Earnings Call Transcript - EQX Q4 2022

Operator, Operator

Thank you for your patience. Welcome to the Equinox Gold Fourth Quarter 2022 Results and Corporate Update. The conference is being recorded. I would now like to hand it over to Rhylin Bailie, Vice President of Investor Relations for Equinox Gold. Please proceed.

Rhylin Bailie, Vice President, Investor Relations

Thank you, Ariel, and thank you everybody for joining us today for our Q4 call. We will, of course, be making a number of forward-looking statements today. So please take a time to visit our continuous disclosure documents on SEDAR and on EDGAR and on our website. I will now turn the call over to our CEO, Greg Smith.

Greg Smith, CEO

Thanks, Rhylin, and thanks everyone for joining us today. On the call 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. As you all know, we're here to discuss our 2022 fourth quarter and full year of financial and operating results. And as a reminder, Equinox is a diversified Americas-focused gold producer. We've got seven producing mines across Brazil, Mexico, and the United States. We also have several growth projects, including our large-scale Greenstone Gold Mine in Ontario that we are constructing now along with our 40% joint venture partner Orion Mine Finance. I'll start with a broad overview for the quarter and the year and then turn the call over to Pete and Doug for more details. Q4 is our highest quarterly production for the year, just over 150,000 ounces. In fact, this is the second highest quarterly production in the company's history. And while inflationary pressures persisted through the fourth quarter, we also achieved our lowest cost for the year with cash costs of $1,223 per ounce and all-in sustaining costs of $1,523 per ounce. We finished the year with total production of just over 532,000 ounces at a total cash cost per ounce of $1,328 and all-in sustaining costs of $1,622 per ounce. We also advanced a number of our assets over the course of the year. We submitted our permit application for the expansion of our Castle Mountain Mine, and that is in process now. We also received permits for three portal locations for exploration ramps in Arizona, so we can start to advance our underground development potentially later this year once we've completed a feasibility study that we're currently working on. We completed construction and achieved commercial production at our Santa Luz mine in Brazil, and we're now starting to see some improvements in the recoveries, and Doug can provide some more details on that. We published a feasibility study on the expansion of our Los Filos mine to a long-life large-scale mine with peak annual production of 360,000 ounces per year. And probably most significantly, Eric and his team at Greenstone have continued to advance construction of the mine on budget. As of year-end, the overall project was 65% complete and today the project is over 70% complete, and I'm pleased to report we remain on track for First Gold in the first half of 2024. Again, Doug will provide more details on the current status of Greenstone later in the call. On the corporate development side, we completed the sale of the Mercedes mine to Bear Creek Mining, and we launched Sandbox Royalties, which is a new diversified metals royalty company. Sandbox is private right now but is working toward going public sometime in the next few quarters. I'm very pleased to say we finished the year with an excellent safety and environmental record that has continued to improve year-over-year. We also recently announced our greenhouse gas emissions reduction target of 25% by 2030 compared to our business-as-usual case. Details of how we plan to accomplish this target are laid out in our first climate action report, which is available on our website, and I'd encourage everyone on this call to take a look at that report when they can. Looking toward 2023, we expect an increase in production to between 555,000 ounces and 625,000 ounces with cash costs between $1,355 and $1,460 per ounce and all-in sustaining costs of between $1,575 and $1,695 per ounce. These costs remain somewhat elevated as they reflect a full year of the increasing input costs that we saw over 2022. That being said, we are working to mitigate this cost pressure through optimization opportunities at all of our sites. Looking beyond 2023, we also expect to see the benefit of lower costs and the overall increase in production from the Greenstone Mine and the Castle Mountain phase two expansion as those projects enter production. With that, I'd like to hand the call over to Peter Hardie to run through our financial results.

Peter Hardie, CFO

Thanks, Greg. We're on Slide 5. Safety and environmental practices continue to improve over 2022. We ended the year with a 12-month rolling total recordable injury frequency rate of 2.12 and a 12-month significant environmental frequency rate of 0.63. I also want to add we had no lost time injuries in Q4. These are just great results, and it really takes an effort by everybody, the whole company. And so, we just want to say congratulations to all of our employees for making Equinox a safe place to work. It's really a great achievement for the year on safety. For the year, we sold 532,000 ounces. It was really an investment year. We invested $456 million in growth development; $328 million of that was at Greenstone, $49 million of that was at Santa Luz to complete construction there. We also spent $43 million at Los Filos, that was primarily on Bermejal underground development and preparing the Los Filos open pit for its next phase. The $139 million we spent on sustaining items was primarily deferred stripping at Arizona, Mesquite, and Los Filos. On slide six, as Greg mentioned, we had a good quarter. We had our second highest output for the company to date. We sold 149,000 ounces for revenues of $260 million, and an average realized price of $1,733 an ounce. As Greg mentioned, cash costs for the quarter were $1,223, and our all-in sustaining costs were $1,523 per ounce. The interesting thing we saw during the quarter in relation to costs is while our costs are up significantly, if you look at it on an annual basis, 2022 versus 2021, or on a quarter-on-quarter basis, i.e., Q4 2022 versus Q4 2021, costs are up significantly. The interesting thing that happened in the second half of the year going from Q3 to Q4 is we actually did not see much by way of cost increases. In fact, costs stayed overall relatively flat. We saw some increases in consumables such as reagents and grinding media in Brazil and the U.S., which were offset by decreases in fuel. So, we're quite pleased to see that. It looks like costs have peaked sometime in Q3 and at least remained steady for Q4. With respect to what that means for our financial metrics, we saw improvement in Q4, which we're of course happy about. EBITDA was $65 million, $75 million on an adjusted basis. Net income of $23 million for earnings per share of $0.07, $7.5 million of income on an adjusted basis or $0.02 a share, cash flow from operations also improved before changes in non-cash working capital. We had cash flow of $80 million or $0.26 a share, so happy with the quarter. With respect to liquidity and capital position, we ended the year with just over $200 million. We have $127 million undrawn on our credit facility for total liquidity of $327 million. We did draw an additional $100 million on the revolving credit facility during Q4. The market value of our investments at February 17th was about $220 million, and I'll note that we realized proceeds during Q4 of $52 million on solar share sales and an additional $20 million in the new year. Net debt increased due to that debt draw to about $630 million. I just want to note a few other things, or at least during Q4, we did other things to improve our balance sheet resilience. We filed the base shelf prospectus with the at-the-market supplement. I will note we have used $25 million of that aftermarket supplement, and through the end of January, we've paused that program since. Also, something we did in the new year to help with balance sheet resilience and cash flow funding, we put in place a strip of hedge callers for 20% of our production through the end of Q1 2024 that represent about 150,000 ounces. The floor of those callers is $1,900 an ounce, and they have significant upside opportunity up to a ceiling of about $2,065 an ounce. Another thing we did in the new year as we worked with our lenders, we just completed late last week to retool our covenants on our revolving credit facility, which will take us through Greenstone startup. And we, of course, want to thank our leads, Scotia, BMO, and ING for working really constructively with us on that.

Doug Reddy, COO

Okay. In addition to the production guidance that we have, I'll also mention that all of our mines have been working on a program that involves continuous improvement as well as consumable reduction and group purchasing initiatives. All of that is above and beyond what we've put forward for our production and cost guidance. We've also doubled down on our adherence and reconciliation of mine plans, benchmarking, and productivity improvement work, which is all geared towards achieving and beating what we've put forward. Looking at the individual mines, Mesquite in Q4. We were mainly in a stripping phase for Brownie and Vista East. That will ultimately contribute to the ore going to the pads in 2023. Due to the emphasis on stripping in Q4, that means we had a relatively low number of new ounces going under leach in that period. And for 2023, we have adopted a new mine plan that will see less stripping and smaller pits in order to reduce costs at Mesquite. We continue with exploration and permitting work at Mesquite for mine life extensions. In Castle Mountain, in Q4, we were running with both run of mine and crushing and agglomeration of the material going to the heap leach pad. The plan is that we should be all going through crushing agglomerations, so we'll continue working on increasing our crush and agglomeration throughput. At the same time, we have been advancing our permitting on Phase 2 and met test work in support of the Phase 2 work, and I'll come back to that later on. At Los Filos, in Q4, we had a production impact related to a shortage of explosives that was caused by a strike at our explosive supplier. We also had some of the material coming from the Guadalupe open pit that had a higher copper content, which meant that it had a reduced recovery over the leach cycle. So, we're now separating that to be able to leach that separately from the rest of the ore feeds. As we look at 2023, we continue mining in Guadalupe open pit and Los Filos open pit, as well as the Los Filos underground with 20% of the tons coming from the open pits. We will be suspending the Bermejal underground, given the prolonged development period and the lower productivity than anticipated. Just to put it in context, we have developed down to the central zone five of Bermejal underground. We've accessed into it and we've been mining from it, but we need to do significant additional development in order to have enough scopes in production at the same time to be able to achieve the 1,500 to 2,000 tons per day. So, in the meantime, we'll be looking at plans to be able to improve overall productivity and reduce the costs. We also look at the timing for this higher-grade ore to eventually be fed into a CIL plant.

Greg Smith, CEO

Thanks, Doug. I'd like to briefly just acknowledge the Equinox team. We had some challenges in 2022, but the team has been doing a great job at navigating those challenges. We're in solid shape to fund the completion of construction at Greenstone, on budget, on schedule. A year from now, we expect to be commissioning one of the largest gold mines in Canada. We're also working hard to progress our growth projects, as Doug mentioned, manage our costs and improve our operations, and we're looking forward to continuing that through 2023. I think, I'll conclude there and pass it back to Rhylin for Q&A.

Rhylin Bailie, Vice President, Investor Relations

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

Operator, Operator

Thank you, Greg. Operator, could you please remind everyone how to ask a question?

Rhylin Bailie, Vice President, Investor Relations

Thank you. And while they're queuing up, Scott, we've got an exploration question for you. I can see from your MDA that you drilled about 30,000 meters of Arizona this year, and it looks like you're going to start underground in Q4. When will we see those results?

Scott Heffernan, EVP of Exploration

The 2022 program at Arizona had three components. We drilled just under 30,000 meters. The first component was a few deep holes on Cabo itself to support the feasibility study that's been mentioned a couple of times on the call so far. Those holes were looking at converting large areas of inferred resources to indicated to support reserve growth and also to address some geotechnical questions in the deeper portions of the mine. So those results will funnel into the feasibility study that will be released mid-year Q3. The other two components included a regional program of approximately 7,000 meters on a number of targets across the thousand-kilometer square land package. But the majority of the effort was focused near mine, looking to hit targets both east and west of Cabo itself within the main trend to support mine life extension, targeting the shallow open pit targets, the multiple targets that we have there. So those results will likely be released here probably in Q2, early Q2.

Rhylin Bailie, Vice President, Investor Relations

Thank you. Operator, can you take questions from the phone, please?

Operator, Operator

Our first question comes from Wayne Lam of RBC. Please go ahead.

Wayne Lam, Analyst

Good morning, guys. Just wondering, at Greenstone, can you give a bit more detail on what you see as the bottleneck items or the large items left to spend? And where have you seen some of the savings optimizations? And then just curious, given the independent assessment complete last year, how has that reconciled the date and how much of the contingency has been utilized so far?

Peter Hardie, CFO

In regards to bottleneck items, I'd say we always knew what our critical path was going to be. It's getting through to building enclosure and then starting on the east end of the processing plant building for ball mill installation. We're four buildings done. The last two buildings will finish off this week. And then, we're starting on installation. I would say going forward, that remains our critical path for most of this year. Obviously, productivity is going to be the issue as we move to the more detailed piping and electrical inside the buildings. But the team's been very good at adapting and compensating for where we have delays in one area. They'll turn around and work out how to adjust the program to compensate for it. Really, we're pushing through this spring to be able to maintain our schedule as we come into the summer where we're most productive, and then we get back into areas such as the TSF and some of the other Earthworks projects that we don't progress as much during the winter months. Overall, I'd say very good against our overall schedule with minor things that they've been adopting and compensating for elsewhere within the overall construction.

Greg Smith, CEO

Yeah, it's probably worth mentioning, we expect to do another quantitative risk assessment. It's currently scheduled, I believe, Doug, for around April. So, we're looking forward to doing that, getting an update from an independent party on schedule and budget. With respect to your other two questions, Wayne, savings optimizations, one of the bigger ones, frankly, is foreign exchange. The Canadian dollar, unlike the Brazilian real and the Mexican peso, has been a little weaker against the USD, helping. It's probably one of our main areas. With respect to contingency through the end of last year, we've used about $120 million of it.

Wayne Lam, Analyst

Okay, great. Thank you. And then maybe at Mesquite, I'm just curious, how should we think about the mine beyond this year? Is it kind of a case of a mature asset approaching depletion given the short reserve life? Or how should we think about the future potential for reserve additions once you have greater capability to reinvest in the capital stripping there?

Greg Smith, CEO

So, for Mesquite, essentially, yes, quite right, it is a mature asset. Every year you'll hear us talk about a stripping program, and then we get into the ore. So, it's essentially diving down into particular areas where we have to strip to get down to be able to mine the ore, and that's been cyclical and this year is no different where we were doing our stripping in the latter part of 2022, and then we'll benefit from that ore during this year. We are continuously doing drill programs and looking at revised models to improve the mine plan. It just happens that this year we have a lower number of ounces being produced while we work through revisions to the mine plan to see what we can do to put more on the table as we go forward.

Peter Hardie, CFO

Yes. We had a like everybody, pretty significant increase in costs. And so, when we looked at the mine plans for Mesquite in 2023, it made sense to go with that smaller pit scenario to maximize cash flow over that period. As we progress through 2023, we'll have drill programs on Mesquite, and then working to extend that mine life into 2024 and beyond. But that requires some additional drilling.

Doug Reddy, COO

Permitting is an ongoing process at Mesquite, and we are currently progressing through two heap leach pad expansion permits that we anticipate receiving in the next few months. These permits will enable us to increase our capacity. Our focus is on expanding pad space while also developing and permitting additional resources to convert them into reserves. It's a continuous effort.

Wayne Lam, Analyst

Okay. Great. Thanks. And then maybe just last one, just looking at the upper end of cost guidance across the operations it seems like a few of the mines have relatively elevated costs near breakeven especially in the first half of the year. As part of the optimization review, is there any scenario where you might see improved economics for, say, putting Castle Mountain on pause, and reopening that with Phase 2 or maybe putting Los Filos on care maintenance and reopening that with the CIL construction, just given the higher cost of those mines?

Doug Reddy, COO

It's something we discussed, but there's more than one reason why we do Phase 1 at Castle Mountain. Obviously, coming into operation while we're in the permitting process is a good thing for us. We wanted to be back into production during that process so we were present and working through everything that our operation ultimately needs. It also means that aside from having our footprint there, we're also able to move essentially dump material from previous operators and be able to leach the gold out of that. So, it actually works as a pre-stripping for us for the Phase 2. So, it's a good outcome; we get that moot during this process. And then the third one is, we did want to get in and try the run of mine versus crush and agglomeration. So, we get an opportunity to be able to do a larger scale test by virtue of doing the Phase 1 operations at Castle Mountain.

Greg Smith, CEO

Yeah, I think you also asked about Los Filos, and I mean, it is a large mine. You know, it's very expensive to shut down a mine, restart a mine like that. I think it's fair to say our focus right now is trying to improve that operation, and we're working hard to do so. We've reduced some of the CapEx at Filos in the near term with the suspension of Bermejal Underground. But that doesn't mean we're not very focused on the Guadalupe open pit and the Los Filos underground mine. So, I don't think that that's on the table at all, and it is not something we're considering at this time.

Wayne Lam, Analyst

That's all from me. Congrats on the quarter and nice to see things going well at Greenstone.

Rhylin Bailie, Vice President, Investor Relations

Thanks for that. I'll jump in quickly and ask a question from online. Would you consider selling Los Filos since it's consuming so much capital?

Peter Hardie, CFO

I mean, the quick answer is no. I don't want to speculate on any individual mine. We've got no plans in process. You know, obviously in the past, we've been commercial on certain assets in the portfolio. We have sold mines in the past. But the challenge with Filos, and I think we addressed this in Q3, it's a huge deposit, a huge reserve resource, lots of exploration potential, permitted infrastructure. I mean, that type of a deposit is incredibly rare. So, parting with something like that would be pretty challenging. I think, again, our focus is working to improve that operation and optimize that operation and turn it into a long-life, very valuable operation for the company.

Rhylin Bailie, Vice President, Investor Relations

Operator, can you take more calls from the phone lines, please?

Operator, Operator

Our next question comes from Anita Soni of CIBC World Markets. Please go ahead.

Anita Soni, Analyst

Good morning and, thanks for taking my question. So, I just wanted to address first you mentioned that you had retooled your covenants for the revolving credit facility. Could you give us an idea of what changes were made?

Peter Hardie, CFO

Yeah, Anita, it’s Peter. The covenants reflect more, I guess what you would call a company and development phase. So, we effectively took a very conservative case scenario and adjusted accordingly. We're not going to disclose exactly what they are, but we're quite comfortable that there's plenty of room in covenants to see us through Greenstone Construction.

Anita Soni, Analyst

Okay. You mentioned some of the deferrals that you've had, and I think Greg mentioned that the sustaining capital that you are doing in 2023 is the essentials only—tailings lifts, et cetera. So, would we expect to see a catch-up in sustaining capital in 2024 and 2025? Is that fair to say?

Greg Smith, CEO

I think, I mean some of the bigger areas where we've deferred capital is Bermejal underground at Los Filos. That's a big one. And then, to a lesser extent, stripping at Mesquite and those are probably the two largest areas where we've retooled the mine plans to reduce near-term capital. And with Filos, yes, I mean, eventually our intention is to get back into the Bermejal underground. We obviously want to develop; that's a big part of the future of Los Filos. So, that is capital we will eventually spend. In the meantime, we're going to work to retool that program and increase productivity and reduce costs. So, we will be back in Bermejal underground; the exact timing is to be determined, but definitely at some point. Mesquite, same thing. I mean, we've got drills going and continuing to operate that mine will involve stripping. I don't think we're working toward a giant catch-up in 2024 that's going to be crazy or anything. We're trying to smooth that out over time. But you're always going to have that at Mesquite, stripping as Doug mentioned, to get down to the ore. But otherwise, I don't think that we've carved out anything critical that we have to spend a whole bunch of money in 2024. Always looking at capital allocation decisions and with Greenstone coming online next year, that obviously frees up some funds for additional CapEx. Personally, I want to see us go underground in Arizona, and that would be another area where we haven't budgeted in 2023 for any sort of a portal construction or decline. But based on the feasibility study as we move into Q4 this year, once the pit reaches the appropriate level in the west end, that's an area I think we'd like to start spending money on next year and even later this year. So, there will be projects, but it's not a situation where we've carved out a bunch of necessary stuff and kicked it down the road.

Anita Soni, Analyst

Sure. The Bermejal underground project was categorized as development capital, not sustaining.

Greg Smith, CEO

It was a mix of primary development. I'm saying capital generally.

Anita Soni, Analyst

Yes, capital generally. I was just wondering if there was anything sustaining that I should be thinking about that might need to get done in the next two years if you're not doing it this year. And then just in terms of Santa Luz, what kind of recovery rates are you assuming when you guided for this year? I just want to understand where you think the recoveries are going over the course of the year.

Greg Smith, CEO

So, for the budget, we backed it off to focus on getting stability. We were looking at achieving a minimum of 65% in the first half of the year, and 70% in the second half of the year. As we came through December and changed the plan, we were at 62% in January, and we're over 70% in February. So, we're, but the key is stability. A big key thing to that was ensuring our makeup water coming back in from a water storage dam was zero or less than 0.5 ppm cyanide, which is a real hindrance to activity of the resin. Our system is now working properly with all the detox, and we saw that that was really helping to establish a good activity on the resin.

Anita Soni, Analyst

Okay. And then just last question was reserves and resources, did I miss that last night? Did you guys update it this yesterday or is that coming later on?

Greg Smith, CEO

No, we did not update our global resource reserve statement yesterday. Looking forward throughout the course of the year, there won't be a single consolidated update. They'll be updated as available and as studies are complete; most of our projects are in a study state versus a steady state.

Peter Hardie, CFO

Consistent with what we've been doing over the last number of years, Anita. I think at some point in the future we do want to get to a one-time annual global update, but what we've been doing is as and when those updates come available, we report it, we integrate it into our consolidated reserve and resource summary on the website. And that's what we've been doing and probably will continue to do for another year or so until we get to the point where we've harmonized everything and do an annual update.

Anita Soni, Analyst

I was just calling from the context of a lot of people are updating their gold price assumptions and cost assumptions, so it would be good to have a sort of resettle on that. And then can you just let me know what the interest rate right now is on your floating rate debt?

Peter Hardie, CFO

Combined, it's about 7.5%.

Anita Soni, Analyst

Is that fixed and floating, or just the floating?

Peter Hardie, CFO

Sorry, that's just the floating. Pardon me.

Operator, Operator

Our next question comes from Kerry Smith of Haywood Securities. Please go ahead.

Kerry Smith, Analyst

Thanks, operator. Just to follow up on a question about the reserves and resources, would you expect that you replace depletion in your reserves and resources overall for the company on a year-over-year basis or kind of unchanged? Or do you think they're going to be down a bit or up a bit? How would you generally point us directionally?

Greg Smith, CEO

Yes, the main objective of our exploration and drilling efforts has been to replenish our reserves. This remains our top priority. Additionally, many of our assets have not received adequate capital investment over the past three to five years, so there is a significant need to enhance our resource base. Consequently, our exploration activities, particularly in Santa Luz, have been quite aggressive. There may be some delay before we move beyond just replacing reserves on an annual basis, but we are optimistic that the substantial exploration investments we have made over the last three years will yield significant resource and reserve growth in the next two to three years.

Kerry Smith, Analyst

Okay. Regarding the Castle Mountain Phase 2 permit application, since you are now fully implementing crushing agglomeration for Phase 1, do you think there is a need to reconsider the assumptions in the Phase 2 feasibility study, which only considered run of mine? Are you anticipating that at some point you might need to incorporate crushing agglomeration, or are you confident that Phase 2 will solely operate on a run of mine basis?

Doug Reddy, COO

No, Kerry, we're quite confident that we get better performance overall through the crushing agglomeration for the material that we're currently processing. But remember, we're dealing with dump material, and we're doing a lot of work to metal modeling on Castle Mountain and a lot of additional met test work for the material. So, if it were all the same material, we would be doing crush and agglomerate for Phase 2, but that's why we're doing additional network and geo metal modeling because we want to ensure that as we look at new material, that we're treating it the right way. So, it is part of the work we're doing in the background. We don't anticipate it will change anything regarding our footprint overall, but we're looking at all opportunities to optimize and also prove out everything that we've done in previous test work and concepts.

Peter Hardie, CFO

And Kerry recall that in that feasibility study, you do have a portion of the material reporting to a small mill in the highest-grade material. So, we are looking at potential scenarios where you would ditch that mill not being required to triage the different ore grades and just put it through one circuit. And so, that is something that we are kind of looking at and doing some trade-off studies on. If there's an opportunity to simplify the overall operation and flow sheet, reduce some capital, that's something that's pretty interesting to us. So, there is some work being done on that. Nothing confirmed, and that'll progress over the course of the year. I can confirm that our permit application does contemplate pretty much any sort of modifications we want to make to that flow sheet. We would not have to go back and do any re-permitting compared to what we've already submitted.

Kerry Smith, Analyst

Okay, so that's all covered off in that application then?

Peter Hardie, CFO

Yes.

Kerry Smith, Analyst

Got it. Okay. And the other question I had was at Mesquite, you reduced the strip ratio in 2023 to lower the costs to help with the cash flow in the short term. Does that impact 2024 mine plans? What sort of in-house mine plan do you currently have for the life of mine for Mesquite like do you guys model three years or two years? How do you model it internally?

Greg Smith, CEO

We continuously remodel it. The mine plan that we have in the budget, it's already—there's a— we're already working on revision to that. What can I say? It's building in the latest information as it comes in from exploration and as we get permitting. So, I know it will change from the budget mine plan.

Peter Hardie, CFO

It's fair to say we're working on a mine plan for next year that would bring production back up to previous levels. But there's work to be done on that, Kerry. We had to adjust the mine plan this year. Just in the United States especially, we saw really significant increases in diesel, cyanide, explosives—all the major input costs at Mesquite, right? That has an effect on production there and cost of production there. And so, this year kind of takes that into account and internally, we're working on what can 2024 look like, given the current cost structure, and this year's mine plan, what will that do for next year? So, we don't have guidance on that yet. That'll progress over the course of the year. And later this year, we should have some more information.

Kerry Smith, Analyst

Okay. And would it be fair to say the operating team at the site at Mesquite has a three-year mine plan that they're working against? Is it one year then? Is it like just 2022?

Peter Hardie, CFO

I mean, if you didn't have any permitting timeline constraints, it's very easy to model out a multi-year mine plan, and we'll also throw five years plus out there. But there are timing differences between, in terms of we pad expansion eventually proceeding to the west, right? There's a highway there that we'd want to move, or sorry, to the east, and other areas of the site that would need some permitting in order to continue on a plan that would utilize all of the resources we currently have. A constraint is not really the deposit itself, it's actually the permitting timelines around some of that expansion opportunity at Mesquite. So, when you model that out, you can kind of play, and the goal for us is continuing with the permitting that we need to do and want to do, while filling in those gaps as best as we can. It’s a continuous process at Mesquite and has been since we bought it. Mesquite's been a great mine for us. Since we've acquired it in 2018, it's made us money every single quarter, I think, except one. We've recovered our acquisition costs well above our acquisition costs. I mean, it's been a great mine for us and continues to be. So, it's important for us to see it continue, and that's been our process all along, just with a mature asset like Mesquite that requires additional permitting.

Kerry Smith, Analyst

Okay. Well, that's helpful. And the kind of the same question at Los Filos with the deferral of the Bermejal shutdown of the underground. Does that impact the long-term plan there in any significant fashion?

Greg Smith, CEO

Well, it doesn't actually. Essentially because Bermejal would've been a pure net investment for this year, it alleviates some of the cash drain that Los Filos would have this year. Deferring it gives a couple of opportunities. One, we need to change our productivity there to be able to make it so we can get to the 1,500 to 2,000 tons per day that we need. It's just prolonging the pain by doing the development at such a low productivity rate. The cost per ton, we're just coming in too high as we were mining in the initial stokes. So, it also gives an opportunity for higher-grade material to be able to go to a CIL. We know that by sending it to heap leach, it means that certain material you have to leave behind because it's not suitable for going to heap leach, but you can process it in the CIL. So that approach for us just means that we'll push it off. In the meantime, we will look to restructure how we'll deal with Bermejal underground.

Peter Hardie, CFO

And the near-term effect is you have a bit of lower production because we're not mining those ounces, but we actually save on free cash flow at Filos because of the deferral capital. Longer term, as I said, we're going to go back into Bermejal underground eventually. The long-term plans for the mine of course include Bermejal underground. And as Doug said, if that material is going through a CIL plant, you're obviously getting higher recovery than you would just on the heap leach itself. There is an economic tradeoff study to deferring it where you're going to get those higher recoveries once you've put that CIL in place.

Kerry Smith, Analyst

And this last question for me then quickly, this explosive strike that your supplier had at Filos, I assume that's behind you now, and I just wondered if you could maybe give a little bit of an update on the pulse of the three communities and how all of that has been going?

Greg Smith, CEO

Yeah, that explosive strike was long past; I mean, it affected the earlier part of Q4. So that's done. The pulse in the communities. Well, we're doubling down on our efforts to be in dialogue with the communities. Bermejal underground will be another point where we'll be talking to all of the communities. I mean, we've tried to make it clear that it's a partnership. It's a dialogue that we need to have and we need to work collectively on our relationship and be able to see what can be a bright future at Los Filos, but it involves everybody working together.

Peter Hardie, CFO

We've increased our and strengthened, I would say our community relations team at Los Filos, including in the last few months. The informal feedback we're getting is that communication has improved quite a bit coming from the communities. It's been a good five or six months so far. We're putting a lot of effort into that relationship, that communication, and as Doug said, making sure that everyone acknowledges and recognizes that we're partners in this project. So, it's been good so far, Kerry, but we've had those challenges in the past and I can't necessarily say they won't manifest in the future, but we're certainly working hard with the communities to mitigate that.

Kerry Smith, Analyst

Right, okay. And I'm assuming Greg, that the communities were told a while ago that the Bermejal underground was going to be shut down, so there were some jobs that were going to disappear. So that's not new news today for them, right?

Greg Smith, CEO

It's officially news today, I suppose, but there have been more informal conversations around the cost profile of Filos and that it can't persist indefinitely under this basis, and that some changes are going to need to be made.

Kerry Smith, Analyst

Okay. Thanks, guys. Appreciate it, great quarter.

Operator, Operator

Our next question comes from John Sclodnick of Desjardins. Please go ahead.

John Sclodnick, Analyst

Thanks, guys. Most of my questions have been answered, so just a couple from me. Impressive gold caller contracts, and just wondering what changed your stance on Gold hedging, and if there was maybe a push from the lenders and finally if they were good with that?

Peter Hardie, CFO

It's Peter. Good question, John. At the end of October, with gold below 1700, it had, as we all saw, a very rapid rise right through the end of January. We have another capital-intensive year this year, particularly to support construction at Greenstone. Given the way gold continued to rise through January, as a management team, we wanted to take the opportunity to secure some cash flow. That represented a change in our thinking. With a solid floor and a notably high ceiling, this was a function of the curve due to three months of steady increases in gold. That large spread allowed us to enjoy a higher gold price through the end of Q1 next year with those callers, so we thought it was a prudent decision. We have a fiduciary responsibility to take such actions. Regarding lenders and hedging, they were generally supportive, as they prefer to see hedges in place during capital-intensive periods.

Greg Smith, CEO

I think, John, if you look back over the last four months or so, it's just one more action we've taken of many, maybe incrementally smaller actions, but collectively designed to ensure that we've got enough resiliency in our cash flow profile, our balance sheet to ensure we get across the line on Greenstone, and get to commercial production next year. So, we've done a number of different things. That's one more part of it.

Unidentified Analyst, Analyst

Yeah, no, makes sense. Great levels to get in at. That was impressive and nice risk mitigation there. Last one for me, just at Castle now I'm just curious how long kind of the status of the Phase 1 operation could continue until additional permits are required.

Peter Hardie, CFO

I mean, probably 10 years plus; once you get through the dump material, you can get into—it's a pretty small operation considering the size of the overall resource there. So, we've got plenty of headroom. I think in the past, we've communicated around nine years or so, but we have no intention of writing it out that long. We're pushing and trying to target having that permit sometime in 2024 so that we can get busy on expanding that line.

Operator, Operator

Our last question is from Mike Parkin of National Bank. Please go ahead.

Mike Parkin, Analyst

Hi, guys. That actually brings up a bit of a good question: how would you rank order your project pipeline in terms of assuming this kind of gold price environment? Where would you look to deploy capital after Greenstone first? Is it Castle Mountain Phase 2 or something else?

Greg Smith, CEO

Yeah, I mean, it does come down to capital allocation decisions. In the context of the gold price and cost environment in the future, we've made those decisions. It’s fair to say you look at our portfolio, you've got some smaller assets and then we've got some bigger, longer-life chunkier assets, which would include Greenstone, obviously, Castle Mountain, Phase 2, Arizona, especially with the addition of the underground and of course Los Filos. As mentioned earlier, we're very keen to get underground at Arizona and start to build out that mine. That's something I think we're actively working on being in a position to start after Greenstone is up and running. Castle Mountain absolutely is one we want to expand as soon as we get the permit. The only one that is probably ranked lower right now is Filos. It's a big nut to crack; it's had a higher risk profile. We have to do more work there as we continue to say before we're ready to start investing heavily at Filos. So, Greenstone's happening, and Castle Mountain I think will happen as soon as we get the permit. Arizona, subject to results of the feasibility study and where we stand in terms of available capital by the end of this year is something I think we'd like to get into as quick as we can.

Mike Parkin, Analyst

And maybe just one last question back to Los Filos with the underground suspension. Does that impact any use of the three communities far more than the others?

Greg Smith, CEO

Yeah, it would affect Carillo more than the other two communities.

Operator, Operator

Thank you, everybody. We're actually out of time and didn't have a chance to get to any of the online questions, unfortunately, so we will get back to you later today by email. My apologies for that. Greg, do you have any closing remarks?

Greg Smith, CEO

No. I think just thanks again everyone for attending the call, and for the well-considered questions. Again, you can always reach out to any of us by email or by phone if you have additional questions or comments to make.

Rhylin Bailie, Vice President, Investor Relations

Thank you very much, everybody, for joining us today. Operator, you can now close the call.

Operator, Operator

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