Earnings Call Transcript - NGD Q1 2023

Operator, Operator

Good morning. My name is Michelle, and I will be your conference operator today. Welcome to the New Gold First Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. Please be advised that today's conference call and webcast is being recorded. After the speaker's remarks, there will be a question-and-answer session. I would now like to hand the conference over to Ankit Shah, Executive Vice President, Strategy and Business Development. Please go ahead.

Ankit Shah, Executive Vice President, Strategy and Business Development

Thank you, Michelle. And good morning, everyone. We appreciate you joining us today for New Gold's First Quarter 2023 Earnings Conference Call and Webcast. On the line today we have Patrick Godin, President and CEO; and Rob Chausse, our CFO. Should you wish to follow along with the webcast, please sign from our homepage at newgold.com. Before the team begins the presentation, I would like to direct your attention to our cautionary language related to forward-looking statements found on slides two and three of the presentation. Today's commentary includes forward-looking statements relating to New Gold. In this respect, we refer you to our detailed cautionary note regarding forward-looking statements in the presentation. You are cautioned that actual results and future events could differ materially from those expressed or implied in forward-looking statements. Slide two and three provide additional information and should be reviewed. We also refer you to the section titled Risk Factors in New Gold's latest AIF, MD&A and other filings available on SEDAR, which set out certain material factors that could cause actual results to differ. In addition, at the conclusion of the presentation, there are a number of end notes that provide important information and should be reviewed in conjunction with the material presented. I will now turn the call over to Pat.

Patrick Godin, President and CEO

Thanks, Ankit, and good morning everyone. Before I turn the call over to Rob to discuss the quarter, I want to provide some brief opening remarks. It has been almost one year since I joined New Gold. And at that time, I saw a lot of potential for our operation and for our company. We worked hard through 2022 and this momentum has carried into 2023. I'm proud of our team's performance in the first quarter of this year. As I noted in our April production release, the first quarter of 2023 was our strongest start in four years. I cannot say enough how important safety is to our success. This was a core aspect of the impressive first quarter operating results. Q1 saw no lost time injuries at our operations. New Afton reached a big milestone and exceeded one million hours without lost time. Rainy River continued to operate safely and reached 1.6 million hours without lost time. I strongly believe safety and production are correlated, and our first quarter performance proved this. As a result, we are well positioned to meet our production and cost guidance set out earlier in the year. During the quarter, we also continued to focus on the long-term strategy of New Gold. We completed multiple steps to strengthen our balance sheet, which Rob will talk to shortly. We continue to advance underground future production at both Rainy River and New Afton. Lastly, I would like to talk about our people. Specifically, the appointment of Johan as new CEO, the promotion of Ankit to Executive Vice President; and Keith to VP Finance; as well as Jean-François to VP Geology; and Luke to VP Technical Services. These executives will all be great assets to our team, as we continue to advance growth opportunities and maintain safe production at our operations. I would also like to acknowledge Rob's retirement at the end of this year. Rob has been crucial in the turnaround of New Gold over the past five years. Over my career, I have worked alongside Rob several times, and he has been an excellent business partner for me. We are grateful he is going to be staying until the end of this year to ensure a seamless transition and support Keith, positioning New Gold for success in the year to come. With that, I will turn the call to you, Rob.

Rob Chausse, CFO

Thanks, Pat. And I'll start with slide 7, which provides our operational highlights. The production details on that slide are consistent with our production press release from April 10th. During Q1, the company produced approximately 105,000 gold equivalent ounces. The amount consisted of 10.3 million pounds of copper and 66,200 gold ounces from Rainy River and 16,300 gold ounces from New Afton, totaling approximately 82,500 gold ounces, almost 20% higher equivalent gold production compared to the prior year quarter and is primarily due to higher gold and copper grades and recoveries, but partially offset by lower tonnes processed at Rainy River. Our operating expense per equivalent ounce was slightly higher than the prior year quarter, primarily due to production from the underground intrepid zone and timing of mill maintenance performed in the quarter at Rainy River, as well as ore purchase costs in association with our ore purchase agreements at New Afton. Our consolidated all-in sustaining costs for the quarter were $14.86 per equivalent ounce, lower than the prior year quarter primarily due to lower sustaining capital spend and higher sales. Turning to our financial results on slide 8. Our first quarter revenue was approximately $201 million, driven by sales of 87,200 gold ounces at an average realized price of $18.90 per ounce and sales of 9.5 million pounds of copper at $4.10 per pound. Our Q1 revenue was higher than the prior year quarter, primarily due to higher gold and copper sales volumes partially offset by lower prices. The first quarter revenue split saw gold contribute 81% to our quarterly revenue and copper 18%. Our operating cash flow before working capital adjustments was $75.7 million or $0.11 per share for the quarter higher than the prior year period due to higher revenue. The company recorded a net loss of $31.8 million or $0.05 per share during Q1 compared to a loss of $0.01 per share in Q1 of 2022. The decrease is primarily due to an unrealized loss on the revaluation of the gold stream obligation at New Afton and related to the free cash flow interest obligation. After adjusting for certain charges, our net earnings were $18.4 million or $0.03 per share, compared to net earnings of $0.02 per share in the first quarter of 2022, with earnings increases primarily due to higher revenues offset by higher operating expenses. Our Q1 adjusted earnings include unrealized adjustments on the Rainy River stream mark-to-market and the free cash flow royalty at New Afton. Our MD&A has details on all of those and other non-GAAP measures discussed. Our total CapEx for the quarter was $63.1 million. $26.3 million was spent on sustaining capital, $36.8 million on growth capital. The sustaining spend was primarily related to planned tailings work at both sites, capital stripping at Rainy River and stabilization activities at New Afton. Our growth capital was focused specifically at the C-Zone at New Afton and the underground at Rainy River. Slide 9 provides details of our capital structure. Our cash at the end of the quarter is $197 million. And liquidity was $570 million, in line with the end of 2022, with our investments at site largely offset by the sale of our previously held Artemis Gold shares, which contributed approximately CAD31.5 million. Subsequent to the quarter, we also amended our credit facility, increasing the maturity date by a year to December 26. We continue to execute short-term hedges on CAD and fuel and are hedged on both commodities at 75% for Q2 and approximately 30% for Q3. With that, I'll turn the call back to Pat.

Patrick Godin, President and CEO

Thank you Rob. Slide 11 provides additional details on the first quarter at Rainy River. During the quarter, the mine and mill performed well and delivered solid production increases over the first quarter of last year. While the mill throughput was below our plans, I'm confident that we can reach the target rate for the year due to the current investment on plan amendments for the processing plant. The average gold rate at Rainy River was 1.12 grams per tonne, well above the first quarter from last year, and more ore was processed. I'm really excited to say that mining of the overburden is now complete, which will lead to a significant improvement in mining efficiencies. I can also share that mining in the North Lobe has finished, providing further confidence in open pit grade reconciliation through the remainder of the open pit mine life. Completing the North Lobe has created a cost-saving and improvement opportunity as this part of the open pit will be utilized to pile waste within the pit going forward. Over the last year, the operation has made upgrades in preparation for water management infrastructures. We have boosted the pumping system, now hold the pipeline, build open pit diversion channels and increase the water treatment capacity. I can confidently say Rainy River is prepared to manage any excess water. During the quarter, the open pit pushback was delayed leading to lower capital spend and budget. I'm confident that the team will catch up over the year. Turning to the underground, Intrepid development advanced 388 meters in Q1. Production in the quarter included over 69,000 tonnes of ore from the Enterprise underground zone at a grade of 3.52 grams per tonne gold equivalent. Most importantly, the underground tonnes and grades continue to reconcile well. Going forward, I remain confident that we are well positioned to meet our annual production and cost guidance at Rainy River. As noted in our guidance, production is expected to get stronger in the second half of the year as plan amendment activities are completed in the first half of the year. The upgrade is expected to normalize in Q2; I want to reiterate our target of 45-55 for the production split between the first and second half of the year. Slide 12 provides further details of New Afton's first quarter results. The underground mine averaged over 7,700 tonnes per day of ore mined in the quarter, an increase over the prior year period as B3 reached steady state mining rate post-completion of constraints activities in 2022. The mill averaged 8,100 tonnes per day, relatively in line with daily mining rates incorporating B3 ore mined as well as ore purchased in relation to our purchase agreement. In short, B3 delivered to plan. C-zone development continued to advance with 1,172 meters in the quarter. Development fell behind schedule during Q1, due to ventilation constraints related to ground conditions and the air intake vent rates. However, I'm confident in our ability to achieve the critical path of mining first production ore during the fourth quarter and deliver commercial production in the second half of 2024. Going forward, New Afton remains well positioned to meet its annual production and cost guidance set out at the start of the year. Before I close out the presentation today, I want to highlight what I view to be the key priorities for the company. First, continue to stabilize our operations. Second, continue to advance our organic growth opportunities. And third, we have safety as the highest priority and deliver on our guidance set out earlier in the year. I'm proud of the commitment of my colleagues who have done an excellent job to start the year. This will continue to drive our success. This completes our presentation. I will now turn it back to the operator for the Q&A portion of the call. Operator?

Operator, Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. The first question comes from Michael Siperco at RBC Capital Markets. Please go ahead.

Michael Siperco, Analyst

Thanks. It's Mike Siperco, everyone. Just on the quarter, I mean, it was obviously a great result, especially from New Afton. You talked about the maintenance in Q2. But could you talk a bit about how we should look at existing operations going forward without looking at the C-zone and the ramp-up of underground mining at Rainy? Should we be rebaselining our forecast at least over the course of 2023 on the basis of Q1?

Patrick Godin, President and CEO

So thank you for your question, Michael. The way we should look at this is actually we are doing significant maintenance from the crusher at Rainy River. We plan for the worst and we hope for the best. So that's what we are doing. Actually, the crusher is under repair, and we are changing main components after six years of operation. So I think we really plan to respect our guidance. So it's why we indicate 45, 55. It doesn't mean that we will do it because we're actually working really hard. We have put in place mitigation measures due to the crusher shutdown. We pre-crush tonnes at site and we continue to operate the mill. So the efficiency is less, but it is why we guide you to 45-55, which we should consider that is the worst position that we can have.

Michael Siperco, Analyst

So should we be thinking coming out of 2022 and what was a pretty challenging year, should we be thinking of 2023 as a period of stabilization at the operations while you're continuing to develop and invest in the new growth from 2024 and beyond, or is it more a case where you are operating at full capacity if that makes sense?

Patrick Godin, President and CEO

I can say to you that first I will start with New Afton. B3, the block cave is performing really well. So we are at the beginning of the block cave. We're probably 60 meters of elevation in the block. So it's performing well. It's a steady state. So I think it’s – for this I'm not concerned about the stability of the extraction at New Afton. For Rainy River, it's the same. I explained to you that we – one of the reasons why in Q1 we mined a bit less is because it was less efficient to mine in the ortho because it was a narrow shallow pit. So the phases are small and it's difficult to interact equipment in one single phase. Also, we are really happy to say to all of you that the overburden is over, and it was a really difficult material to handle. So we maximized the winter opportunity to extract this. So it's behind us. We have a mine life of 3.5 years, 2023, 2024, 2025, and 2026 in the first half. We will mine in rock. The mine is in good shape. The ore is – the pumping system is robust and all mitigations are in place. We have deployed a lot of investment, time, and effort, and capital to beef up preventive and predictive maintenance underground. I'm strongly confident about this. That is why I said to you that our priority is to stabilize. Going forward, we have reduced a lot of risk on the execution of the production and the guidance. I’m not seeing any huge risk for the operation going forward other than something out of my control.

Michael Siperco, Analyst

Okay. Perfect. Thank you so much.

Operator, Operator

Thank you. The next question comes from Andrew Desal, National Bank Financial. Please go ahead.

Unidentified Analyst, Analyst

Hi, good morning. I just have a couple of questions. On Rainy River, I'm just wondering if you can give some update on how that's proving versus the block model and what your conviction is in that going forward?

Patrick Godin, President and CEO

You talked about underground?

Unidentified Analyst, Analyst

Yes, at underground, sorry.

Patrick Godin, President and CEO

Yes, sorry. Actually, we have a team that is when we have a new – as you probably saw, we increased our capacity to do stuff and to look for opportunities. We have Johan, Luc, and Jean-Francois who recently joined us that will support us in this. We're still working on the block model, so to optimize the ore shapes. We did a lot of work in terms of solutions for the extraction for under the main zone. So we're working actively on that. The optimization underground, the optimization of the inflation, and the optimization of the equipment underground; up to now in Q1, we reconciled really well at Intrepid. I think we will be well positioned to finalize our transition for Q3 this year.

Unidentified Analyst, Analyst

Great. Thank you. And then just one follow-up just on the development of the C-Zone, just wondering if you can provide a little bit more color on the delay that you mentioned this quarter and if you see any impacts going forward to the timelines that you've previously provided.

Patrick Godin, President and CEO

Good question. Really good question. To summarize, actually just first, we developed this. C-Zone is split into two. We have the infrastructures underground and we have the development underground. The development we had what we call a critical path, and what are the supporting other development to support development for other purposes. Actually, we respect the critical path. We will create the undercut of the block cave and develop the draw bells and also do the development for the concern of the crusher. So we actually are a bit late in Q1, mainly because the main fresh air raise for C-Zone is 450-meter long and it's a raise more. The bottom part has some zones where we had to spend more time to short-read and to rehabilitate the part. Actually, it's all stabilized. It's part of mining. We are full steam ahead. If you look, we recently increased a lot our development meters. We did 450 meters in March. We are now at 500 meters per month. We reduced the temperature underground from seven to ten degrees Celsius. That is mainly due because we have more exchanges. We are going really well for the development of the exhale phase 2. We are expecting to receive our new electrical equipment in the following days. The first zone is still expected for the second half of 2023, mainly in Q4. We are still expecting to reach commercial production or what we call the hydraulics for the second half of 2024. Our production profile model is still respected.

Unidentified Analyst, Analyst

Yeah. Thanks for the update. That's it for me.

Operator, Operator

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

Fahad Tariq, Analyst

Hi. Good morning. Thanks for taking my question. On Rainy River, you highlighted a few different mining efficiencies and underground optimization. Just at a high level, how do you think about aspirationally what the cost profile could look like at this mine? For example, is it possible that the all-in sustaining cost gets closer to let's say the $1,200 an ounce range? Just trying to get a sense of like a best case scenario where costs could end up longer term. Thanks.

Patrick Godin, President and CEO

I think for this, we ask you to give me more time to look at my numbers, because we're still optimizing this. The fact that we can now mine the North Lobe is providing us a huge opportunity to shorten the overall expense of the pit. So that's going to be really significant for us in terms of efficiency and fuel consumption and operating costs. For underground itself, I think the customer is still in the tech report or still value, but we are working again to reduce development as much as we can, reduce the CapEx, and maximize the fact that we have the open pit that we can tie in to reduce development. So, it's what we are working on. As I said previously, I will be more in position to answer that in Q3.

Fahad Tariq, Analyst

Great. Thank you.

Operator, Operator

Thank you. The next question comes from Anita Soni of CIBC World Markets. Please go ahead.

Anita Soni, Analyst

Hi. Good morning, Patrick and team. I have a number of questions. So, hopefully, you'll bear with me. I just wanted to clarify first at Rainy River on the grade. You said grade is expected to normalize in Q2. Can you talk about what happened in Q1? Like was it positive grade reconciliation in the pit? I know you're pulling tonnes from Intrepid now, but you haven't given us an idea of how much tonnes are coming from underground or from the open pit. If you could give us a breakout of both of those, the tonnes and the grades, and then also what was different about what happened in Q1 would be helpful.

Patrick Godin, President and CEO

The main reason for the normalization is that in the North Lobe, the years prior to the reconciliation were more complex. We applied a mine core factor and used RC drilling to determine the grade, resulting in more volatility in the North Lobe compared to other areas of the ore body. This is now behind us as it has been mined out. That’s why we believe our comments moving forward will be clearer. The contribution will be easier for us to assess. For the underground mine, the entire grade is 3.5 grams per tonne, and the reconciliation is proceeding as expected. We mined primarily in relation to the tonnes processed, which is 60,000 to 70,000 tonnes against two million tonnes processed from the pit. Essentially, that is what is influencing the difference.

Anita Soni, Analyst

Okay. And when you say the grade is expected to normalize, what you're talking about is that you've mined out the North Lobe and you're going back into the, I guess, the main zone. And that grade should be more along the lines of 0.9, I assume 0.9 0.95 or so?

Patrick Godin, President and CEO

Yes, something like that. It's also easier for us to predict the grade now, and we have improved reconciliation.

Anita Soni, Analyst

Okay. When you mentioned the 55, 45, you were referring to the grade, but also indicated that maintenance is still ongoing in the second quarter. That should be finished by the end of the second quarter, correct?

Patrick Godin, President and CEO

Yes. So the shutdown is actually ongoing, and it's going to end at the beginning of May.

Anita Soni, Analyst

Beginning of May. Okay. All right. My next question actually relates to the financials. I noticed that you said New Afton costs there went up as it relates to ore purchase agreements. Could you clarify what those ore purchase agreements are referring to? I apologize. I don't think, I've seen that before, but I'm not sure if you had previously mentioned that. If you'd explain what ore purchase agreements are, that would be helpful.

Patrick Godin, President and CEO

Okay. As you know, the New Afton mill has a throughput capacity of 14,500 tonnes per day and can increase to 16,000 tonnes per day in peak depending on the work index. Actually, we are using just 60% of this capacity. We have neighbors around us who are smaller operations. For us, it's an opportunity to look at. This quarter, the ore purchase agreement generated for us 2,500 ounces of production and represented mostly 7% of New Afton in terms of revenues. It's mainly because we have smaller operators beside us who do not have milling capacity on ore mill in place, and so it's just an opportunity for us to generate more cash flow. As we are looking at our purchase agreements from an ASIC point of view, it's increasing our costs.

Anita Soni, Analyst

Okay. So could you explain how that ore purchasing agreement works in terms of how it would impact your financials? I mean, you mentioned that it added to the cost, but I'm just trying to understand like do you purchase the ore at the spot price less a discount? And then like what's the cost associated with those ounces? How do we figure that out?

Rob Chausse, CFO

We acquired the ore at a discount. As we process it, we recognize those ounces and generate cash flow. It's straightforward and not complicated.

Anita Soni, Analyst

Okay. And then just a follow-up sorry on one comment you guys mentioned in your opening remarks, Rob, you mentioned that you said we are 75% hedged and 35% hedged on both commodities. I think you were referencing fuel and CAD, but I just wanted to clarify you meant fuel and CAD and not gold and copper.

Rob Chausse, CFO

Yes. No, it's the input costs: fuel and our exchange rate.

Anita Soni, Analyst

Okay, I just wanted to clarify that you didn’t mean commodities. I have another question, probably the last one. Looking at Note 11 in the financials, I want to understand the two different types of fair value charges that are being reported. One of them appears in the comprehensive income of the owners, while the other is reflected in the income statement and it seems a bit higher than what we’ve seen previously. I understand that the charge in the income statement is related to the Royal Gold and the teachers' pension plan share agreement. However, I’m confused about the one affecting the owners' side, particularly why it's associated with our own credit risk. I would like to know if there are any implications from the current higher rates mentioned in that note.

Rob Chausse, CFO

Yes. The big change in the gold stream obligation and the New Afton free cash flow obligation, as you noted, I think in your note, there is some impact on higher metal prices which increases the liability for both of those. But the bigger change is related to our bond yields and the change during the quarter of those yields, which impacts the discount rate that we use. There was a change of approximately 28% in that discount rate downward, which increases the liability. There is some impact from the risk-free rate, but not as much as what we've seen on that New Gold credit spread, if you will. It's part of the option of the model that we have to use to calculate these liabilities.

Anita Soni, Analyst

Okay. Yes. What I wasn't understanding is that it would have implied the discount rate was going down while rates have generally gone up.

Rob Chausse, CFO

It has nothing to do with the open market rates or the risk-free rates.

Anita Soni, Analyst

Okay. Thank you very much. That’s it for my questions.

Operator, Operator

Thank you. Next question comes from Farooq Hamed from Raymond James. Please go ahead.

Farooq Hamed, Analyst

Hi there. Thanks. Good morning. Most of my questions have been asked and answered. But maybe just following up on Rainy River and the performance in Q1 and what you're kind of guiding for Q2 here. Q1 was strong. I think it represents something like 27% or so of your full-year guidance, and yet you're calling for a 45-55 split in the second half. My focus is actually on the costs. Your Q1 costs, despite the good production, were above your guided rate. I’m assuming that if you have this pullback in grade and lower production in Q2, I would imagine that costs are probably moving higher in Q2 relative to Q1. In order for you to hit your cost guidance at Rainy River for the year, that would imply something like operating expense in the $700 to $800 per ounce range in the second half of the year. Is this consistent with your expectations?

Patrick Godin, President and CEO

No. First, in terms of the second quarter, I said to you that we plan for the worst and we wish for the best. So that's one thing. We mitigate the risk there, going forward and our costs too. We plan in the budget to mine mostly 131,000 tonnes pit per day. We averaged 118,000 in Q1, but actually we are hitting 170,000. We have a significant part of our mining costs with the same people, same equipment. So, our costs will decrease. Our capital costs for the pushback will decrease as we are much more efficient in our business. In terms of ASIC, I'm not expecting that. We are slightly higher in terms of milling costs because of the contractor costs and for the shutdown. But when it is behind us in the second half of the year, these costs will go back to normal. We are totally in control of our G&A. So, we are building, we are pretty lean as an organization. Obviously, in terms of ASIC, it's not proportional going forward now.

Farooq Hamed, Analyst

Okay. Thanks. That's helpful. I guess I was focused a little more on OpEx because I figured that there was some CapEx accounting moving over into the ASIC category there, but just more on the OpEx because that was already running ahead of your guidance for the year despite the strong production in the first quarter. So, maybe I can just follow up on that. But unless I misheard you, I'm surprised to hear that you're expecting costs to come down. Were you saying you're expecting costs to come down in the second quarter from Q1 levels, or is it really just the second half thing?

Patrick Godin, President and CEO

It's always about the broader perspective, but I suggest looking beyond just the first quarter for the upcoming quarter. Our operations are similar for open pit and underground mines. Focusing solely on the second quarter would be a mistake. We need to consider the costs moving forward, and I believe we are anticipating a strong second half in terms of customer production ounces in 2023.

Farooq Hamed, Analyst

Okay. Thanks for that. Maybe I'll just switch gears a bit. A little bit on strategy. In your wrap-up slide, you talked about your second priority being advancing your organic growth opportunities. Patrick, can you talk to us a little bit about what those organic growth opportunities are? Is that the C-zone and underground at Rainy River, or is there something else to be considered in that organic growth bucket?

Patrick Godin, President and CEO

The C-zone represents a significant opportunity for us, as it aligns with our mission. We have a clear vision regarding future copper prices, and our goal is to achieve maximum efficiency beyond 2024 when we anticipate a rise in copper prices. The successful execution of the C-zone, including its development and construction, is crucial for us to take advantage of the potential copper surge expected at the end of 2024. Regarding Rainy River, we see a chance to enhance efficiencies, optimize geological resources, and explore how we can further address underground resources. We view this as a valuable opportunity to increase our net asset value.

Farooq Hamed, Analyst

Thanks. I have one last question. At the start of the call, you mentioned strengthening your balance sheet. I understand you sold your shares during the quarter and extended your credit facility timeline. I'm curious about the reasons behind the emphasis on enhancing the balance sheet, particularly starting in the first quarter of this year.

Rob Chausse, CFO

Yes, I think it's just driven by good housekeeping and optionality and just keeping ourselves in good shape and ahead of the game. Nothing specific.

Farooq Hamed, Analyst

Okay, all right. Perfect. Thanks.

Operator, Operator

Thank you. The next question comes from Eric Winmill of Deutsche Bank. Please go ahead.

Eric Winmill, Analyst

Hi, it's actually Scotiabank, but thank you very much. Yes, thanks for taking my question. I think a lot of what I was going to ask has already been addressed. But maybe just quickly on Rainy and the underground, any additional details there in terms of maybe quantum and tonnes or grade or what you're seeing there in Q1?

Patrick Godin, President and CEO

Are you talking about the past production, or are you looking forward?

Eric Winmill, Analyst

Well, I guess both actually any additional details you could provide?

Patrick Godin, President and CEO

We have changed the mining method, and I believe we are operating efficiently now. We are reconciling the grade and the tonnes. It's always a challenge at the beginning of underground operations, but it's giving us confidence. Looking ahead, as I mentioned, we will be in a better position to provide updates in Q2 and at the end of the year and in Q3 regarding the optimization of the underground mine. It will be subjective and not realistic at this stage, because when we do present numbers and efficiency from the underground, we will support it, and I cannot discuss this further.

Eric Winmill, Analyst

Okay. Great. Thank you. And then maybe one more quick one on New Afton, and in terms of additional ore purchased from third parties, should we assume that will be the same throughout the balance of the year or any sort of guidance there?

Patrick Godin, President and CEO

Yes, you can assume that, yes. We're looking at this as an opportunity. I think we have a strong team. The metallurgists at New Afton have a lot of scale experience, credibility and capacity. We have an excellent mill, and the retirement factor is excellent. We have a lot of maturity, and we want to maximize the value of our infrastructure and people with that.

Eric Winmill, Analyst

Yes. Great. Okay. Thank you very much. Really appreciate it.

Operator, Operator

Thank you. Our last question comes from Mike Parkin of National Bank. Please go ahead.

Mike Parkin, Analyst

Hey, guys. Thanks for taking my questions. Just a follow-up there. The regional ore purchases from third parties, was that factored into the original guidance?

Patrick Godin, President and CEO

No, it was not.

Mike Parkin, Analyst

Okay. Regarding the drilling extensions at the Rainy River underground, when can we expect you to start? I understand you were planning to resume drilling from underground stations rather than more expensive surface locations. Is that still the case, and when do you think you'll be ready to begin?

Patrick Godin, President and CEO

We did definition drilling as business as usual this year. For the exploration, it will be difficult for us to drill from the pit because we have new activities, and we cannot be in conflict, and it can be costly. We are looking at this in our transition to developing a platform to drill in advance. It's probably something that will be ready to go in 2024.

Mike Parkin, Analyst

Okay. Regarding your commercial production rates at New Afton, what percentage of full capacity are you using as a reference? Is it based on a capacity of 14,500 tonnes per day or something different? What is your basis for that?

Patrick Godin, President and CEO

It's a bit. Usually, the definition of commercial production is when you achieve 70% of your mill rate during 30 consecutive days. In the block caving, it's a bit different. It starts to cave by itself. When you reach where it caves, if you have the cave that is already initiated. In our case, it's particular because we're only two mining companies doing block caving in Canada. The way that it’s established, the trigger to be in commercial production is when we reach the regions where it caves by itself. It can vary. It can change. It can be 22 or it can be just 10. For us, it's the point where we call it into any previous commercial production. We will start to extract C-zone. We cannot extract at 14,000 tonnes per day C-zone, but we have B3 operating at the same time. Once the C-zone starts overlapping B3, we will have a progression up to the moment that we reach 14,500 tonnes per day. The C-zone will be at maturity, if I'm right, in 2025.

Mike Parkin, Analyst

Could you give us an idea of what percentage of your operating costs at New Afton are fixed compared to variable, especially considering the significant increase in tonnage expected? This might not mean a consistent cost per tonne compared to today. The fixed costs could decrease significantly as they are distributed over a larger volume. Is it too early to ask this question?

Rob Chausse, CFO

It is a bit early, but I could start to give you a range of between 70% to 80% fixed. It's a high fixed component. As you know, but it will be in that 70% range. I haven't done the math recently, but it should be in that spot.

Mike Parkin, Analyst

That's good enough. And then has there been any chat with Ontario Teachers in terms of what their intention is with the Q2 2024 decision to either take a direct interest in New Afton or maintain their interest in the free cash flow?

Ankit Shah, Executive Vice President, Strategy and Business Development

Hey, Mike, it's Ankit here. We have a great relationship with Teachers that buy back provisions are a year out. We maintain open dialogue, but there haven’t been any specific discussions around the buyback. That's a year away from now.

Mike Parkin, Analyst

Okay. All right. That's it for me. And Rob, congrats on your retirement. I hope you get it on a sailboat or something.

Rob Chausse, CFO

Thanks, Mike.

Michael Siperco, Analyst

Thank you.

Operator, Operator

Thank you. There are no further questions. I will turn the call back to Ankit Shah for closing remarks.

Ankit Shah, Executive Vice President, Strategy and Business Development

Thanks, Michelle. And again, thanks to everybody who joined the call today and asked those great questions. As always, should you have any additional questions please feel free to reach out to us by phone or e-mail. Have a great day.

Operator, Operator

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.