Dundee Precious Metals Inc.

Good morning and welcome to Dundee Precious Metals Second Quarter 2021 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Jennifer Cameron, Director of Investor Relations. You may begin.

Thank you, and good morning. I'd like to welcome you to Dundee Precious Metals' second quarter conference call. Joining us on the call today are David Ray, President and CEO, Hume Kyle, Chief Financial Officer, and Michael Dorfman, Executive Vice President, Corporate Development. After the close of business yesterday, we released our second quarter results and hope you have had an opportunity to review our material. All forward-looking information provided during this call is subject to the forward-looking qualifications, which is detailed in our news release and incorporated in full for the purposes of today's call. Certain financial measures referred to during this call are not measures recognized under IFRS and are referred to as non-GAAP measures. These measures have no standardized meaning under IFRS and may not be comparable to similar measures presented by other companies. The definitions established and calculations performed by DPM are based on management's reasonable judgment and are consistently applied. These measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures prepared in accordance with IFRS. Please refer to the non-GAAP financial measures section of our most recent MD&A for reconciliations of these non-GAAP measures. Please note that unless otherwise stated, operational and financial information communicated during this call are related to continuing operations and have generally been rounded. References to 2020 pertain to the comparable periods in 2021, and references to averages are based on midpoints of our outlook or guidance. I'll now turn the call over to David Ray.

Thanks, Jennifer. Good morning, and thank you all for joining us. As you've seen from our news release circulated last night, we delivered an exceptional quarter, achieving multiple records for operating and financial performance. Highlights from our results include excellent operating performance at our mines, which resulted in production of 85,000 ounces of gold and 10 million pounds of copper. Strong cost performance at all our operations, with all-in sustaining costs of $605 per gold ounce. Record financial results. including free cash flow of $67 million and reporting $67 million of adjusted net earnings for the quarter. Closing with the sale of MineRP, which brought in proceeds of approximately $46 million, and we continue to build our financial strength, exiting the quarter with a cash balance of $261 million. As you may also have seen from our news release earlier this week, we successfully closed the previously announced acquisition of INB Metals, adding the high-quality Loma Laga project to our development pipeline. This is a project that we believe fits extremely well with our core strengths and our proven track record as an environmentally and socially responsible mining company, and that has the potential to add meaningful production growth to our portfolio. As we move forward, our approach to developing Loma Lago will reflect our firm commitment to the highest standards for engagement with local communities and environmental stewardship, and we'll leverage DPM's technical depth, financial strength, and our strong track record of delivering innovative solutions to unlock the significant potential of Loma Lago. I'm joining today's call from Ecuador as we take the first step in engaging with the national and local stakeholders and our local teams. and we look forward to continuing this engagement as we work to advance the project. In terms of next steps, we intend to explore further optimization studies at Loma Laga while continuing to advance the permitting process and will be taking a disciplined approach to project development. This includes minimizing upfront spend during the permitting process while engaging with local communities in line with international best practices and working to secure an investor protection agreement with the Ecuadorian governments. prior to making any significant capital commitments. Turning to a review of our operating performance, I'll start with Chalopech. Chalopech delivered an excellent quarter, producing 52,638 gold ounces and 10 million pounds of copper, which was a significant increase compared with the first quarter as a result of mining in higher-grade zones and improved recoveries. Cost performance continues to be strong, with second quarter oil and sustaining cost at $638 per gold ounce, which is below the low end of Chalopech's 2021 guidance range. We continue to focus on extending the mine life through our in-mine and brownfields exploration programs, and during the quarter, significant effort was dedicated to testing conceptual targets within the Breveni exploration license, as well with the completion of the scout drilling of several near-mine prospects, including Bosdol, Petrovden, and Shaladiri, which are expected to continue over the summer season. We continue to advance work to support and optimize infill and mineral resource delineation draw programs planned for Sveta Petka. That, at the moment, is an exploration license, but it's in anticipation of moving into the commercial discovery activity, where the contract is anticipated to be signed off within the last part of the year. With mineral reserves that now extend to 2029, an updated mineral resource base, and increased in-mine and brownfield exploration drilling, we believe there is strong potential to continue our track record of mine life extensions at Chalapeche. Turning to Adetepa, we've continued to deliver impressive performance, producing approximately 32,500 gold ounces in the second quarter. Adetepa also achieved strong cost performance during the quarter. with an all-in sustaining cost of $563, which is at the low end of its guidance range. This highlights its significant potential to drive free cash flow generation in our portfolio. We continue our exploration efforts around Atatepa with 23,000 meters of drilling planned for the year, including 9,000 meters of additional resource and conceptual target extension on the mine concession, as well as advancing the Chattel Kaya and other prospects on regional licenses. Drilling activities have been completed at CERNAC, SINAP, and KUKLITSA. At CERNAC, a new geological model has been completed in order to support internal technical assessments. We've now shifted our focus towards a significant camp-wide surface data evaluation and compilation program, which includes additional mapping programs as well as geochemical and geophysical surveys to support exploration targeting exercises. Turning to cement, complex concentrate smelted increased in the second quarter, following the completion of the off-smelt furnace maintenance at the end of March. The smelter processed approximately 59,600 tons of complex concentrate during Q2, and the cash cost per ton was $400. significantly lower than the first quarter and more typical for Sumit, reflecting the increase of concentrate processed as the facility returned to a higher level of throughput following the maintenance shutdown in the first quarter. It's worth noting that while Canada and other parts of the world are seeing an encouraging decline in COVID cases, we are seeing a third wave in Namibia linked to the Delta variant. At all of our sites, we continue to maintain the strict protocols which we had in place throughout the pandemic to prioritize the health and well-being of our workforce and to provide support to our local communities. Recently at SUMED, this included donations of medical supplies and oxygen produced from our smelting facilities, which then displaced medical oxygen for use in local medical facilities. In terms of future growth, we continue to advance our team-up project in Serbia. Earlier this year, following the positive results of the pre-feasibility study, we initiated a feasibility study, which we expect to complete in the first quarter of 2022, with the results to follow in the second quarter of that year. Drilling programs were completed at the Czoklet, Czoklet South, Brazen and Czoka Rikita targets, all located southeast of the Bigger Hill deposit. This information is now being processed to support the preparation for the feasibility study. Plans for the next quarter include scout and target delineation drilling on the adjacent UMCA exploration license south of Bigger Hill, as well as other regional early stage exploration programs. We also continue to pursue our growth strategy by evaluating additional opportunities that have the potential to generate strong returns and enhance the value of the In closing, overall, our strong gold production profile and significant free cash flow generation, combined with our operating track record and unique skills of innovation and building strong partnerships with local communities, position us well to continue delivering value for our shareholders. We are focused on demonstrating the potential of our portfolio to generate significant free cash flow and our commitment to deploying this capital in a disciplined manner. We firmly believe that DPM's strong fundamentals continue to represent a compelling value opportunity for investors. I'll now turn the call over to him for a review of our financial results and comments on our 2021 guidance and three-year outlook, following which we will open the call to questions.

Thanks, David. Good morning, everybody. As David mentioned, we had very strong operational performance during the quarter, including record quarterly gold production excellent cost performance, and generated record net earnings and free cash flow. For the quarter, adjusted net earnings were $67 million, or 37 cents per share, representing an increase of 13 cents. Adjusted EBITDA was $101 million, up $23 million. These increases reflected 9% and 69% increase in realized gold and copper prices, respectively, and lower G&A costs related to share-based compensation, partially offset by a weaker U.S. dollar. For the first six months, adjusted net earnings were 98 billion or 54 cents per share, compared to 52 cents in 2020, and adjusted EBITDA was 167 million, up 9 million. These increases were primarily attributable to higher increased metal prices, partially offset by the impact of the Q1 maintenance at SUMEB, a weaker U.S. dollar, and in the case of the earnings, higher income taxes. For the first six months, net earnings attributable to common shares were $108 million and included a $21 million gain from the sale of MineRP, as well as mark-to-market losses on our Sabina warrants and deferred income tax adjustments related to unrealized losses in respective Sabina shares, none of which are reflective of our underlying operating performance and are therefore excluded from our adjusted earnings. From a cash flow perspective, funds from operations for the second quarter and first six months, which represents cash flow from operations before changes in working capital, were $85 million and $184 million respectively, up $18 million and $22 million compared to 2020. Free cash flow for the second quarter and first six months was $67 million and $118 million respectively, up $7 million and $8 million compared to 2020. These year-over-year increases reflect the continued solid operating performance from Chalopech and Atatepe, higher realized gold prices and copper prices, including the fulfillment of the prepaid forward gold sales at Atatepe, which was completed in December 2020, partially offset by SUMEB's Q1 maintenance shutdown, and higher cash outlays for sustaining capital expenditures in line with the mine plans. Turning to our consolidated cost measures, we continue to deliver strong cost performance, achieving an all-in sustaining cost of $605 and $583 per ounce for the second quarter and first six months. These represented a decrease of 17% and 12% respectively, due primarily to higher copper byproduct credits and lower allocated G&A expenses, partially offset by a weaker US dollar and higher cash outlays for sustaining capital expenditures. At SUMEB, cash cost per ton in the second quarter was $400, up $55 compared to 2020, due primarily to a weaker U.S. dollar and lower asset byproduct credits as a result of the timing of deliveries. For the first six months, cash cost was $550, $58, I should say, up $206, reflecting the impact of the Q1 maintenance shutdown and the fixed cost nature of the facility, as well as a weaker U.S. dollar. From a capital expenditure standpoint, sustaining capital expenditures incurred in the quarter and for the first six months were $12 and $29 million, respectively, as compared to $10 and $17 million in the corresponding periods in 2020. These increases were due primarily to planned maintenance at SUMEB, and the accelerated growth grade control billing at Atatete. Growth capital expenditures incurred in the first quarter and the first six months, sorry, correction, during the quarter and the first six months were $4 million and $6 million, respectively, and this compared to $1 million and $4 million in the corresponding periods in 2020. Turning to our balance sheet, our financial strength continued to grow during the quarter with available aggregate resources of $411 million. This is comprised of a $261 million cash position, as well as $150 million of available capacity under our long-term committed revolving facility. We also have a liquid investment portfolio providing additional upside valued at approximately $58 million. Fix excludes IMV metals, which, as you know, as of Monday, we now own 100% of. From a risk management perspective, all of our key financial metrics and underlying financial exposures are well within our established tolerance levels. And as previously communicated, from time to time, we enter into hedges to manage cost metrics with the primary objective of reducing variability and supporting the achievement of our guidance. For the balance of the year, we have hedged the currency exposure in respect of approximately 79% of SUMEB's projected operating costs using a zero-cost collar structure locking in a weighted average floor and ceiling exchange rate of $15.65 and $18.69. And we've hedged substantially all of the copper byproduct price exposure, which forms part of our all-in sustaining cost at a weighted average fixed price of $3.77. Looking forward, as Dave mentioned, we're on track to deliver on our previously issued 2021 guidance and our three-year outlook, which remains unchanged with the exception of growth capital expenditures, which we have revised to reflect the addition of the Loma Larga Gold Project. Our detailed guidance for the year is outlined on slide 15. And with strong year-to-date performance, we're on track to produce 271 to 317,000 ounces of gold and 34 to 39 million pounds of copper, achieve an all-in sustaining cost in the range of 625 to $695 per ounce, and smelt 200,000 to 220,000 tons of complex concentrate at a cash cost of approximately 450 to $520. With the acquisition of Loma Largo, we've updated our growth capital expenditure guidance to 21 to 28 million, And this reflects an estimated five to seven million of costs that we expect to incur on this project over the balance of the year. Over the longer term, covering 2022 and 2023, the guidance that we've provided remains unchanged and can be found in the three year outlook section of our MD&A. In closing, we're committed to continuing to deliver value to our stakeholders. And when you consider the current share price, solid free cashflow generation strong three-year outlook, and a strong balance sheet, the case can certainly be made that we represent a compelling value opportunity for our investors. With our unique capabilities and track record, we are also well-positioned to further optimize our existing assets and to realize the potential value of our development assets, including our newly acquired Loma Larda Gold Project. As we reinvest and grow the value of the business, we're also committed as part of our discipline capital allocation to ensuring that we return capital to our shareholders and that these returns are underpinned by a regular and sustainable quarterly dividend, the most recent of which we announced yesterday. With that, I'll turn the call back over to the operator.

Thank you. If you have a question at this time, please press the star, then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question comes from the line of Dalton Barreto with Canaccord.

Thank you, Alfred. Good morning, David and team. A couple of quick questions from me. First of all, it looks like there was a decent bump in the cost per ton at both mines. And I'm trying to understand how much of that is currency and royalty driven and how much of that is something more operational, if you will. Thank you. Jim, did you want to take that?

Yeah, I mean, I would say, yeah, we are seeing an impact with respect to some costs, but the main drivers for the quarter and what we would expect for the year center around three aspects. Power pricing, which is up significantly year over year. weaker U.S. dollar. And in the case of Adatepe, a higher royalty, because as you may know or may recall, the royalty rate at Adatepe is a sliding scale based on prior year profitability. So that royalty rate increased, I think it was approximately 2.7% in 2020, and it's now at the higher end of the sliding scale. at 3.9%, and there's a cap of 4%. So those are the three primary factors that are causing an increase in the cost per ton metrics.

I understand. And so on the assumption that the exchange rate, the power pricing, and the royalty rate don't change, can we assume that costs kind of stay in this range on a part-time basis going forward for the rest of this year at least?

I think that's probably fair to say. I mean, we'll obviously look to reduce costs and offset some of that elsewhere through productivity and otherwise. But at this stage, yeah, we are expecting costs to be higher in the second half of the year and why we've indicated that, you know, given the current backdrop, we're likely to be at the higher end of the range on those cost-per-time metrics. Now, having said that, the all-instaining costs that we report – which includes those cost pressures, is certainly well on track to achieve the midpoint or even perhaps the lower end of the guidance on the basis of the copper pricing.

Understood. And then just in terms of Chalipatch's concentrate distribution, it looks like CEMA processed about 60% of the concentrate produced by Chalipatch this quarter. That's a bit higher than I was expecting. I thought you would minimize the amount of concentrate that you mark. Yeah.

So there's, there's, uh, you know, slight timing differences between when Chalopech actually, uh, ships concentrate and when SUMEB processes it. Uh, but when you look at it from a Chalopech perspective, um, you know, this year we did, In the quarter, we did send or divert some material to other smelters, other third-party smelters, whereas last year, all of it went to SUMEB. And in the six months, we definitely have shipped less material to SUMEB relative to last year. And for the year, we do expect to divert more material to other third-party smelters, so we should see a year-over-year decrease relative to 2021.

Got it. But on an ongoing basis, then, what's a good number to assume in terms of the percentage of concentrate produced at Chalifax that gets sent to SUMAP? Is it 60%, is it 30%? I would say that...

you know, probably something around 70, 80% is a good number, you know, based on history. And it can and has varied, you know, year over year. And it all depends on the spot market that exists. So wherever there's an opportunity for us to, you know, displace material, bring in additional third-party material to SUMEB and divert it elsewhere, we're going to do that. But it's a difficult thing to really predict. But that's really the strategy. We've seen those opportunities. We've taken advantage of it. And it's tended to range between, say, 20% and 30%. The share will probably be higher, but it can vary.

Okay. And then just a couple of quick ones on Loma Larga now that the transaction's closed. First question, to what extent do you anticipate having to optimize the IMB feasibility study. And do you actually plan to release an updated kind of DPM feasibility study?

Hi, Dalton. It's a bit premature to be able to say that at this point. We see that there are some trade-off studies that we will be doing with an intent to optimize. And also, we have some opportunities to upgrade some of the environmental standards, for instance. And we can do that in a way that may not require at this point, to update the feasibility studies. So it's a little early. We're busy doing the trade-off studies. We see there's some opportunity for operational improvements, some things which would make a meaningful difference to our sustainability objectives, you know, energy utilization, greenhouse gas, climate change type of thinking, and other opportunities in terms of the overall value of the project. So we're working on that at the moment. It's going to be an activity, I would imagine, over the next, three to four months to really get the priorities and opportunities balanced. The other opportunity here, which I know you didn't ask, but just pointing out, so Hugh mentioned the cost projection to the end of the year. There's obviously some exploration opportunity here as well that we're considering in the course of our immediate actions in Ecuador.

Got it. And then just maybe one last one for me. In terms of the investor protection agreement you're looking for, Are you starting from scratch in terms of discussions with the government, or are you going to pick up where IMB left off, and is there an existing framework you can work on?

Basically, we're picking up where IMB left off. We've been in consultation with the government. Things are well on track, and we anticipate some news before the end of the year. That's great. That's all from me, guys. Thank you. Thanks, Dalton.

Your next question comes from the line of Don DeMarco with the National Bank Financial.

Thank you, operator, and good morning, gentlemen. Your cash balance is growing quite a bit. I see you benefit both from the pre-cash flow and the mine RP disposition this quarter. Is there any chance that you'll revisit your capital allocation strategies? potentially with higher dividends or NCIBs or potential other uses as your cash balance continues to grow?

I mean, I'll start with that in tune. Yeah, sure, I'll start. But anyway, I think the answer is that obviously our capital allocation program is something that is a very healthy discussion with our board at each meeting, and we're very conscious of the fact that we do have that building cash balance Clearly, we have some needs for that cash going forward, but there is an opportunity to use both the NCIB and look at the dividend level. So, you know, at this point, do we anticipate anything? We just released the information on the dividends for this quarter, but it is something that we look at. Hugh, did you want to answer anything further on that?

Yeah, I think I'd just supplement and say that, yeah, that's something that, you know, we've put The dividend in place, the primary objective at the outset was to establish a sustainable dividend over the long term. And obviously, from our standpoint, it's based on a long-term outlook. And over the last period of time since we implemented that dividend, there's no doubt that the environment in which we've operated has produced better than anticipated free cash flow levels that actually would have originally driven you know, the dividend setting by the board. So I think, you know, we're obviously in a stronger financial position. We update the outlook on a regular basis. I think from time to time the board will revisit that decision. So I think, as you say, like there is an opportunity in future to potentially increase and or supplement that dividend and, you know, certainly to the extent that we have a view that our shares are undervalued, there is the opportunity for us to do some buyback under our existing NCIB.

Okay, thank you. And continuing with a previously asked question, you mentioned that the power pricing has gone up. Can you comment on just the power situation, that your mines are in Bulgaria, how much it's gone up, and whether you expect this to be transit foray and power prices coming back down or expect to stay elevated? Go ahead, Hugh.

Yeah, I mean, I guess what I would say is at this stage, you know, we would expect that they're likely to remain elevated. They can be seasonal. And if you look over, you know, the last four or five years, the levels that we're seeing currently, you know, aren't unprecedented. I think that the current spike up is reflective of carbon tax in Europe. So it's difficult to say that they're going to return to the lower levels that we've previously seen over the last four years just because of the impact of the carbon tax. And so at this stage, I'd probably say that we're looking at If nothing were to change, we're probably looking at something in the order of a 30% increase in power prices that could be sustained, which we consume, I think it's something like 165,000 megawatt hours of power. So when you translate it, it's probably $3 to $4 million of increased costs if things don't revert back to the historical average.

Okay, that's helpful. Just shifting over to Loma Larga then, one final question. You're not spending a lot there over the next couple of years, but can you talk about the primary pushbacks that you anticipate in the permitting process and perhaps how you can leverage some of your permitting experience at Atatepe to specifically address some of the expected challenges in Ecuador?

Yeah, hi, Don. So first of all, just some numbers around the power. It's around 10% of our cost for Chalopex and 7% for Adatepe. You're trying to get a sense of the impact of that change. In terms of what's going on here with Loma Laga, there was a view that we would be able to get the permitting within six months. We think that is optimistic, and we, as you know, have been saying, you know, 18 months to two years is, we think, something that's realistic. Now, in terms of what we need to do, obviously, myself and the VP of Sustainability, Nikki Tristoff, are here at the moment. We're going to be joined by Kelly Stark Anderson next week. And we're in Quito at the moment, but heading to Cuenca. And the outcome of this will be helpful in terms of understanding our path forward. Coming in, the due diligence that we've done, we can see a need to engage more broadly with the communities and more consistently with the communities. so you know our intent is to go and listen to the needs we know for instance that concerns conservation of water and the the areas in which loma larga would be developed is a sensitive ecological areas it's not that we can't mine that appropriately it's just that there are concerns that we need to understand and address directly and that's going to take engagement with the key stakeholders at the community levels, at the regional level, and at the national level. So we see that as a process that we're going to accelerate over the time that I'm talking about with the permitting, such that by the time that we have the national permits, we'll be in a position with the support from the communities to then go ahead and develop Loma Lago. Okay.

Okay, great. And so is there anything that, in your experience in permitting out of Tepe, there was similar – challenges in some ways that you leverage that experience to apply it to Loma Larga?

Absolutely. So, you know, engage broadly, listen carefully to what people have concerns about. There's a strong appetite here for people, groups that come in that demonstrate best practices in mining, and I think there's some good examples already in Ecuador, for instance, Fruta Del Norte. And it's our intent to demonstrate, you know, what quality mining internationally can mean in terms of, you know, the success in engaging with communities and constructing projects so that everybody looks back with pride in a sense that, you know, this has been something that's generated value and outweighs any minor negative impact. So learning from Adatepe, yeah, I mean, what we did there, the thing that really made the difference was, you know, engaging more broadly, understanding the key concerns of working with innovation and technology solutions as well as the latest best practices. And as long as we do that, I feel very positive that we're going to be able to get good early traction and then really get to the true points of concern as we sort of go through that period I was talking about with the permitting with the government. So far, I've been here since Saturday last week, very, very happy. with the commentary that we've had after meeting a number of government officials in different ministries and hearing from local stakeholders. I'm looking forward to hearing more as we move to Cuenca and the communities over the course of next week.

Okay, thank you. That's all for me. Thanks, Tom.

Your next question comes from the line of Cosmo Chu with CIBC.

Hi, thanks, David, Hume, and team. Maybe my first question is on ChelaPedge. Just quickly, I noticed that Q2 grades were up 3.85 grand per ton, 1.02% copper. Could you maybe comment on that and in terms of as well what we should be expecting for the remainder of 2021?

Sure. Yeah. So obviously, we did mention that there was some sequencing between the two quarters. So what happened was we had some areas that we were set to mind that sequenced between Q1 and Q2. So hence the difference in grade between those two quarters. I'll come back to the grade expected for the rest of the year in a moment. But in terms of what else has been going on, we've also been doing some work which is looking at getting more consistency in our performance around the mine in total and specifically focusing on the metallurgical plant at Chalopech. And this is sort of an upgrade to our operating model and looking at how each individual in the organization can create greater continuity and efficiency in terms of performance. So all of these things have come together to change the grade between quarters and change the metallurgical recovery. And I'm not too sure if you noticed it, but this was a record total production quarter as well. So if you add the production both from copper concentrates and pyrite concentrates. So it's sort of all of those things that are a part of it. For the balance of the year, you know, I'd anticipate a grade between the first and the second quarter, because what you see is that the reason why there was a displacement was just the moving of stokes between quarters. You know, that was basically at the average grade expected for the year. So take the answer in Q1, take the answer in Q2, anticipate we're going to be somewhere in the middle of that range, then project to the guidance, and, you know, we do target mid-range. So, you know, that should give you some sense of comfort as to where we can expect to end up. There was another sort of minor thing. So in some areas, what happened was when we went in with our 20 by 20 meter spacing for the grade control drilling, and then we got into the stubs, we were actually finding ore earlier and at a higher grade than we'd anticipated. So in combination then, sequencing improved recovery overall and a more consistent performance in Q2 than Q1, and also a slightly more positive reconciliation in Q2 than Q1. Mm-hmm. That's great.

Maybe my next question on that, you know, the the I word these days seems to be the new effort in mining. And by that, I mean, you know, inflation, David, and Hume, you've touched on power costs, you've touched on some of the other costs. But, you know, inflation wise in the mining industry, is it something that keeps you up at night? Are you seeing inflationary pressures and labor or any other areas outside of power?

So, cost of living increases. We're running at about 3% typically at the moment. So, labor increases are running at around those numbers. We do have a slight offset with efficiencies in terms of the number of people that we have at the operations. In terms of other Variable costs are consumables. We're seeing similar but lesser inflationary pressures. So an example would be steel balls. Coming out of COVID, there's obviously been some constraints in that supply chain. It's not affected us in terms of our production, but we have seen a 20% increase in steel costs and about a 10% increase in our key reagent costs. So cost of living increased 3%, 30% in energy, 20% in steel, 10% in gas. in terms of reagents.

Okay. And then how do you, you know, I guess looking forward, David, how do you expect to manage that risk? Is that something that you can hedge against or, you know, how would you factor that into your budgets? You know, how do you manage that cost?

So we're actually just at the moment in our details planning for our three-year outlook and our 2022 fixed numbers. So we're actually looking at exactly that. So how do we deal with that? We deal with that in a number of ways. So we're obviously continuously looking at optimizations and efficiencies, and we're applying advanced technologies on the mill in terms of energy efficiency, water consumption, reagent consumption, you know, what I came back to in terms of consistency of operation. That affects not only recovery performance, but effective utilization of all the consumables. You know, better grind control means that you're managing both power and fuel consumption. So I would say that, you know, we're busy looking at this thing in more detail at the moment and seeing how we might change some of our focus on innovation. But as Hugh said, not all of these things are going to be in and stay. We do expect there's going to be something where we're seeing a peak at the moment and anticipate greater supply and some competition in those prices. coming down. Jim, I don't know if you wanted to add anything to that.

Yeah, I mean, I guess, yeah, some of these things are transitory, like, just like we're, you know, we see in the news, like, the numbers when you're comparing period over period are quite high in part because, you know, some of these areas and prices were at lower levels a year ago. So when you look at it over a longer period of time, the numbers aren't as stark as you might first think. On the power side, as I said, I don't necessarily anticipate nor are we banking on there being a reversion to sort of the historical mean. But for instance, in Bulgaria, which has largely been a closed power market, it is opening up access at the end of this year to a number of other markets. So that might help to support price decreases. But again, we We just don't know for sure. So, you know, what can we do? We can certainly look closer at our procurement. We can look at what we can do in terms of entering into contracts that might provide for lower costs over a longer period of time, and we just have to do everything that we can on a continuous basis to find ways to offset through productivity.

For sure. And maybe switching gears a little bit here, you know, reading through your MD&A, clearly there is a, not renewed, but, you know, certainly there's a focus on exploration at both Chalapage and at Atepe. Could you remind me in terms of, you know, the drilling here, how much of that is infill, how much of that is step out? And, you know, what are you targeting here from, you know, if I were to step back and look at it from 10,000 feet. Are you looking for incremental increases in terms of one or two years of mine life? Are you looking for replacement or are you looking for that jackpot here in terms of finding a completely new deposit? Could you maybe comment on exploration for Chalopeche and also Adetepe?

Sure. All right. So let me start with Chalopeche. So Chalapetch does around 44,000 meters of underground drilling annually. It's a very consistent number. And two-thirds of that is step-out, as you've referred to it, and one-third is infill. So perhaps the best way to say it there is it's actually extensional rather than step-out, and that's the underground drilling. So last year we did, I believe it was 17,600 meters from surface of Chalapetch. This year we have 38,000 meters planned. And that's including, you know, picking up on our geological discovery, which we're anticipating we'll get the contract to move to the commercial discovery phase, which is going to be one year of activity on Sveta Petka. If you have a look at Adetepe, so there we're doing something which is not going to be a useful reference. I'll put that right off the bat. So this year we're doing 217 kilometers. of drilling, which is all of the grade control drilling for the balance of the life of mine. The reason why we're doing that is because we have found a good deal of value in our understanding the nature of the acid in terms of being able to be ready for metallurgical material, metallurgically different material coming into the plant to support recovery. and also to be able to put together a program which maximizes mine recovery and grade control as well as maximizing the overall process efficiency and so on. That's why we're doing that. It's roughly $10 million of $5 million direct drilling and $10 million of analytical costs. In terms of the extensional drilling, we're doing 23 kilometers of drilling. where last year I think we did 11,000 off the top of my head, and that's focused on two areas. So that's immediately around the mine, and then it's up to 40 kilometers away in case of Chattel Kaya. So all of that outside of what I talked about with the 217 kilometers is extensional. It's step out.

Great. That's helpful. Yep, that's very helpful. And one last question. I ask this every quarter. And I apologize if you've already answered it. I got cut out a little bit during the call. Certainly, free cash flow was very good in Q2. How much of that came from SUMED?

Jim, did you want to take that?

No free cash flow came from SUMED or very, very little in the quarter.

And is that the expectation for the rest of the year?

Yeah, I'd say that SUMEB this year is probably looking at, at best, like a break-even cash flow situation. So, you know, historically we've said that we can manage SUMEB to a kind of a break-even to maybe $10 million of free cash flow. You know, certainly this year it's going to be at the lower end of that range, principally due to the fact that it's a maintenance year. So with the maintenance that we took in Q1 and the extended maintenance, But, yeah, we're not expecting CNAB to generate much, if any, free cash flow this year.

Of course. Those are all the questions I have. Thanks again, David and Hugh, and have a good weekend. Thanks, First Master.

And, again, if you have a question at this time, please press the star then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your next question comes from the line of Wayne Lamb with RBC Capital Markets.

Good morning. Thanks, guys. Yeah, just kind of following up on the other questions, just wondering if you could maybe provide some more detail on the higher labor incentives that you guys have outlined this quarter. Just wondering if that was seen at both the operations and are those more one-off type payments or kind of ongoing in terms of cost inflations?

Go ahead, Jim. I'm guessing that this is in addition to Dave's comment, you know, just in terms of normal course escalation that we're seeing in labor rates, which are sort of in the order of magnitude of 3%. I think the other thing that came through in the year is there was a higher cost that came through in 2021 as a result of higher LTIP payouts that were allocated down to the site. So last year, very strong year, payouts higher than previously expected and budgeted for. So that came through the year and on a year-over-year basis, the LTIP payments that impact operations were higher on a year-over-year basis. So that would have been the other factor. Are they you know, transitory. I hope not. I mean, I hope that we continue to perform well and our share price goes up and those payments continue to maintain at current levels or grow. But it's, you know, that aspect of it you can't really predict.

Okay. And just on that, are those payments accrued and then paid out annually or is it paid out on a quarterly basis?

Like on an overall basis, we... we accrue quarterly. As it relates to the mark-to-market impacts, we accrue those on a corporate basis quarterly, but we don't allocate them down to the site until they're actually known. And they can be quite volatile, so you don't really know exactly what to accrue or what's going to be paid out until the end. So when we actually realize on the STIP the mark-to-market component gets allocated down in a quarter. So it's Q2 of every year that that mark-to-market would flow through to operations, and it can be favorable or unfavorable.

Okay, perfect. Thanks. And then just in terms of the third wave in Namibia and kind of the measures that you guys are putting in place at SUMED, kind of similar to the other operations, should we also anticipate an uptick in cash costs there in the back half of the year?

No, I don't think that's fair to assume. So the uptick is already showing signs that it's decreasing. So it looks like it may have been relatively short-lived. What happened was first in South Africa and then into Namibia, we saw this new wave. And from being fairly open, things were closed down pretty rapidly. Travel between the major centres in the country were effectively shut down, forcing people to wear masks, this type of thing. And that seems to have had the desired effect. Schools were closed and so on. We haven't changed what we do at the site itself. You know, we've maintained a higher level of control than watching distance and hygiene and this type of thing. In terms of the impact on costs, it's actually more of an impact on, you know, the efficiency in and around the sort of edges of the operation. So, for instance, you have a team of people that's working on a particular activity, and then the following week suddenly you've got a number of them in isolation. It's not to say that You know, they're positive. It's just that somebody in contact with them has been, and, you know, we take contract tracing very seriously. So it's more little sort of things around, you know, you thought you were going to get something done. It's going to get done a little bit later. You know, we might have to bring other people in and sort of swap things around. It doesn't really translate too much into a cost issue. It's more sort of just one of those things on the fringe of the operation that makes that a little bit more difficult to require more management.

Okay, perfect. Yeah, that's all for me. Thanks, guys. Thank you. Thanks, Wayne.

Your next question is a follow-up question from the line of Dalton Barreto with Cannac Award.

Just one quick question for me, and thanks for taking the follow-up. Now that we're halfway through the year, is there any thought being given to hedge out the copper production next year?

Go ahead, Jean.

Yeah, I'd say we regularly look at all of our exposures. Copper on a byproduct basis is one of those exposures that we consider. So yeah, we're considering it. But no, at this stage, I think on balance, we're inclined not to hedge. There's no formal plan to put on additional hedge. As I said earlier, we've hedged substantially all of our second half production I think something, you know, very significant would have to change for us to put on any additional hedges. And, you know, at this stage, looking at our outlook that, you know, we have for the business, you know, we probably see our all-in sustaining costs tracking in and around the levels that we've put out. So there's no need for us to put on an additional hedge at this time.

Thank you for the comment.

And there are no further questions at this time. And now I would like to turn the call over to Jennifer Cameron for closing remarks.

Well, thank you, everyone, for joining us today. If you have any further questions, please feel free to reach out, and we look forward to keeping you updated.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect. All presenters, please hold the line.