Earnings Call Transcript - EQX Q3 2023

Operator, Operator

Thank you for your patience. This is the conference operator. Welcome to the Equinox Gold Third Quarter 2023 Results and Corporate Update. Please note that all participants are in listen-only mode, and this conference is being recorded. After the presentation, there will be a chance for questions. I will now hand the conference over to Rhylin Bailie, Vice President, Investor Relations for Equinox Gold. Please proceed.

Rhylin Bailie, Vice President, Investor Relations

Thank you, Chris, and thank you, everybody, for joining us this morning to discuss our Q3 results. We will, of course, be making a number of forward-looking statements today. So please do visit our website and our continuous disclosure documents to learn more about the company. I will now pass the conference over to our CEO and President, Greg Smith.

Greg Smith, CEO and President

Thanks, Rhylin, and good morning, and thanks, everyone, for joining the call today. On the line with me is our COO, Doug Reddy, our CFO, Peter Hardie; our EVP of Exploration, Scott Heffernan and, of course, our VP of Investor Relations, Rhylin Bailie. Again, today, we're discussing Equinox Gold's 2023 third quarter financial and operating results and I'll just start with a broad overview for the quarter and then turn the call over to Pete and Doug for more details. This was a record third quarter for the company in terms of gold sales and revenue, with just over 148,000 ounces of gold sold at a realized gold price of $19.17 per ounce. Cash cost per ounce sold was $13.63 with an all-in sustaining cost per ounce sold at $16.03. I would note that these costs do include our write-down of inventory at Los Filos, which totaled approximately $70 per ounce on a consolidated basis. For the first nine months of the year, we sold 409,000 ounces at a cash cost of $13.57 per ounce and all-in sustaining costs of $15.95 per ounce. These also take into account the inventory write-down at Los Filos. These results also reflect record sales for the company for the first nine months of the year, and we remain on track to meet our 2023 production and cost guidance. In September, we had a site visit to our Greenstone mine in Ontario that included our analysts, our lenders, and some of our shareholders. Just a reminder that Greenstone is being developed as a joint venture in cooperation with our 40% joint venture partner, Orion Mine Finance. Again, the site shows very well, and it was a great opportunity for all the visitors to see the site and the progress in-person. All of our analysts attended. So, there are fairly recent analyst reports out there, and you can get in touch with Rhylin if you'd like to see any of them. The full site tour deck is also available for download on our website, and you can track progress in the Greenstone photo gallery, which we update weekly. Greenstone continues to progress very well. As of September 30, we were 93% complete overall with construction 92% complete. Doug will have more on Greenstone, but the punchline is the project remains on budget and on schedule. I want to take a quick minute now to talk about the convertible note financing we closed in September. To remind everyone, we announced a $150 million convertible note offering on September 18, with an annual interest rate of 4.75%, a 5-year term, and a conversion price of US$6.30 per share. With the overallotment being exercised, we closed the total financing of $172.5 million. As many of you on the call have noted, the market did not react positively, but we strongly believe in the merits of this financing. The new notes have a lower interest rate, a higher conversion price, and a longer term than the existing convertible notes that mature in April '24. So, we've secured better terms for the company and mitigated the risk of having to cash settle the April 2024 notes if they mature out of the money. In early October, we did use the proceeds to partially pay down our revolving credit facility. This results in substantial interest savings to the company while ensuring the funds are available to settle the maturing note in April if needed. So with that financing closing just prior to quarter end, we finished the quarter with an unrestricted cash balance of approximately $357 million. Before I hand the call over to Peter Hardie to run through our financial results, I want to take a moment and thank Francois Bellemare for his contributions to the company as a Director of Equinox since January of 2022, but Francois has actually been involved with Equinox since several years before then. At the same time, I'd like to welcome Fraz Siddiqui to the Board of Directors as the new Board appointee through Mubadala Investment Company. So with that, Pete, I'll turn it over to you to discuss our financial results.

Peter Hardie, CFO

Thanks, Greg. Now on Slide 5 of the presentation. For Q3, for the 149,000 ounces sold, we received an average realized price of $19.17 per ounce generating $285 million in revenue. We had $201 million in operating expenses in the quarter, which is an increase compared to the $193 million of operating expenses from Q2, and an increase compared to last year's quarter, which was $189 million. The increase is primarily due to the contribution of operating expense at Santa Luz and higher operating expenses at Aurizona and RDM as a result of higher production. With RDM achieving its highest quarterly gold production since Q4 of 2020, offset partially by lower operating expense at Mesquite as a result of lower production. On a per unit basis, our cash cost per ounce of $13.63 is consistent with the previous quarters of this year. Our all-in sustaining cost per ounce of Q3 is in line with Q1 and increased, as planned from Q2 thanks to additional sustaining spend at Aurizona on deferred stripping and tailings facility work, which is a typical Q3 activity at that operation. When compared to last year, cash cost per ounce decreased in Q3 to $13.63 from $13.91, and all-in sustaining cost per ounce decreased to $16.30 from $17.51. One of the trends we've seen this year is the increase in leach pad inventories. We've seen a year-to-date increase of $130 million in those inventories related to an increase in ounces on the pads of Mesquite and Los Filos. For Mesquite, most of the increase occurred during Q3. At Los Filos, the increase occurred in the first half of the year. During Q3, at Los Filos, we saw an overall drawdown on pad ounces. Doug will speak to leach pad dynamics during his review of the operations. We're seeing decreases in input costs in Brazil and Mexico from Q2 of this year. There was an increase in the U.S., though, which was driven by higher fuel prices. In Mexico and Brazil, some of the benefits of decreases in input costs are offset by stronger performance in the local currencies against the USD. Equinox manages its foreign exchange exposure with the corporate hedging program. Year-to-date, the company's realized gains of $26 million on its peso and real risk management. Those gains are recorded below the line in other income and are not included in our company's mine operating or cash and all-in sustaining cost metrics. Had those realized foreign exchange gains been included with mine operating earnings, they would have decreased cash and all-in sustaining costs by $76 an ounce for Q3 and $63 an ounce on a year-to-date basis. Those savings are attributable to about 60% at Los Filos and 40% to the Brazilian operations. Our EBITDA in Q3, 2023 was $65 million or $81 million on an adjusted basis. We had net income of $2 million for basic and fully diluted earnings per share of $0.01. Included in net income is an income tax recovery of $8 million. On an adjusted basis, we had net income of $29 million or $0.09 a share. The differences between net and adjusted income include $18 million for unrealized losses on foreign exchange contracts, $11 million in unrealized losses recognized in deferred taxes, and $6 million for unrealized gains on gold contracts. Cash flow from operations before changes in non-cash working capital was $83 million or $0.26 a share, which is entirely in line with our Q2. With respect to our remaining sustaining spend, year-to-date, we spent $77 million, and we expect to be a little under our guidance for the year - by the end of the year of $136 million. Moving to Slide 6. In terms of liquidity and capital position, we ended the quarter with $357 million of unrestricted cash, which includes the net proceeds of the convertible bond that Greg already discussed. Yesterday, we closed a $75 million long-term prepay arrangement with funds provided by Sandbox Royalties and Regal Resource Royalties in exchange for delivering 9,000 ounces of gold over 15 years with monthly deliveries to the greater of 500 ounces a month or 1.8% of Greenstone gold production. The gold deliveries can be satisfied with production from any of our mines and they start next month. We will receive 20% of the spot gold price for every ounce delivered, and we have the option at any time to buy down as much as 75% of any undelivered gold ounces for spot gold, assuming a minimum price of $2,000 per ounce. With respect to Greenstone, we are ahead on spend. Our guidance for the year was $277 million and we spent $270 million through Q3 with $90 million spent during Q3. Based on construction progress to date, we believe the construction spend will decelerate, and our share of the remaining construction budget is about $80 million to $85 million, which is about $140 million on a 100% basis. We expect to fund our remaining share of the spend through our cash at the end of the quarter, our operating cash flow, and the proceeds of the $75 million long-term prepay that we just closed. Additionally, we have the $100 million accordion feature on our revolving credit facility that remains available and undrawn. Finally, we have other levers in our investment portfolio and ATM should they be needed. I will note we have not drawn on the ATM since January. With those sources of liquidity, we believe we are well-funded to complete Greenstone construction. I'll turn things over now to Doug for a review of the operations.

Doug Reddy, COO

Thanks, Pete. We're on Slide 7 in the presentation. At Mesquite, during Q3, the mine switched from waste stripping to ore movement and stacked 7.6 million tonnes on the leach pad. The strip ratio reduced from 2.0 in Q2 to 0.6 in Q3. Those stacks down have begun to come under leach during the quarter, so now we're waiting for them to start coming off the pad in Q4. Early in the quarter there were issues with precipitation of magnesium silicate and low pH levels caused by the re-leaching of some older areas of the pad. Both of those were addressed and resolved. During the quarter, the site has also been working on our plan to mine the Ginger deposit, which is a new zone next to the Brownie pit. We look forward to seeing how Ginger can come into our mine plan going forward. At Castle Mountain, crushing and agglomeration throughput continues to improve. We were at 67% of the ore being crushed before it's stacked. We continue to make up the difference with run-of-mine ore, which does have a lower percolation rate and a lower overall recovery. We are working on additional modifications to the crusher that will improve ore throughput. Scaling on the drip lines on the leach pads occurred at Castle Mountain in the quarter, and those have been addressed and resolved. At Los Filos, our productivity improvement program in the open pits and the underground mines has been underway from Q1 onwards. That program has seen a strong increase in the total tonnes being moved year-on-year and a reduction in dilution from the underground, and at the same time, delivering more ounces overall to the pads. 80% of the ore is coming from Los Filos, Bermejal, and Guadalupe open pits, and the underground ore is from the Los Filos underground only. On the leach pad, we had delays in gold recovery, as noted in Q1 and Q2, but we're starting to see those ounces draw down in Q3. One of the previously reported problems with broken leach pad piping has been fixed, and we believe all of those ounces have now come off the pad in that area. We also had some areas with carbonate precipitation where the pH had gotten very high, and that was in preparation for the rainy season where there was a drawdown of the overall solution on the pad. The area with the carbonate precipitation has now been turned and is being released. The higher grade ore with copper content continues to be separated, as it receives a higher cyanide dosage and has a long leach cycle time, impacting less than 14% of the recoverable ounces that have been stacked year-to-date. More recently, the mine sustained no damage as a result of the hurricane that devastated the coastal region around Acapulco. Our employees at Los Filos have initiated a voluntary donations campaign to support the affected families in Acapulco and other impacted areas, and Equinox Gold will be supporting this effort. On the next page, in Brazil, all of our mines have had tailing storage facility construction either recently completed, or currently underway. As Pete noted, this is the time of year where we do the big push in all of our tailings facilities, and that's reflected in our sustaining capital expenditures for each of these mines. At Aurizona, Q3 production was higher than the prior quarter as they mined more tonnes and had access to higher grades. We continue mining with a second contractor on the site to help move more waste and build up an ore stockpile for the coming rainy season. Currently, we're over 400,000 tonnes on the stockpile. We've largely caught up on waste movement with almost 8 million tonnes being moved in the quarter. Fazenda was mining from a combination of open pit and underground sources. Underground mining was up on both tonnes and grade in the quarter, and the feed grades going into the plant, plus plant throughput were above plan, so a very good quarter for Fazenda. Drilling was over 16,000 meters in the quarter. This is in the underground. That brings our underground drilling to over 39,000 meters year-to-date, focused on reserve replacement. That's been a successful program for the last half dozen years, and it's looking to be the same for this year as well. Exploration overall in the Fazenda, Santa Luz, and Greenstone Belt continues on several promising targets. At RDM, the mine achieved its highest quarterly gold production since Q4 of 2020, primarily due to sending higher-grade in-situ ore to the plant. You'll recall that much of the previous year we were supplementing feed to the plant with low-grade stockpiles. We've been able to focus more on in-situ ore, and the RDM team has been doing a great job in mining with owner-operated equipment, and it's a combination of our trucks plus additional rented trucks. RDM is also in the permitting process for a filtered tailings storage facility that was submitted at the start of the year. We're looking for that to come through sometime at the end of the year or into the New Year, but it doesn't have an impact. We have sufficient space to carry on in any case. Santa Luz continues to work on changes to overall recoveries. They were running at 67% in the quarter, and we've been running just shy of 70% in October. So it's the small changes that make a difference at Santa Luz. I'll note that in the quarter, the total organic carbon content of the plant feed was running higher than planned. While we did have recoveries well into the mid-70s, when the lower total organic carbon levels are being fed in. Our work continues on improving overall recovery, increasing throughput, and being able to feed ore with higher total organic carbon into the plant. One of the initiatives we're currently working on is the impact of desliming carbon from the ore that's currently being fed. We see that this will result in enhanced recovery. Essentially, it's removing the highest carbon portion of the ore, allowing the remaining mass to improve overall recovery. Moving on to Greenstone on Page 9. Full-scale construction of Greenstone was announced in October of 2021, and two years later, the project remains on budget and on track for H1 of 2024 production. We are fortunate to have a very experienced and focused, diligent team at the site. This is a great photo showing the progress in the last two years. In the foreground is the ore storage dome. On the left-hand side is the primary and secondary crushing building feeding into the HPGR building that's near the center of the photograph. Behind the HPGR is the truck shop and warehouse building. On the right-hand side is the mill building process plant building with the thickener in the foreground and leach tanks to one side. Between the thickener and the ore storage dome is the on-site power plant. The project had one LTI in the quarter and has had over 5 million hours worked so far. Move on to Page 10. Progress at the site as of September 30. The overall project is 93% complete with construction at 92% complete. Procurement is 90% complete, and then mechanical piping and electrical; those are the big focus. The big focus at the site is to reduce the personnel on site in the fourth quarter. This is how the construction team will start to ramp down as our operations team has been building up, and we're in towards pre-commissioning and commissioning. The capital spend is 89% complete. On Page 11, the process plant is 91% complete. Both ball mills are mechanically complete, conveyors installed, belt installation underway, crusher, reclaim and HPGR substantially complete, and the hydro testing and leach tanks have been underway. Our pre-commissioning activities are underway in several areas. Our power plant is already complete and has gone through commissioning. It's fully operational. The pipeline is commissioned and operational, and we've been switching over to powering portions of the plant during Q3, with full transition happening in Q4. The tailings facility is 94% complete. The South portion is complete to the final elevation, and buttress work continues. It is on schedule for completion and ready for use in Q4. There's a list of additional infrastructure, but suffice it to say that the key areas that remain are the tailings storage facility and the process plant. We've already done the realignment of Highway 11. That was opened for traffic in August of this year, and we've relocated the Ministry of Transportation Petroleum. Moving to Page 12, looking at key milestones. The highway is open, the process plant is 90% complete, and we've moved into pre-commissioning. Our operational readiness and commissioning teams are in place and very active on site. In Q4, the big focus is the mechanical piping and electrical installation. Then we move into wet commissioning on the process plant. The TSF will be ready for use, and pre-production mining ramps up. We'll have 800,000 tonnes on the stockpile, currently over 400,000 tonnes on the stockpile. The mining fleet will be augmented in Q4, bringing our fleet to 14. We'll continue adding trucks, aiming for 22 trucks by Q3 of next year. H1 2024 will see hot commissioning and first gold production at 145,000 tonnes a day and the buildup of the lower stockpile. Looking at our other expansion projects, Castle Mountain is in permitting. The application was submitted in March 2022. In the meantime, we continue with our optimization work, doing additional met test work, and continuing with front-end engineering. The Aurizona expansion will see concurrent mining of Piaba underground, along with Piaba open pit and other nearby open pits such as Tatajuba and Genipapo. The engineering work continues on supporting infrastructure, like additional power for vent fans and supporting the underground. The underground portal development will happen in 2024, providing the basis for future production. At Los Filos, the CIL plant is set to add life and improve overall recovery. We're looking for the conditions that are conducive to investing in the construction and extension of the mine life. In the quarter, we have met with communities and started the dialogue that needs to involve all parties. We'll need everyone to be involved so that we can put Los Filos on the path towards being able to invest in the CIL, additional stripping, and ultimately extending the life. With that, I'm going to hand it back to Greg.

Greg Smith, CEO and President

Yes. Thanks, Doug. Rhylin, why don't we move on to Q&A.

Rhylin Bailie, Vice President, Investor Relations

Sure. Operator, can you please remind people how to ask a question?

Operator, Operator

Certainly.

Rhylin Bailie, Vice President, Investor Relations

Sure. So I've got a couple of questions online, and we'll take one of those while we're waiting for people to queue up. First question here, why did the convertible notes now? Why not wait until the spring when the 2024 note was coming due?

Greg Smith, CEO and President

Yes, I'll handle that one, Rhylin. So as you noted, in April 2024, we had a $140 million convertible note that was maturing. The company has been involved in a large capital program for the last 2 years in building Greenstone, and we did not want to be in a position just as we're in the heat of commissioning and ramping up Greenstone where we had to make a $140 million debt payment. So we've been pretty clear in the past that we wanted to get ahead of that maturity, effectively refinance that note. We've been looking at a number of options to do that. Why now, why September? In large part because the market was cooperating. The terms were very attractive in the context of the note that was maturing. Again, much higher conversion price, lower interest rate, and of course, you get the extension of the term. We were able to do it in market conditions that were favorable to the company at a period where we were able to then park those funds on a revolving credit facility and save a considerable amount of interest, the delta in the interest between our revolver and the convertible note over the period of time between now and maturity of the April 2024 notes. From our perspective, we have to control or focus on the things we can control. We don't know where the gold price is going to be or where the market will be in April 2024. To mitigate having to make that payment in cash if those notes matured out of the money, we wanted to get well ahead of that, and that's why we executed on those notes in September.

Rhylin Bailie, Vice President, Investor Relations

Perfect. Thank you. Operator, can we go to the phone lines now, please?

Operator, Operator

Certainly, the first question comes from Wayne Lam with RBC. Please go ahead.

Wayne Lam, Analyst

Yes. Thanks. Good morning, everyone. Just wondering maybe at Los Filos. Just wondering what the expected leach cycle is now for those delayed ounces beyond the 60 days. And I guess, given that it's been a couple of quarters now, should we be expecting a big catch-up of ounces coming off in Q4?

Doug Reddy, COO

So on - for example, the longest leach time is on the high copper ores. So that's a 120-day overall cycle. Yes, it's a longer drawdown of those ounces will go through Q3, probably into Q4 for those ounces. We had hoped that it would be quicker, and we all come out in Q4, but it's likely going to drag into 2024.

Wayne Lam, Analyst

Okay. Great. And then just maybe related to that, it looks like the heap leach inventories have built up by quite a bit this year. What proportion of that number is related to Los Filos versus, say, Mesquite and Castle Mountain, and at what point in time would you have to consider taking a bigger write-down on those inventories if they don't come off the pad? Like would that come with impairment testing at year-end?

Peter Hardie, CFO

Yes, Wayne. So about 2/3 of the buildup is at Mesquite, and most of the buildup at Mesquite occurred during Q3, which was frankly planned with the stacking activity and our budgets for the year. At Los Filos during the year, we saw a net drawdown overall of the ounces. So the ounces that we had expected a little earlier in the year, we have started to see those come through during the year. As Doug just mentioned, we hope that, of course, that continues, it's just taking longer than we expected.

Doug Reddy, COO

One of the things to note at Mesquite as we saw opportunities to optimize our mine plan a little bit, which meant a bit more stripping to get more ore, and that is up a little bit. So we knew it was a risk that some of the ounces would push into 2024, but you see the large number of tons that we've managed to stack in Q3; we were opportunistic, and we took that opportunity to optimize the mine plan.

Peter Hardie, CFO

Yes. A final note on the Mesquite stacking is it's typical of the operation where you do your big pushbacks followed by periods of stacking and then leaching and recovery.

Wayne Lam, Analyst

Got it. And then maybe last one at Greenstone. Can you give us a sense of timing of spend through the completion of the project into next year? And then how should we think of CapEx into Q4, given the spend this quarter seems to be quite elevated and to date looks like it's pretty close to the full year guide?

Greg Smith, CEO and President

Sure, Wayne, this is Greg speaking. So to your point, we've spent about $270 million of the $277 million that we planned for the year. For the most part, this is a timing issue. The overall budget in aggregate is still valid. What we're seeing at this stage is a fairly rapid deceleration in construction burn, and that is everything from the installation of equipment to the number of people on site starting to drop fairly significantly. Most of the major work in terms of construction is coming to completion here, including the tailings facility, which we said Q4, but really, we're weeks away from that being entirely complete. So most of the big burn that we had through 2022 and 2023 is now coming off pretty significantly. There's about $140 million at 100% left to spend. In total, 60% of that relates to us; it should be about $85 million. I think for the rest of 2024, we're going to be in the sort of $30 million to $40 million range. Obviously, we're moving into hot commissioning here in Q1 and as quick as we can to gold production. No change to the overall budget. Things are moving quite quickly at Greenstone, and like I said, the overall burn is now coming off quite significantly, and really the spending is starting to orient more towards just mining.

Wayne Lam, Analyst

Well great. Thanks. Thanks for taking my questions and best of luck in the months ahead.

Greg Smith, CEO and President

Thanks, Wayne.

Operator, Operator

The next question comes from Kerry Smith with Haywood Securities. Please go ahead.

Kerry Smith, Analyst

Well, thanks, everyone. Greg, does that $80 million to $85 million your share of the remaining CapEx, does that actually include the working capital buildup?

Greg Smith, CEO and President

In terms of ore, like stockpiled ore and first fills and all that?

Kerry Smith, Analyst

Yes.

Greg Smith, CEO and President

Yes.

Kerry Smith, Analyst

Okay. Okay. That's great. And are you having any issues on the operating side? Because I know you're adding equipment as we move into every quarter here going forward. Are you having any issues sourcing equipment from the suppliers or maybe any issues sourcing people as you build up your staffing levels, or is all that kind of running in line with what you expected?

Greg Smith, CEO and President

Yes. On the equipment side, no, because everything had been previously acquired. So we haven't had any issues around that or certainly not at this stage in the game. In terms of hiring, things have accelerated quite significantly. We're working towards having around 360 people on-site by year-end. We're at about 300 now, and that will continue to increase. I'm talking about the operating team, which will get us to about 550 at some point next year. The number of people on-site in terms of construction is coming off quite rapidly. We went from over 800 people just a few weeks ago to about 500, and continuing to drop.

Kerry Smith, Analyst

Okay. And can you remind me what the peak employee levels are once the operation is running?

Greg Smith, CEO and President

About 550.

Kerry Smith, Analyst

Okay. Okay. And just for Mesquite, with this buildup of inventory, do you have any directional comment on the production in Q4 from Mesquite that you would expect? I mean, do you think it's going to be 10% better than Q3? I'm just thinking about how we model this.

Greg Smith, CEO and President

Yes. No, I hear you, Kerry. We've actually stacked a lot more recoverable ounces in the year than we budgeted. But we did it a bit later, as Doug mentioned, because we extended the stripping program. We've seen this in the past with Mesquite where the recovery starts to incrementally increase and all of a sudden, it starts to really increase and reach the levels that we anticipate. It's one of those situations where we're totally comfortable reiterating our guidance. We're going to be within our guidance for the year. Whether we're at the back end of that guidance or closer to the midpoint of that guidance, that could be a matter of a couple of weeks at Mesquite just based on the recovery of those ounces. We're anticipating those ounces starting to accelerate significantly over the course of the quarter, which we've seen every year that we're mining Mesquite, but the exact timing around that year-end could affect the overall production for the year. It will obviously do so.

Kerry Smith, Analyst

Okay.

Doug Reddy, COO

Remember, a large number of tonnes doesn't come under leach at the same time. We had to finish lead cycles on other areas as it was coming on. And then you've got your normal leach cycle, plus it's a very high pad. The pad height means that the percolation takes quite a while to work its way through. So all that combined, and we've done lots of discussions and analysis on that means that any day now. That is through Q4.

Greg Smith, CEO and President

Kerry, the situation at Mesquite is favorable. This year, we saw positive results from our reconciliation in the pit, and we have more recoverable ounces now available for mining. We are also working on integrating the new Ginger deposit into our mine plans, which will allow mining at Mesquite to continue into 2026. Overall, we are pleased with the developments at Mesquite. The timing for recovering these ounces is slightly delayed, affecting production toward the end of the year, but we still anticipate staying within our guidance.

Kerry Smith, Analyst

Okay. And just one last question for Doug on Santa Luz. I know when you started the resin project, you were thinking recoveries in the mid-70s, maybe the best that we can ever hope to expect for this project? Or how are you thinking about it now?

Doug Reddy, COO

The team on site is very optimistic about the additional modifications they're making. We need to proceed step by step to understand what is effective and what is not. Desliming is the major area that should lead to a significant improvement in our recovery, and we are currently working on the engineering for that, aiming to implement it in 2024. We anticipate a realistic target of around 75%, though we recognize it will be incremental progress. The original goal of 84% is unattainable. We acknowledge that the transition from bench scale to pilot plant to industrial scale did not achieve the expected overall recovery, but we believe reaching the mid-70s is feasible. Additionally, blending has been significant for us, and we are looking into ways to blend with ore to reduce total organic carbon levels, which will take some time.

Peter Hardie, CFO

Yes. And Kerry, we'll expect to have more on the addition of that desliming circuit and when we can expect that stepwise change in recovery as part of our year-end call next time we chat on results, which will probably involve guidance as well.

Kerry Smith, Analyst

Okay. And is it the desliming that you think could get you to the mid-70s recovery range? Or are there some other step change opportunities that you would have to look at as well?

Doug Reddy, COO

Exactly. Yes. So, essentially, desliming would bring us to around 73%, and then continued work on a couple of other areas would give us another couple of percent, hence why I'm saying around 75%. The site will remain focused on 73% for now. Nonetheless, we'll continue working on it, so it's a long-term target.

Kerry Smith, Analyst

Okay. Okay. Yes. Thanks very much, guys.

Rhylin Bailie, Vice President, Investor Relations

Quick question from online. What are you thinking for timing of the Castle Mountain permit?

Greg Smith, CEO and President

Yes, that's a tough one. We've submitted the permit in March 2022. We did have a fairly rapid engagement from the state and county. The BLM and federal authorities have been a little slower. If you'd asked me a year ago, I would have said we should have that permit sometime near the end of 2024. I think it's more likely at this stage, just given the progress to be around late 2025, give or take, so it's a hard question to answer specifically. The permitting process is going well. There's no drama. There are no significant issues, but it has been slower than we anticipated.

Rhylin Bailie, Vice President, Investor Relations

I guess with Q4 halfway through, people are already starting to think about next year. So I've got about 5 questions about sustaining capital spend next year and costs next year in Greenstone costs. Did you want to remind people about when guidance will come out?

Greg Smith, CEO and President

Yes. We'll be issuing our 2024 guidance in connection with our year-end results, which will be sometime in February, likely late February.

Peter Hardie, CFO

Which is typically when we do release our guidance in the second half of February.

Rhylin Bailie, Vice President, Investor Relations

Okay. We'll take questions from the phone, please.

Operator, Operator

The next question comes from John Sclodnick with Desjardins. Please go ahead.

John Sclodnick, Analyst

Yes. Thanks for taking my questions, guys. Just looking at the covenants for the revolver and the credit facility there, it looked like the coverage ratio was 4.1% in Q3. Just wondering if you see this remaining tight moving forward? Obviously, it depends on the gold price and production, but just wondering how you're thinking about it internally and managing that?

Peter Hardie, CFO

Yes. As we mentioned on previous calls, we worked with our lenders to loosen covenants during the construction phase of Greenstone. We do expect them to remain tight until construction is complete, but we're very comfortably on side with our covenants.

John Sclodnick, Analyst

Okay, perfect. Yes. I appreciate that. Just in reference to Doug's comments on removing some of that higher carbon material from Santa Luz. What kind of grade is associated with that? And is this going to impact the head grade in any material way?

Doug Reddy, COO

So you're asking about the mass pool of the carbon material?

John Sclodnick, Analyst

Yes. And really, if that change in your planning there, removing that higher carbon material, if that's going to impact your planned head grade?

Doug Reddy, COO

No. I'd have to double-check, but I believe the math pool that we're looking at is 10% to 20%, but the gold that's lost there is tied up intrinsically with the carbon. What we're removing is the most refractory material, so that we're allowing the remaining mass to be properly leached. We've done test work on it, and it worked quite well, giving us a good bump. It depends on the total organic carbon of the material that goes in on how much of a bump you get. The grade is about 1.3 grams that ends up getting lost, but that's okay because that gold wasn't coming anyway, and it gives us a bump on the remaining material.

John Sclodnick, Analyst

Perfect. That makes sense. I understand it's different when you're operating as opposed to working with a spreadsheet, but I appreciate your insights. The balance sheet appears to be in good shape for the cash throughout the rest of the Greenstone development. I'm just curious about your thoughts on divestitures at this time. In the past, there was some discussion about possibly divesting a smaller asset, and I would like to know your current perspective on that.

Greg Smith, CEO and President

Yes, we have always positioned ourselves as a commercial entity, and in the past, we have sold older mines when it made sense and when we received reasonable offers. We remain open to opportunities, but I prefer not to discuss any specific mines. The current environment for selling assets is quite challenging. There isn’t much financing available, especially for cash sales, as interest rates are high. While gold prices are elevated, equity values are low, making it an unfavorable time to sell. Our focus has been on optimizing cash flow and value at some of our smaller operations. We have received feedback regarding these smaller assets, but right now, we can extract more value from mining them than we could from selling them, which will remain our focus. Although we are open to commercial transactions, the current environment makes such moves difficult.

John Sclodnick, Analyst

Yes. No, I appreciate that. And also I know public forum questions on M&A are every CEO's favorite question to get. So I appreciate that color. That's it for me. So congrats on the great quarter.

Operator, Operator

The next question comes from Anita Soni with CIBC World Markets.

Anita Soni, Analyst

So the first one relates to Los Filos operations. So just looking at the grades, they've come off in the open pit. Is that what you can expect going forward? Or is that just a temporary sequencing issue?

Doug Reddy, COO

That's a sequencing issue. We did pivot at Filos between two areas. We had a delay in finalizing our geological review of one area. We've got the permit for it, but we need to sign off on the archeological review at Guadalupe. We pivoted to an area in Bermejal and another in Los Filos, which had slightly lower grades and required more strip to get back into them.

Greg Smith, CEO and President

I think year-to-date, Anita, the actual open pit grades are quite a bit higher than they were last year in aggregate. So it's just a sequencing issue within the year.

Anita Soni, Analyst

Okay. And then moving, I guess, to Santa Luz. The cash flow from operations question I have is related to Los Filos. But in your last slide, I think it's 17, you still reiterated this 55% of production, more than 85% of operating cash flows managed to 85% still? Is that the case? Or is this the write-downs that you're taking at Los Filos affecting that forecast? And you just haven't updated that 85%?

Greg Smith, CEO and President

The big driver of that is as you start to pull, especially in Mesquite, you start to pull ounces off these leach pads. You've already spent the cash to place those ounces up there, and now in terms of cash, you pull them off in the fourth quarter. That drives the cash flow number. So, we haven't changed that guidance. I'm not going to find it on the call, but that's where that number comes from. You go through a big strip campaign, stack a bunch of ounces, we saw that at Mesquite, and then start to recover them off the pad.

Anita Soni, Analyst

Okay. We will take this offline because on the first half, you're around $200 million. So 85% in the back half would be a significant number. So maybe we'll follow up on that one. And then another question with regards to Santa Luz. And just in terms of you mentioned something about the reserves. So is there any impact to reserves given the fact that you're not delivering or expecting to deliver the prior recovery rate than you previously were looking for?

Doug Reddy, COO

We've been working that through. And because we're still working on things such as the desliming, we're not ready to concede any change at this point. We've also been looking at opportunities to blend down. It's a matter of improving recovery and throughput, as well as dealing with higher TOC ores.

Anita Soni, Analyst

Okay. And then just pivoting back to Los Filos again. The delay in the ounces, you're going to get some in Q4. Am I still right to think that perhaps your accounting cost at Los Filos will be higher than anticipated in Q4? Or will they end up taking an NRV write-down as well? I'm trying to figure out if you are tracking to the bottom end of the guidance range or do you think it will trend up more towards the middle? Or should we stick to the bottom end of the guidance range after accounting for a potential write-down in Q4?

Peter Hardie, CFO

Yes. So Anita, it's Peter. I'll answer that question in two parts. Yes, we expect to see an increase as those ounces are realized. And with respect to sustaining spend, we have something to do in the quarter. That's going to affect all-in sustaining costs, as well as increase in Q4. On both counts, we're expecting things to be higher in Q4 and as a result, year-to-date for the whole year than for the first three quarters year-to-date. But still, I'm sorry, I'll just finish, but still in range.

Anita Soni, Analyst

Yes. Okay. Sorry to cut off there. Thanks for my questions.

Operator, Operator

The next question comes from Mike Parkin with National Bank. Please go ahead.

Michael Parkin, Analyst

Hi everyone. Thank you for answering my questions. Most of them have already been addressed, but regarding Greenstone, are you tracking ahead of budget on the total tonnes mined from the pit? If that’s the case, could that help explain some of the CapEx expenditure compared to your initial budget at the beginning of the year?

Doug Reddy, COO

For tonnes mined, no, we're on track.

Michael Parkin, Analyst

Can you talk about the 300 people you have hired? Are you transitioning to owner-operated for mining, or did you start with that model?

Doug Reddy, COO

Yes. It's owner-operated from day one. We started mining in August 2022, a couple of months ahead of schedule. We switched to 24/7 in November or December of last year. So it's been owner mining all along.

Peter Hardie, CFO

And Mike, there are other aspects of the operation of the projects that have been transitioned to being owner-operated. All the ancillary buildings were transitioned and other aspects have advanced here through construction.

Michael Parkin, Analyst

Okay. Thanks so much, guys.

Rhylin Bailie, Vice President, Investor Relations

If there are questions online that I haven't gotten back to yet, I'll follow up by e-mail. There's no further questions on the phone. Greg, do you have any wrap-up comments?

Greg Smith, CEO and President

No, just once again, thanks, everyone, for attending the call today. You know where to find us if you need information; you can reach out to Rhylin or myself. The website has again all the updates on Greenstone, including the site tour deck. Thanks again, and we'll talk to you in the New Year.

Rhylin Bailie, Vice President, Investor Relations

Perfect. Thanks, everybody, for joining us this morning. Operator, you can now conclude the call.

Operator, Operator

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