quarters would be a little tougher. We are coming out of the rainy season in Northern Brazil as well and with the investment periods at Mesquite and Castle ramp-up. And obviously, we've had a challenge with Los Filos over the last year as we've taken over ownership, but pleased to be coming through a period and getting towards, hopefully, a period of stability going forward here at Los Filos. So we're turning to a very catalyst-rich period of the year in the second half of this year and excited to walk you through this presentation and indicate where we see the future opportunities and that long-term vision. In terms of the actual results, like I said, just - we sold just under 125,000 ounces for the year. Our all-in sustaining costs were slightly down from previous quarters, and Pete will walk you through some detail on that in our slightly revised guidance. We did take a $28 per ounce write-down on the Los Filos inventory with the shutdown there and the lower production; the cost of the actual ounces going up on the leach pad was fairly high for the quarter. So that does impact the overall all-in sustaining costs, which we hope not to see much in the future. When we turn over to the recent highlights on the next slide, #4. In terms of construction development and exploration, we continue along with Santa Luz. Doug will walk you through that, but pleased to see it on budget and on time. And now we're getting to about half complete now. We're still on track for roughly building a mine per year over the last 3 years, and this year will be no different. So things are tracking well there. We've advanced early works at Greenstone. We're getting ready for construction here in the near term. In the second half of this year, we'd like to be launching into full construction, but we have had a very productive summer. The team has done a great job of getting camps and tree clearing and all that work done. So Doug will walk you through a little more detail and a couple of photos on that. Lots of drilling ongoing, and I'll leave that to Doug to talk about, but really excited with the areas we have decided to invest in from an exploration perspective and expect to see some results from that in the second half of the year as well. In terms of the operations, I mean, the one key point I will stop on for a second here. Obviously, the Los Filos blockades that we had last quarter were frustrating for us. I'm sure for shareholders as well. And we've come through that period. We have got those resolved, and obviously, a lot shorter period than the original one last year. The union did go back to work, and I think there was a real frustration level about not being paid for a period that they had walked out on and a legal blockade there. And they've gone back to work. There was pressure from communities and certain union leaders to get back to work and start earning a wage again. So pleased to see them back on the job. And really kudos to Greg and the team. They've got things ramped back up fairly quickly there, and we'll give you a bit more color on the operation in a few slides here. And also the community blockade from Xochipala, a smaller community quite a distance away from the mine, another unfortunate legal blockade. That situation has been resolved. We do appreciate the support from the communities and from the government and the district attorney to step in and really put some pressure on to get them back to work as well. And again, we've gotten back into the Guadalupe open pit. So please see us operating at full capacity across all the pits and undergrounds on the site there at Los Filos. And in terms of other corporate actions for the quarter, we completed the acquisition of Premier Gold Mines. It feels like a long time ago, but it actually completed during the second quarter. I think there's some exciting stuff going to be coming from that, and we'll walk you through obviously the Greenstone project. Mercedes has been integrated. Ewan is doing a great job on i-80, and we're really excited about that as an investor where we own 30% of it. We obviously took up our pro rata interest in their financing during the quarter. So things are going well there. We've also acquired an additional 10% of Greenstone, as I think most are aware, but we love 50% of the project. We love 60% even more. And we've been working well with Orion and the project team to get that ready for launch into construction here in the second half. We sold Pilar. It's a gain on the financial statements, but we sold it for almost $50 million when you add in the royalty and the equity interest that we have. And we published our first ESG report. And again, that's an important area for us to now start communicating and putting out a lot more public disclosure. So I think you should expect to see a lot more information on a quarterly basis, but also we'll be looking very closely at things like our emissions, managing our key areas, where we think we can make a big difference going forward, especially where we have diesel emissions, and obviously, our energy sources in various countries will be looked at for more efficient ways of running the business. And I'll pass it over to Peter to walk you through the financial highlights on the next couple of slides.

Peter Hardie, CFO

Thank you, Christian. During the quarter, we sold 125,000 ounces at just over $1,800 per ounce, generating revenues of $226 million. Our costs per ounce decreased from the first quarter, with cash costs down by about $50 to just over $1,080 per ounce, and all-in sustaining costs reduced by around $100 to about $1,382. This led to mine operating earnings of $46 million, which is an increase of roughly $4 million compared to the previous quarter. As Christian noted, we were quite active on the corporate front, resulting in a net income of $326 million, or about $1.10 earnings per share. This figure includes several noncash gains, such as $50 million from the sale of Solaris shares that Christian referred to. Additionally, with this sale, we shifted our investment accounting from a cost basis to a fair value basis, which resulted in a gain of $186 million. We also recognized a $45 million gain from the sale of Pilar. Furthermore, there were typical noncash items like unrealized gains on foreign exchange hedges totalling around $43 million. Adjusting our net income for these noncash items brings our adjusted amount to $3.1 million, representing $0.01 per share on an adjusted basis. Our cash flow before adjustments for noncash working capital was $32 million, or roughly $0.11 per share on a basic basis. Despite all the activity within our operations, our balance sheet remains robust. As of June 30, our cash and equivalents stood at $334 million, and our net liquidity was $530 million, taking into account the $200 million of undrawn revolver credit available to us. Our net debt is at $216 million, putting us in a solid position to support our growth plans as we move ahead. In terms of investments, we invested in i-80 Gold to keep our 30% stake, which currently has a market value of just over $100 million. We also sold 10 million shares of Solaris along with warrants, with the fair value of that investment exceeding $300 million. Altogether, our investment value exceeds $400 million, contributing to the previously mentioned net liquidity of $530 million. We have updated our production guidance for 2021, now estimating a range of 560,000 to 625,000 ounces. Generally, our mines are performing at or above expectations, except for Los Filos, where we reduced guidance by about 50,000 ounces, balanced by a 10,000-ounce increase at Aurizona as we expect to access higher-grade ore in the latter half of the year, and a 5,000-ounce increase at RDM, which had a strong first half. Castle Mountain's production guidance has been lowered by about 10,000 ounces due to a slower start in the first half. The reduction at Los Filos is mainly attributable to blockades that halted operations for parts of June and July, impacting Bermejal underground development and delaying access to higher-grade ore. Now, our cost range is $1,025 to $1,075 per ounce, influenced by the reduced overall production for the year and rising costs for consumables and energy, particularly in the U.S. and Brazil. Those cost increases will carry over into all-in sustaining costs as well. Our sustaining capital remains steady overall, while on a mine-specific basis, Aurizona saw a decrease of about $50 per ounce in all-in sustaining costs due to lower sustaining capital requirements. In contrast, Los Filos experienced cost increases because of reduced overall ounces, and Castle Mountain faced higher liner costs due to a pad expansion. Non-sustaining costs have decreased, especially at Santa Luz, where we anticipate a $19 million reduction for the year. This is primarily due to the timing of expenditures; the project is on budget and on schedule, and costs are simply not being incurred as quickly as anticipated, pushing that $19 million out from this year into 2022. Now, I will hand it over to Doug Reddy, our Chief Operating Officer, for an update on operations.

Douglas Reddy, COO

Thanks, Pete. I just would like to say that there are two main themes for operations based on how things have happened in the first half and how they will affect the second half of the year and going into 2022. The first one is waste stripping, where we've had large programs at Mesquite and RDM, as well as waste stripping happening at Aurizona and Los Filos. So all of those investments in the waste stripping make for a stronger second half of the year into next year. The second aspect is a significant effort by our exploration team. They've drilled 51,000 meters so far this year, which is an investment in the long term at each one of our mines, both within and near the mine. These will affect the future for each one of our operations. If we look at Mesquite, we completed the Brownie stripping campaign and are expecting a stronger H2 since we are mining oxide ore in that pit. The exploration has been focused on mine life extension; we've done this every year with Mesquite, where there's opportunity to extend the mine's life. Q2 production was 24,185 ounces with an all-in sustaining cost of $1,520 per ounce. At Castle Mountain, our team has continued to optimize the leach pad and plant. While we've had issues with percolation on the leach pad, we have managed to see the daily ounces being doubled, with Q2 versus Q1 representing a significant increase in production. Q2 production was 6,128 ounces with an all-in sustaining cost of $1,026 per ounce. Los Filos operations restarted well after the interruptions we faced. H2 should be a strong second half of the year as we are mining at the Guadalupe open pit. As Pete mentioned, we have been doing underground development in Bermejal. We expect to see ore coming through late in the year from Bermejal. Our Q2 production was 27,079 ounces with an all-in sustaining cost of $2,016 per ounce. We also look forward to the completion of the updated CIL plant study, which will come in the second half of this year. The Mercedes mine is a steady producer. We are campaign milling, allowing us the opportunity to increase throughput and production, with good exploration upside. The second quarter production attributable to Equinox was 10,708 ounces at an all-in sustaining cost of $1,226 per ounce. H2 should maintain consistent production levels from Mercedes for the company. Looking at Brazil, Aurizona experienced heavy rainfall during the quarter, but the mining went really well. Contrary to a year prior, the team efficiently handled the rainy season. The processing plant managed to utilize some of the stockpile that had built up during the dry season. We anticipate a strong second half of the year as we move fully into the dry season in that portion of Brazil. Q2 production was 26,830 ounces at an all-in sustaining cost of $1,083 per ounce. We're excited for the pre-feasibility study that has been underway to analyze the underground potential at Aurizona. A large drill program was completed in 2020, wrapping up at the start of 2021, and that study will conclude in the second half of this year. This will impact Aurizona and our future production significantly. Fazenda had consistent underground production in the second quarter, albeit some lower-grade areas were mined. We had scheduled to open up a new open pit, which has now opened, albeit later than expected. That will contribute in the second half of the year. Q2 production was 13,130 ounces with an all-in sustaining cost of $1,263 per ounce. We are managing a consistent long-term exploration program, both within and around the mine, including the area between Fazenda and Santa Luz, promising numerous targets along the 70-kilometer long Greenstone belt. At RDM, we now have a very full water dam. For the first time, I can look at that water dam and confirm we have ample water for the rest of 2021 and all of 2022. Despite an exceptional rainy season, we mined 19% more ore in Q2 compared to Q1. A major pit expansion this year provides access to the lower portion of the ore body. Q2 production was 14,089 ounces at an all-in sustaining cost of $1,073 per ounce. We look forward to steady production through H2 and a strong 2022 based on the expansion work in the pit. Now looking at our growth and development projects, I’m pleased to report that we have a robust pipeline of growth projects. Looking at Santa Luz, currently in construction, as Christian mentioned, we are 50% complete, with our first gold pour on track for Q1 of 2022. I'll elaborate a bit more on Santa Luz on the next slide, but let’s briefly discuss the other growth projects. Los Filos expansion entails developing additional open pit and underground mines. Guadalupe is now providing ore as part of the expansion at Los Filos. Bermejal underground development has resumed, and we expect to see ore coming from that late in the year. We have been finalizing the study for the new 8,000-tonne per day CIL plant, processing the higher-grade ore at the site. This study aims to increase reserves and potentially extend the mine life. Our focus is to work constructively with the communities so that expansions at Los Filos can proceed smoothly. For the Greenstone project, it is an exciting project overall, with 5.5 million ounces of reserves and a 14-year mine life. Early works are already underway, and full-scale construction is targeted for Q4 of 2021. So keep an eye for that later this year, as we progress through the preparatory work.

Christian Milau, CEO

All right. Thanks, Doug. I'm going to step back and look at the bigger picture on the next few slides here. I want to emphasize our long-term focus has been on growth, building a large diversified, top-tier gold mining company during this downturn in the gold cycle. Gold has held nicely at $1,800, and our producing assets are generating good cash flow. However, as seen on Slide #13, our diversified portfolio is coming together. We've been focused on all four of these countries and regions, building one mine per year and working on expanding virtually every country in terms of production levels and reserves. We anticipate asset values and production will be split about a quarter each among these countries as we finish our expansion and development efforts. You're likely to see potential production growth from our projects and exploration in all four countries. Our goal is not to be reliant on any one key asset but to sustain a diversified portfolio that can weather the sector's ups and downs over time. We are on track to create that through this portfolio. As shown on the next slide, we aim to reach 1 million ounces of production in our second column. We'll be part of the top tier mid-tiers moving towards senior level. Our growth profile is projected to be the highest among our peers, growing by over 75% over the next three years while we develop and expand our assets. Our reserve base is already at 16 million ounces. Doug has alluded to some exciting prospects, including Aurizona, Mesquite, and Bahia exploration programs. We also see opportunities in Mexico to expand our reserves and resources, not merely depleting them over time. The portfolio is very prospective. While we haven't emphasized it publicly enough, we will focus on this as we finish this key investment year. Referring to the far left, this is exciting but also a bit disappointing due to the Los Filos blockade. The fall in share price is unfortunate, but I see great value potential on a price to net asset value basis, and we are trending towards the bottom. We are committed to rebuilding confidence and stability in the Los Filos situation. Re-rating will occur; this investment year is ongoing and should lead to progressively better quarters. Q3, at least, will be slightly better than Q2 and Q1, while Q4 holds great potential as we move into the new year. Moving on to Slide #15, we are prepared to deliver on these future projects with strong support. As Pete alluded to, the balance sheet is rock solid right now, holding $330 million in cash. We perform our planning conservatively under lower gold prices, and assets like RDM are cash flow positive. We still have our $200 million availability on the revolver and a strong banking group backing us. The exciting part for me is the $420 million in investments, as Pete has mentioned. Solaris has performed excellently under Richard and Dan’s leadership. We believe that asset could equal our debt one day, and it almost does now. We also expect promising progress from Ewan at i-80, who has ambitious plans supported by us. We're coming through a production cash flow trough this year; Q3 will improve, and Q4 looks excellent. With a strong balance sheet, we can fund all our growth projects, including Greenstone, and you'll see exciting announcements in the second half of the year. I'll summarize here: this year, we’re working toward 800,000 ounces of production next year, thanks to Santa Luz's commissioning, regaining stability at Los Filos and maximizing production at RDM and Mesquite. I'm optimistic about next year, and while we have trimmed guidance slightly, it still straddles the original output of 600,000 to 665,000 ounces, with potential to reach up to 625,000 ounces despite the disruptions at Los Filos and considerable investments in our mines. Kudos to the team for maintaining respectable production levels. Watch out for news from Aurizona's underground study and exploration results from Aurizona, Bahia, and Mesquite. Like the Energizer Bunny, it keeps going and going. It still has a 2.5-year mine life, and I believe we'll increase that in due course. I’m pleased with Mesquite's results and expect our first consolidated reserve and resource update in the second half of this year, presenting a solid overview of the business. We will continue supporting our investment companies and will remain alert for opportunistic M&A. Right now, our focus is on delivering projects and capitalizing on the robust team we have assembled here. Keep an eye out for these upcoming catalysts in the second half of the year. That concludes the formal part, and I appreciate your time. I'll now open up the floor for questions.

Rhylin Bailie, Vice President, Investor Relations

Perfect. Thanks, Christian. Operator, can you please remind people how to ask questions?

Operator, Operator

Thank you, Christian. Can you please remind everyone how to ask questions?

Rhylin Bailie, Vice President, Investor Relations

Thank you. While we wait for our phone callers to queue up, I'll take a couple of questions from online. Let's just get the inevitable out of the way. What steps have you taken at Los Filos to manage the risk of further disruptions?

Christian Milau, CEO

Yes. I mean, that's something that we're obviously laser-focused on, and stability there is the key goal, and partnership is a word we use often. It's been a tough journey since taking over, with COVID presenting significant challenges in visiting the site and building relationships. We did change senior management about 5 or 6 months ago. I think they've done a great job of engaging and involving communities. Establishing that the mine operating benefits all local stakeholders is crucial. In this most recent blockade situation, we learned that everyone wants the mine to operate—government, unions, employees, and us. We've taken a principled approach to resolving these issues, emphasizing working with communities, sharing in benefits, and managing the process ethically and responsibly. Several requests have emerged from various parties seeking greater access to contracts and jobs. We manage at least three communities, a union, employees, and governments. We want to ensure that local sharing is as fair as possible without disadvantaging others. Part of our strategy has been communication and establishing boundaries, ensuring fair negotiation channels without sacrificing operational stability. When the mine isn't producing, it impacts wages that can't be indefinitely funded, which I believe has focused many minds on prioritizing stable operations. I recognize this has been painful, both personally and for stakeholder confidence. However, we're gradually establishing parameters for a new norm with the communities. Rebuilding trust will take time, but we have a strong team, and the sentiment among employees is positive despite disruptions, granting me optimism for our future.

Rhylin Bailie, Vice President, Investor Relations

We'll now take some questions from the phone, please.

Operator, Operator

The first question from the phone is from Dalton Baretto from Canaccord.

Dalton Baretto, Analyst

I kind of want to follow up on that same line of questioning there. You touched on this a little bit in your prepared comments. But Christian, can you give us a bit more color in terms of how the blockade actually did get resolved? And what, if anything, you had to give up?

Christian Milau, CEO

Yes. I'll provide a bit more context without delving into intricate details. The union situation involved requests for bonuses exceeding what was contractually due. This occurred amidst significant operational challenges. We couldn't entertain such demands, leading to a legal blockade. Ultimately, employees realized the greater loss in wages from the blockade outweighed the benefits of those demands. They chose to return to work voluntarily without us conceding much beyond the operational downtime. I hope this effort earned us some respect and trust. Regarding the community, there's a misunderstanding related to their ownership—around 2% land ownership—that restricts employment expansion. We're committed to providing training programs to evolve skilled labor within the community. As for future exploration, the area presents exciting prospects that we aim to engage in. Patience and education about the mining process are paramount for fostering understanding and collaboration.

Dalton Baretto, Analyst

Okay. And I know you said there are no guarantees in your last response. Is there anything you can put in place before sinking significant capital into the plant and so on?

Christian Milau, CEO

Certainly, we want to establish communication to assure communities that we are committed to developing stability before we invest further. We aim to build jobs and provide contracts that benefit these communities. We'll ease into any new investments, emphasizing stability first while influencing the communities. Our available options will always be there, but capital will prioritize stable opportunities first.

Dalton Baretto, Analyst

Good. And then just one last question from me, and then I'll jump back in queue. So the blockade lasted about 34 days. A 50,000-ounce guidance cut seems disproportionate even with Bermejal underground being pushed out. Can you provide more context around this? How much are you expecting from Bermejal underground? Is there anything else at play?

Christian Milau, CEO

Certainly, just to clarify, there are multiple factors at play. It's a large leach pad, and production timing affects operations; we can't merely turn it on and off. The blockade curtailed production, impacting ramp-up time. Additionally, we had to defer some expected results due to development delays. Bermejal may not significantly contribute in the short term this year, but we are targeting gains through stability in H2.

Douglas Reddy, COO

It's mostly development work at this point, with minimal contributions anticipated from Bermejal this year. The ramping issues from the leach pad have deferred production excellence to Q1 next year.

Christian Milau, CEO

We take this matter seriously. Regarding our workforce, numerous COVID-19 safety protocols must be in place as we transition back and rebuild our entire situation. This isn’t a quick fix but rather a steady path back to normalcy. We need to manage these shifts judiciously.

Operator, Operator

The next question is from Kerry Smith from Haywood Securities.

Kerry Smith, Analyst

So Christian, following up on Los Filos again. If you've got 2,000 employees and already have 30 employees from Xochipala, how can you deliver more jobs for that community when it seems their share is already being met?

Christian Milau, CEO

Yes, it’s tricky managing community dynamics. We've committed to training programs for skilled labor in Xochipala, and we aim to increase community employability that way. Moreover, future exploration opportunities are primarily within their land, and we need to help them understand that these ventures will ensure economic opportunities for them, albeit gradually as the education process unfolds.

Kerry Smith, Analyst

Okay. And just to clarify, do you have agreements in place with all three communities today? Did Xochipala ignore those agreements? What specifically transpired?

Christian Milau, CEO

Yes, we have established agreements with all three. Xochipala's agreement is newer since their first engagement in mining operations. They seem to conflate exploration and exploitation stages, thinking they’re synonymous. We need to help them differentiate that we can only access more resources as we proceed and that exploration is part of a larger process leading to employment.

Douglas Reddy, COO

We had agreements with Carrizalillo and Mezcala for years since the mine's inception in 2008, with renewals in 2019. Xochipala represents a new partnership, and we need to strengthen that relationship and work through the different stages of mining with them.

Kerry Smith, Analyst

The agreements with Carrizalillo and Mezcala were renewed in 2019. Were they set for six-year or five-year terms?

Douglas Reddy, COO

Five years for Carrizalillo, and I believe it’s ten for Mezcala.

Kerry Smith, Analyst

Okay. And what about the new agreement with Xochipala? What's the contract term?

Douglas Reddy, COO

The new agreement is set for 20 years. Exploration is on a renewal basis, but the exploitation agreement is for 20 years.

Kerry Smith, Analyst

Okay, got it. On Castle Mountain, why are you having issues with percolation in the oxide ore body? I've been there, and there’s really no clay. Why are there these percolation issues? Also, the mining cost per tonne seems high compared to Mesquite. Any comments on that?

Douglas Reddy, COO

The material in question is pre-mined, and that’s contributing to the percolation challenges. The leach pad setup involves complex percolation processes; we've found solutions deploying various emitter types, which have proven successful. Mining costs vary based on these operational challenges, but we'll continue adjusting strategies to optimize operations.

Peter Hardie, CFO

It's important to note that the contractor method incurs additional costs compared to owner mining, which is slightly influencing the end results. Lower production volumes relative to total mined material can amplify the cost per unit.

Kerry Smith, Analyst

So the lower denominator refers to lower tonnes rather than lower ounces, correct?

Peter Hardie, CFO

Yes, that’s right.

Kerry Smith, Analyst

Okay, and regarding the emitter advancements, do you consider this the best solution, or are there more improvements to be seen?

Douglas Reddy, COO

We’re not resting. We’re dedicated to enhancing percolation and exploring other avenues; there’s more progress to be made.

Kerry Smith, Analyst

Alright, and one final question for Peter: What’s a good G&A quarterly run rate? It seems to fluctuate significantly.

Peter Hardie, CFO

There were spikes this quarter due to several transactions, including professional fees related to the Pilar sale and Premier acquisition, alongside a cleanup item linked to share-based comp, resolving a carryover from prior periods. We expect about $7.5 million quarterly as a consistent run rate, equating to around $40 an ounce on an annualized basis.

Rhylin Bailie, Vice President, Investor Relations

Thanks, Kerry. I'll be taking a few questions from online. Many inquiries revolve around all-in sustaining costs, so I'm combining these. You've raised your guidance, yet mentioned lower costs in H2. How do you foresee all-in sustaining costs into '22? And beyond that, aiming for a million-ounce goal?

Christian Milau, CEO

I'll summarize briefly—Pete can add granular details if needed. As we finish investing in some mines, all-in costs should decline. Investments in Mesquite and RDM will provide operational improvements leading to more efficient mining and potentially higher grades, lowering average costs. Furthermore, Santa Luz and Greenstone projects possess naturally lower costs. The flexibility in operational management will allow us to optimize our efforts and reduce costs down the line as well, while also contributing positively to emissions standards.

Rhylin Bailie, Vice President, Investor Relations

Good. Given the undervaluation of your stock, are you considering share buybacks?

Christian Milau, CEO

It's an important question. It’s a desire of ours, but our current capital focus is on investment opportunities. Only upon assessing our project delivery can we commit any capital to buybacks. Rest assured, returning capital to shareholders remains a key longer-term goal after establishing stability with our investments.

Peter Hardie, CFO

Exactly, long term, we are wholly committed to returning capital to our shareholders after boosting growth investments.

Rhylin Bailie, Vice President, Investor Relations

Operator, let's proceed with the remaining queries from the phone.

Operator, Operator

The next question over the phone is from Anita Soni from CIBC World Markets.

Anita Soni, Analyst

First question pertains to Los Filos and the $83 million earmarked for non-sustaining capital this year. What specific areas is that capital being allocated to?

Christian Milau, CEO

At a high level, the key allocations include ongoing developments for Bermejal and Guadalupe. These are emerging ore bodies critical to extending the mine life, and growth projects encompass important spending throughout the year.

Peter Hardie, CFO

Yes, as Christian indicated, we did reduce that amount by $12 million, refining our focus on critical growth projects.

Anita Soni, Analyst

Alright. Shifting to a broader perspective, I noted on Slide 20-16 that your target production for 2022 aligns around 800,000 ounces. Is this projection considering Los Filos's impact? Is there caution factoring in a slower Santa Luz startup?

Christian Milau, CEO

Next year's target relates directly to our operational data. If we enter with a good start, we anticipate Santa Luz being capable of delivering approximately 100,000 ounces, hinging on ramp-up velocity. Mesquite's output will also contribute as it performs significantly better in the second half. Overall, we project positive growth moving forward.

Anita Soni, Analyst

Regarding competitors facing rising capital costs, have you considered reassessing the feasibility study for Hardrock before starting capital expenditures?

Christian Milau, CEO

Absolutely. As we've taken on our responsibilities, we’ll thoroughly evaluate the project with our new head of projects in Vancouver and ensure that we're on target with capital estimates, assessing COVID-related impacts and ensuring our spending is thoroughly anticipated.

Peter Hardie, CFO

Our strategy is clear; we aim to initiate a well-planned project positively impacting our long-term asset value. We evaluate every project dimension within this framework.

Operator, Operator

The next question is from John Tumazos from John Tumazos Very Independent Research. John, your line is open. Next question is from Wayne Lam from RBC.

Wayne Lam, Analyst

I'm wondering, in Mexico, there seems to be heightened scrutiny around subcontracting and PTU payments. To what extent do you subcontract at Los Filos? Can you provide a ballpark figure for the annual PTU profit-sharing payments?

Christian Milau, CEO

These legal changes around subcontracting are being analyzed closely. I don’t have specific PTU figures at hand, but our site leadership can navigate these changes effectively to adapt operations as necessary without significant impacts to our cost structure.

Wayne Lam, Analyst

Alright, thinking about the growth towards 1 million ounces, as Los Filos expansions play a vital role, are you still inclined to pursue the CIL plant despite recent interruptions?

Christian Milau, CEO

Yes, the CIL remains essential to our long-term strategy. We intend to develop it while ensuring operational stability first. As we coordinate with local communities and stakeholders, we will ensure stability supervision before we make further investment in the CIL.

Wayne Lam, Analyst

Thanks. Finally, could you elaborate on the cost inflation referenced? What percentages are you seeing in terms of labor and cyanide reagents costs within the U.S. and Brazil?

Peter Hardie, CFO

In terms of labor, there haven't been notable increases yet. It pertains more significantly to energy—electricity and diesel in Brazil, plus consumables across both jurisdictions. Operationally, we’re looking at roughly a 5% increase overall, with similar percentages noted in the U.S. for fuel and reagents. We'll keep track of whether this will be structural or temporary as supply chains reset post-COVID.

Rhylin Bailie, Vice President, Investor Relations

Thank you all for being here today; we appreciate your participation. If you think of anything further, please don’t hesitate to reach out. I'll turn it back over to Christian for closing remarks.

Christian Milau, CEO

Thanks, Rhylin. I believe we’ve thoroughly covered all the necessary points. We’re excited about the second half of this year. While the first half was notably challenging, we've anticipated these obstacles. Exciting times ahead for Q3 and Q4, stay tuned. Thank you!

Rhylin Bailie, Vice President, Investor Relations

Operator, you can now disconnect the lines.

Operator, Operator

Thank you. This concludes today's conference call. You may all disconnect your lines. Thank you for participating and have a pleasant day.