K92 Mining Inc. (OTCQX:KNTNF) Q4 2021 Earnings Conference Call March 31, 2022 8:30 AM ET
Company Participants
David Medilek – VP, Business Development and IR
John Lewins – CEO and Director
Justin Blanchet – CFO
Conference Call Participants
Michael Gray – Agentis Capital
Andrew Mikitchook – BMO Capital Markets
Michael Fairbairn – Canaccord Genuity
Don DeMarco – National Bank Financial
Sean Ghosal – Stifel
Chris Thompson – PI Financial
Operator
Thank you for standing by. This is the conference operator. Welcome to the K92 Mining Fourth Quarter and Year-end Results Conference Call and Webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]
I would now like to turn the conference over to David Medilek, Vice President, Business Development and Investor Relations. Please go ahead.
David Medilek
Thank you, operator, and thanks to everyone for attending K92 Mining’s fourth quarter 2021 conference call. We hope you and your families are doing well. In addition to myself, we have on the line John Lewins, Chief Executive Officer and Director; and Justin Blanchet, Chief Financial Officer.
I would also like to remind everyone that after the remarks from management, the call will be followed by a Q&A session. As we will be making forward-looking statements during the call, please refer to the cautionary notes and the risk disclosure in our MD&A and Slide 2 of the webcast presentation. Also, please bear in mind that all dollar amounts mentioned in the conference call are in the United State dollars unless otherwise noted.
Now, I’ll turn it over to John to provide you with an overview.
John Lewins
Thanks, David, and welcome, everyone. In the fourth quarter in many ways has been our most complete quarter at K92 Gold Mining to date, record production, record mill throughput, record mine production, just some of the highlights and then highest recovery for both gold and copper to date. And once again, a positive reconciliation versus the resource model, a low all in sustaining cost of just $872 per gold ounce. All of that, in turn, resulted in K92 achieving strongest financial position since inception, and put the company in extremely strong position to continue to self-fund both growth and exploration.
When we look on the safety front, we’re pleased to report there was zero lost time injuries in the fourth quarter. K92 continues to operate one of the best safety records in Australasia, and we really have a strong focus on occupational health and safety and continuing to improve our safety systems. On ESG front, I’m pleased to provide an update on my recent trip to PNG not without a few hiccups. I did get COVID while I was there and spent a bit longer there than I intended. But 4 weeks in the country, and really, we achieved a lot in that period. And I was fortunate to have a lot of interaction with government communities especially during that time.
So, during the trip I met once again with the Prime Minister, the Honorable James Marape; met with the Mining Minister, the Honorable Johnson Tuke; the Eastern Highlands Governor, Numu; Head of the Mineral Resources Authority, Jerry Garry, among many others. The meetings were consistently positive. Many were featured in multiple publications in the local media in PNG, including the picture you have in front of you there where this came from the business section of the national and this was a release put out by the Prime Minister’s Office where he highlighted K92 as a good corporate citizen.
During my visit as well, I was invited by the Governor of the Eastern Islands Province to the official opening of the COVID-19 isolation Center at Goroka that was funded by K92. This is the largest isolation center in Papua New Guinea and it’s also designed to be multipurpose, so that it can be converted into a sports center so that it’s not just about being an isolation center, but longer-term asset Goroka in for the Eastern Highlands Province.
And very pleased that K92 to date has provided PGK2.5 million in COVID-19 funding to support various levels of government in ESG related visit included presenting scholarships at the University of Technology and lay the University of PNG and Port Moresby, as well as touring a variety of aid projects and for further information on that direct to our latest ESG report, which can be found on our website. And we really are very, very proud of the positive impact that we continue to have in our community in our province and in Papua New Guinea.
You can move on to operational performance. During the quarter, we produced a record 36,145 gold equivalent ounces, 20% above previous records. And that was really on the back of as I mentioned a record mill throughput of just under 100,000 tonnes processed at a high grade of 12.2. Recoveries in Q4 were the highest for the year in both gold and copper and among the highest to date. Compared to Q4 2020, throughput increased 45% and comparing 2020 to 2021 throughput increased 46%.
In addition to that, when you look at the performance of the process plant, you’ll see in the fourth quarter 21 days actually exceeded 1,300 tonnes per day. And we achieved a record of 1,538 tonnes through in a single day. And when you look at what we need to do to achieve our 400,000 tonnes per annum, 1,150 a day. So, this is significantly above what we need to do to achieve that.
In terms of some of the key operational physicals, record mill throughput as I mentioned, record total material moved increasing 14% and 13% from the previous quarter, respectively, and development was comparable with previous quarter. And despite all these multiple records achieved in the fourth quarter, COVID was still a factor for us driven by the Delta variant which resulted in short staffing and absenteeism. And in fact, COVID has been a factor for the entire year, yet as we’ve shown from the charts, we continue to push ahead with higher throughputs quarter-on-quarter and commissioning of Stage 2.
We’re pleased to report that our control measures have continued to hold up. Note that K92, we elected to maintain our quarantine system during the first quarter of 2022 as the Omicron wave came through. I believe we were the only mine to continue to do that. But that combined with one of the highest vaccination rates for our people in the resource sector in PNG really meant that the impact was significantly below many others in that first quarter. And so now with the Omicron wave appearing to recede, we are looking now at removing a lot of those restrictions and in April we expect to move back to a more normal operation, more normal roster.
So, with that, I’ll hand over to Justin Blanchet, our Chief Financial Officer, to discuss the financial results. Thank you.
A – Justin Blanchet
Thank you, John, and hello, everyone. During the fourth quarter, we had revenue of $53.9 million, a 12% increase from prior year. We sold 30,068 gold ounces at an average selling price of $1,707 compared to 28,112 ounces at an average realized selling price of $1,792 in the prior year. As of December 31, 2021, there are 7,147 gold ounces in inventory, including both concentrate and dore [ph], an increase of 2,678 gold ounces when compared to September 30 due to timing of sales.
For the year, we had revenue of $154.3 million, which is comparable to 2020. We sold 92,560 gold ounces compared to 93,273 ounces in the prior year. During the year, we had an average realized selling price of $1,724 per gold ounce as compared to $1,692 per gold ounce in 2020. This is partially offset by K92 having a negative pricing adjustment in 2021, mainly attributable to the first quarter 2021.
In the fourth quarter, cost of sales was $21.3 million compared to $23.9 million in the prior year. Excluding non-cash items was $15.9 million compared to $16.6 million despite a significant increase in mining and processing tonnes compared to prior year. For the year, cost of sales was $83.3 million compared to $73.4 million in 2020. Excluding non-cash items was only $63.3 million compared to $57.2 million in the prior year despite mining 35% and processing 46% more tonnes.
In general, the higher costs on an annual basis were primarily due to increased operational activity, as illustrated by the significant increase in tonnes mined and processed and when broken down on a per ton basis are lower than 2020 in spite the company incurring additional costs related to the COVID-19 pandemic as outlined previously.
Q4 2021 cash flows from operating activities before changes in working capital was $24.3 million compared to $18.9 million in the prior year. For the year, cash flow from operating activities before changes in working capital was $59.8 million compared to $76.5 million in the prior year. As of December 31, 2021, we had $71.3 million in cash and cash equivalents, while spending $23 million in expansion capital for the year and having our strongest working capital balance to date of $88.5 million.
The company fully repaid the outstanding loan from Trafigura earlier in the year, leaving the company with no debt. As John mentioned, during the fourth quarter, the Kainantu gold operations produced 33,220 ounces of gold, 1,048,100 pounds of copper and 28,218 ounces of silver or 36,145 ounces of gold equivalent. We sold 30,068 ounces of gold, 969,992 pounds of copper and 25,871 ounces of silver, or 32,771 ounces gold equivalent.
We incurred a cash cost of $456 and an all-in sustaining costs of $672 per ounce, which was significantly below our realized gold selling price of $1,707 per ounce. For the year, the Kainantu gold operations produced 95,055 ounces of gold, 3,375,528 pounds of copper, and 70,792 ounces of silver or 104,196 ounces of gold equivalent. We sold 92,560 ounces of gold, 3,095,208 pounds of copper, and 66,251 ounces of silver, or 100,960 ounces gold equivalent.
We incurred a cash cost of $614 and an all-in sustaining costs of $856 per ounce, which was significantly below our realized gold selling price of $1,724 per ounce. Our Q4 2021 cash costs per ounce decreased to $456 compared to $639 in the prior year. Our 2021 cash cost per ounce decreased to $614 compared to $651 in 2020. The decrease in cash costs was partially due to the successful ramp up of the 400K expansion allowing the company to achieve better economies of scale, but offset by costs related to the COVID-19 pandemic.
It’s important to note that after commissioning the Stage 2 plant expansion in late third quarter, we have seen a significant compression in our total unit costs per tonne processed. We continue to see downward pressure on costs via economies of scale as operations ramp up.
I will now turn the call back to John to continue with the rest of the presentation.
John Lewins
Well, thanks Justin. For the exploration growth section of the call, we will begin with Kainantu’s production growth strategy. In late third quarter, we achieved the run rate throughput of our Stage 2 expansion 400,000 tonnes per annum, and we’re advancing to other expansions concurrently. Stage 2A which will increase throughput further 25% of 500,000 tonnes per annum, and Stage 3, which is now set to increase throughput to 1.2 million tonnes per annum through the construction of a separate standalone plant.
So, in early October, the Board of Directors approved what we call a Stage 2A expansion. And that, as we said, increases our throughput by 25%. The expansion is driven by the fact that we’ve achieved significantly above design throughput during our commissioning of Stage 2A. And so, we’ve now looked to capitalize on this, identifying where the bottlenecks are and spending approximately $2.5 million to remove those bottlenecks and allow us to achieve 500,000 tonnes per annum.
On the process plant, that involves an additional filter press which is already installed are being commissioned, an additional TC-1000 Crusher, so it’s a second TC-1000 Crusher, which is currently on site. [Indiscernible] work is on site, some of the electrical and IT parts are still coming to site, but we’re looking to do install that in the next quarter.
The third part, additional flotation capacity that will only come in late Q3 or potentially even Q4 due to supply issues which I think the whole industry is seeing. But that one to prevent us being able to ramp up towards that 500,000 tonnes per annum. And we expect to achieve that in the fourth quarter. Capital costs of that only $2.5 million in the plant. When we look at the underground and the ramp up underground, we’re looking at really bringing forward some of the capital expenditure on mobile plant from Stage 3, so that we can achieve that earlier production as well as some of the capital development.
And importantly, Stage 2A gives us a meaningful boost in terms of our free cash flow generation and therefore further strengthens our balance sheet and our ability to self-fund growth. I would also mention while we’re talking about site during the quarter, while I was on site, I was there to see firsthand the commissioning or gravity circuit and are included the boring of some of our first story bars which not only improve the pay ability, we’ll get 10% to 30% of our gold out from the gravity circuit and improve our recovery.
Now we start looking at the Stage 3 expansion, really pretty pleased to advise it multiple milestones were achieved during the period. Firstly, the twin incline can progress well and we achieved over 1,000 meters over a kilometer a milestone by the end of February. Twin incline advanced rate during Q4 was in line with budget and for the second half of 2021 was actually 7.5% of our budget. But note that as that twin incline advances towards Kora, we plan to develop a number of drill caddies [ph] from the twin incline which we will be looking to drill and extent the resource in Kora at depth and also to the north at depth.
Further in relation to Page 3, we also have completed our update of the high-grade Kora resource as well as completing a maiden resource at Judd. And that will serve as the basis for the completion of our DFS, our definitive feasibility study, as well as the updated preliminary economic assessment or Stage 3 and beyond. So firstly, the Kora resource in terms of measured indicated exceeded our 2 million ounces target while maintaining high grades. And that’s after the depletion of almost 200,000 ounces from last resource which was some 2 years ago.
Importantly, when you compare historical with actual and look at the model depletion, this new resource still underestimate by about 7.5% the amount of gold we get. When we look at the maiden resource at Judd, high-grade measured and indicated is basically very close to the existing development. Cut off was 31st of December, so very limited drilling. And so, when we look at that we’ve got 130,000 ounces, 11 grant per tonne measure and indicated, 185 ounces at 5.6. This covers less than 20% of the area that Kora covers, and that really is reflective of the very limited amount of drilling, and we do intend that as we go forward to do a lot more drilling in Judd this year and up to 4 of our 6 rigs underground actually focusing on Judd.
So, when you look at the exploration during the quarter, we are drilling underway at Kora, Kora South, Judd South and also at the Blue Lake Porphyry. And Kora, the latest drilling results continue to deliver high grade intersections, solid thickness to date. When you look at Kora over 30% of K1 and 30% of K2 holes have recorded grades exceeding 10 grams per tonne. The high-grade hit rate has really translated through into the resource and is something that we’ll be able to leverage in the upcoming economic studies.
Important to highlight, in late 2021, we completed our major infill drilling program at Kora. And now for the first time in 18 months, the majority of the drilling that we’re doing underground will be focused on resource growth. In addition, the primary focus in Kora South and Judd South also resource growth.
And from this long section, when we look at Kora, Kora South, three key areas exploration focused. Kora South from surface, as you can see, from the long section, there’s been absolutely no drilling done previously along and approximately 1 kilometer strike length south of the mining lease, despite the fact it’s got promising outcrop [ph], it’s also got our seasonal workings. We’ve only drilled one hole in the quarter that went through Kora. But what we have seen is potentially the most significant exploration finding since the discovery hole in Kora North from underground in 2017. I will discuss that further when we look at the cross-section.
Kora South from undergrad, you’ll see we’ve got that Kora, Judd South drill drive on the 1,200 level. Now that’s currently being equipped to allow us to drill into Kora South, so that south of the mining lease underground. And we’ll be able to extend our resource we believe, around 150, 200 meters around that 1,200 level, 200 meters plus vertically above and below that level. In addition, we’ll also be able to drill Judd from that. So, it’s not just Kora, we’ll be able to bring both Kora and Judd from that development tribe.
And then when we look at the twin incline coming in, we’ll be able to start drilling what we call Kora Deep and that northern extension of Kora and we’re looking at the second half of the year to be able to do that. When we consider Judd and the Judd South vein system, the exploration program follows a similar plan to the previous slide with a distinction that when you look at exploration of Judd, we’re about 3 years behind where we are at Kora. So, we’ve still got all of that area within the mining lease that needs to be drilled out. And hence the focus from the underground drilling with 4 of our 6 rigs we’ll be drilling Judd this year, and then probably well into next year.
And remember that we only made a fine great discovery in Judd underground Q4 2020. Kora high-grade, May 2017. So, we’re 3 years behind where we were in terms of Kora. So, Judd, focus both underground and we’ll also focus in what we call Judd South moving to the South. So, if we look at the cross sections of both Kora South and Judd South, you’ll see that both holes intersected the Judd vein system, 75 meters, and 150 meters approximately along strike on the last hole with the mining lease. Only one of the holes actually intersected the Kora and that’s because on the second hole, we lost the hole just [indiscernible] through Judd.
But let’s look first of all, at the Judd vein system. Firstly, we’ve encountered high-grade veins, not just J1 but also J2. So, two vein system which recall the maiden Judd resource is only on one vein system. Extremely important in looking at this is the dilatant zone that we identified 150 meters along strike from the previous historical drilling. And essentially, we’re getting discrete high-grade veins and good hybrid veins, 2.9 meter, 8.5, 15.25 meters and 15.87. And we’re also getting a dilatant zone.
And in that first hole 66.5 meters at over 5 grams per tonne, the longest intersection that we’ve ever recorded at K92. Solid geotech as well, this hole dilatant zone hangs together really well. And it’s a potential order of magnitude, bigger than that that we’ve seen to date. If we look at Kora South, again, we’ve encountered high-grade above average intersections of both K1 and K2. And in addition, we’ve also encountered a third K3 vein, which returned 5 meters, almost 8 grams per tonne, and the whole bottom in that K3 mineralization.
And as a reminder, K3 is not in the Kora resource. Secondly, these Kora veins high grade copper, up to 80% of the value in the gold equivalent is actually in copper, and two of the veins recorded approximately a meter to two meters of 20% copper in the Kora, mostly chalcopyrite with [indiscernible] bornite. And then third, as we’ve seen in Judd, a dilatant zone, in this case 35.9 meters at almost 6 grams per tonne. The intersection was the widest that we’ve ever drilled for Kora. And as I think I’ve noticed, in Judd, I mean these dilatant zones have significant potential incomes, the amount of diamond of metal.
As a bonus in that hole, we found a previously unknown vein located approximately 75 meters to the east of Judge, 3.45 meters at 10 grams per tonne. It’s something for the endowment that we have at the intersection of a previously unknown vein of 3.5 meters at 10 grams per tonne is almost an aside. We’ve had one rig drilling up there, we now have two drill rigs on Kora South and in the next quarter, we’ll have three rigs drilling up there. We are really the largest explorer in the country in PNG. And I think our budget is around $15 million this year with excess that we’ve had in the first quarter of this year. We’re certainly reviewing that budget. We are looking exploration at Kora South and Judd South.
We’ve also advanced it with a surface sampling program which we’re completing every 100 meters apart and that is progressing towards the interpreted A1 offered. And this whole program, the drilling program, the surface sampling program will provide important factors for drilling towards that Porphyry and obviously enhanced understanding of the system which progressively to the site.
Lastly, as we conclude, I just like some of the regional exploration activity. We recently completed an advanced MobileMT deep penetrating airborne geophysics program in November, December. The results are to say the least promising. It’s the first major geophysics, airborne geophysics program completed in PNG for something like 15 years, biggest for over 20 years and the most advanced [indiscernible]. The results and we’re still processing all the data. That’s delineated, high conductivity zones that extend from Kora and Judd along Kora South as you can see, that Kora South, Judd South towards that A1 Porphyry and then continuing to the Southeast for about 5 kilometers. And that continuation is something that previously hasn’t been recognized.
We’ve also got its own, which is going off to the Northwest. And associated with that we’ve got the [indiscernible] historical resources. The results from this program have also demonstrated the highly prospective nature of this whole belt and the potential for porphyries in the belt as well. And they correlate well with known targets such as the Blue Lake and A1.
Phase 2 drilling program, Blue Lake, almost completed and we will provide an update in Q2 on that program once we’ve received all the results. As I mentioned, the geophysics that’s still in a very strong response in A1 even stronger than Blue Lake, making it a very high priority target for the near-term. And we intend commencing surface sampling program on that this year as well.
So, with that operator, I think we’d like to commence the Q&A. Thank you very much.
Question-and-Answer Session
Operator
[Operator Instructions] The first question is from Michelle Gray (sic) [Michael Gray] from Agentis Capital. Please go ahead.
Michael Gray
Hey, John. It’s — yes, it’s actually Michael Gray for Agentis. Just a couple of questions. First of all, the strong gold recoveries created by Judd, was that solely from the gravity circuit being implemented?
Operator
Your lines are live, you can go ahead.
Michael Gray
Yes, Michael Gray from Agentis here. John …
Operator
Yes, we could hear you, Michael, just David or Justin.
Michael Gray
Okay. Sorry.
John Lewins
Yes. Yes, Michelle (sic) [Michael], really nice to meet you. I think we’ve spoken before. You remind me of an analyst I once knew at Macquarie. In terms of the gold recovery, it’s actually a combination of things. We’ve been doing quite a lot of metallurgical tests as part of the definitive feasibility study and we saw that as an opportunity to look at optimization of the full circuit in terms of different reagent regimes and what have you. So, in part it’s been driven by some modifications to the regime. The gravity is we think helping a bit. But the gravity wasn’t fully operational during the fourth quarter. It was being commissioned, but it wasn’t fully operational. It really won’t be fully operational until the next quarter. So, it probably had some impact, but not an enormous impact. I think it’s more about optimizations that we’ve been able to achieve by looking at the test work that we did. And that obviously will be something that feeds into the design of the new client.
Michael Gray
Okay, no, very good. Appreciate that color. And then just on the Porphyry exploration, an update on Blue Lake, you — I think, at the very end you may have said that was coming in Q2. But can you give us a bit of color on timelines for results of Blue Lake as and what we may see as far as roadmap results?
John Lewins
We’re still waiting for the results. We just — we literally just finished drilling last hole in the current program. And so, we are now awaiting the results from that. So realistically, I doubt it will get the results until probably May, April, probably into May.
Michael Gray
Okay.
John Lewins
And there’s a compilation of all that. Chris Muller is actually busy, busy putting together — putting that together right now. But I would say second half of the second quarter for the — for more comprehensive report to come out.
Michael Gray
Okay, thanks. The final question, John, is on your, 4 rigs in country and meetings with the Prime Minister’s — Prime Minister and various ministers? Was that a routine series of meetings? Or were there certain objectives and things you’re working towards that were really key to K92?
John Lewins
Well, actually, the meeting with the PM was at his request. And I think that’s a recognition of the profile of K92 in the country. The good news is — good news, especially when you’re going into an election. And so, you like to be associated with success. So, I think there was an element of that. But also, I think the PM has been reaching out to quite a number of significant players in the resource field. And really, I think there’s a recognition of the importance, especially coming out of COVID of the resource sector, and the drive that, that is going to have on the economy. And that’s only information that’s come out from the World Bank, or whatever else on that until there was an element from the PM of reaching out. I think the week before I was there, we met with Mark Crystal [ph], for instance.
From our perspective, it was pretty much about updating on the plants, or what we have achieved. Obviously, an important part of what we’ve been doing is, is paying corporate tax. And I think last year we were the second highest payer of corporate tax in, in the mining sector, which is — which gets us a lot of kudos in country, especially from the PM. And then, one of the questions was okay, this is a great story, what can we do for you? And so, from our perspective, we highlighted that we put an application for renewal of mining license. It’s ahead of schedule. But we are planning on spending in excess of a PGK1 billion over the next few years. And so, we’d like that, when renewed as quickly as possible, and the PM turn to the Mining Minister and the head of the MRA and said, well, you’ve heard what he needs, we to get it done. So that was extremely positive from that side of things.
And the head of MRA was flagging with both the Mining Minister and the PM that we are the biggest explorer in the country. And so, there was an appreciation that you can explore, you can develop and you can pay tax and you can do it all in the same year. We got a round of applause for that, by the way, Michael, believe it or not, first time I’ve ever had some politicians.
Michael Gray
It’s good insight. Good color. Great year. Thanks, John. Appreciate this.
John Lewins
Thanks, Michael.
Operator
The next question is from Andrew Mikitchook of BMO Capital Markets. Please go ahead.
Andrew Mikitchook
Just a quick couple of questions. Can you guys give us any sense on seasonality on costs? Are there any substantial plant maintenance periods that would kind of impact the full quarters reporting, or any significant variations in grade that would also have an impact on production and more importantly, costs and an all-in sustaining cost basis, so that we can accurately forecast forward the trend after a very strong Q4?
John Lewins
Yes, thanks. Thanks, Andrew. Look, I think 2022 as we’ve actually seen for the last couple of years, we do expect 2022 to be back end loaded to a certain extent; a, because obviously, we commissioned 2A towards the end of the year. We’ve already got a lot of equipment on site, some of that installed, such as the filter press, the crushers on site. Delivery is a bit slower than we’d like and we’ve certainly got a long lead time on the additional flotation capacity that we’re putting in. That’s probably the longest fluid item that we’ve had. And that certainly is going to push us out into the third quarter, perhaps even the fourth quarter to get all the equipment. We are seeing the same thing other people seem to guess in that context, that doesn’t stop us ramping up.
Production doesn’t stop us pushing more time certainly, obviously been able to do that to a certain extent. But, for instance, the additional flotation capacity, and we’re increasing flotation capacity by more than 50%, almost 100%. On the rougher side, even though we’re only increasing throughput by about 25%. That’s also coming out of metallurgical tests, where we’ve shown the — we do have some slow floating species that should benefit from a longer retention time. So higher tonnage, especially I think, in the fourth quarter throughput.
In terms of grades, certainly, I expect the first and the second quarter to be lower grade overall than the average for the year. Tonnage wise, we expect both quarters to be close to our sort of the first two quarters, three quarters to be roughly 100,000 tonnes for itself, pretty much on par of the design capacity that we currently have. The one provisor [ph] being any impact from COVID. And certainly, we had a bit of impact from COVID earlier in this first quarter. But now, it seems that COVID has very much abated within PNG. The Omicron variance seems to have gone through and cases have dropped dramatically over the last couple of weeks, as I understand it. We’ve got no cases on site, we’ve got no cases that have presented to go into quarantine prior to coming to site, and we will actually be looking to step down our — to step down our quarantine in the next month.
So, we’re hopeful that we’re not going to see any real significant impacts from COVID in terms of the workforce and what have you. I think we’re all seeing impact in the supply chain and we’re seeing it in shipping. A couple of bits of mobile plant that should have been in at the beginning of the quarter. And they’re only coming into the country now. So, we are seeing some hiccups here as well. And we anticipate we’ll see that for the balance of the year. We are expecting to have supply chain issues and we’ve been ramping up the amount of material that where stores that we’re holding on site, which see from the balance sheet, what have you to deal with that. But to come back to your first question, expected to be back end loaded, higher tonnage second half of the year and the first half of the year, slightly higher grades in the second half and the first half of the year.
Andrew Mikitchook
And just a quick second question. The new ramp is dispensed, I guess, by 1,000 meters and roughly 2 kilometers to go. What kind of advance rates should we be expecting or either to the end of this year or per quarter or month, just something so we have a rule of thumb to kind of know what to expect?
John Lewins
Generally, our target is 150 to 200 meters per month.
Andrew Mikitchook
To be clear, that’s for most inclines, or is that combined, so it’s half of that on [multiple speakers]?
John Lewins
Combined. Yes. Yep.
Andrew Mikitchook
Okay, so 75 to 100 meters per month, better the 1.9 that’s left?
John Lewins
Yes.
Andrew Mikitchook
Is that accurate?
John Lewins
1.9, remember, takes us to the very end of the mining lease. That’s not where we need to be obviously put in first major production ramp.
Andrew Mikitchook
Okay. And then where — at what point can you start using this as a drill platform?
John Lewins
It will be second half of the year, where we’ll start looking at Kora down plunge to the North. And it will be into early next year before we get basically to be under our current Kora resource area.
Andrew Mikitchook
Okay. Thank you. I’m sure there’s other people who want to ask questions. So, congrats on a strong finish to the year. And I’m sure we’re all looking forward to the exploration results from all those different targets.
John Lewins
Thanks, Andrew.
Operator
The next question is from Michael Fairbairn Michael Fairbairn from Canaccord. Please go ahead.
Michael Fairbairn
Great. Thank you and thanks very much for taking my question, and congrats on a strong quarter. I’ve got a question on costs here. We saw a pretty dramatic decrease in mining and milling costs in the back half of the year, particularly as the Phase 2 expansion came online. So, I’m just wondering, was the decline in mining and milling costs, if we look at it on a per tonne basis, it’s the lowest it’s been in some time. Was that decline really due to the economies of scale that you’re — you’ve been able to achieve now that you have Phase 2 online? Or have you done anything else that’s really driving that cost reduction?
Justin Blanchet
Okay. So, I guess economies of scale are certainly part of the benefit, which we’ve always sort of said, would be the case. And I think we’ve projected that this year our average costs will be above what they were in the fourth quarter. But generally speaking, should be below the average for 2021. When you look at 2020 to 2021, there is some obviously fairly significant increases in or processed, you basically increase by about 50% labor wise, you’re not actually adding many more people to be able to get that 50% increase in throughput.
Mining, yes, you’ve obviously expanded to people underground, but not by the margin of what you’ve mined, for instance. Same with power, your power costs, obviously, not quite fixed costs, but they’re certainly not variable costs as some people tend to model them as. So, it’s clearly about sharing the fixed costs over more tonnes. We would argue, if anything, we’re probably going to have higher operating costs and we will otherwise have simply because we are building up a team of people.
We are carrying out a lot of work, which is really setting up for the next phase of expansion and some of that cost you take as a expansion costs for some of it, you take a sustaining cost and some of it, quite frankly, you take as an operating cost because it’s very difficult to quantify what you should put into sustaining capital, what you should put into a cash cost. If you, for instance, bring some additional people on, expats on, provide additional technical support, and the primary focus is in the operation, but they’re also doing support work for your expansion, et cetera, et cetera.
So really driven — certainly in for the year and for the quarter by an increase in tonnes mined and tonnes processed, et cetera, et cetera. Not a focus on driving costs down per se, because we’re still very much in an expansion phase. And you’ll see that I think, continue this year. I would make the point that last year, our estimate was that COVID cost is around $60 and that is a cash cost. And when you look at rock health and safety, environmental costs from 2020 to 2021, we doubled from $11 to $22 a tonne. And that is reflective of — to some of the costs that we incur this direct costs related to COVID. So, we see some of those costs coming out in 2022.
So, we, as I mentioned, we’re looking at dropping our quarantine in the next quarter. That alone is fairly significant on our labor costs. When you look at expats, all of last year, expats going back into Australia, was a 2-week quarantine period. That’s 2 weeks, that your European people to sit and be in quarantine and you’re actually paying for them to be in quarantine, you’re paying the government a fee for them being in there as well. So unusually, we actually believe we’ll see our labor costs come down this year. But obviously, there are other escalations that we and the rest of the industry have seen. Nevertheless, we’ll be increasing throughput, increasing our mine tonnes, and we do expect that to continue to drive down our unit costs.
Michael Fairbairn
That’s very helpful. Thank you. And just one more from — for myself, if I can, around the exploration spend in 2022. I think in the press release, you had some language about possibly increasing the exploration budget in 2022. Just wondering if you have any soft guidance around the magnitude of where this might land? And if you do go ahead to increase the exploration budget, just what are you going to be targeting? Is it going to be more accelerating with the targets that you’ve already laid out? Or is there anything additional that you’re considering going after?
John Lewins
I think if we were accelerating the budget, it would be putting more rigs on the ground in the main part. That’s where we incur most of our cost is putting physical rigs on the ground. And if we put in physical rigs on the ground that’s really focused right now around Kora and Judd surface. I think underground we’re pretty much what we can do. We’ve got 6 rigs underground, plus a mobile rig for doing short jobs, but effectively 6 rigs underground, that we wouldn’t be looking at putting any more rigs underground. We’ve currently got 2 rigs drilling surface, about the third rig coming up. And we may bring in a fourth rig. We’re actually looking at sourcing right now. But that’s when I’ll have to go cap in hand to the board on when I’m sure if I can deliver a few more results like the first couple we’ve had in Kora and Judd South. I’m sure I’ll have a receptive board.
Michael Fairbairn
Fantastic. That’s really helpful. Thank you and congrats on a good quarter.
John Lewins
Thanks, Michael.
Operator
The next question is from Don DeMarco from National Bank Financial. Please go ahead.
Don DeMarco
Thank you, operator. Good morning, John. How should we think about 2022 guidance? The midpoints 930 for AISC, in light of the strong Q4 with AISC at 672.
John Lewins
Yes, look, we had a lot of discussion on the whole guidance for 2022. I guess in many ways, we weren’t happy to give guidance that was quite wide, 115,000 to 140,000 ounces. It’s pretty — it’s quite a wide guidance and we recognize that. And a result of doing that, of course, when you put together your budget and look at your fixed costs, and all the rest of it is that you end up with a relatively wide cash cost, and all in sustaining cost. So, 2022, we’ve allowed a substantial amount and you’ll obviously see that from the difference between the cash cost and the all-in sustaining costs.
There’s a lot of sustaining capital going in there. Some of that is effectively deferred from 2021, where, for instance, we should have had some mobile gear that arrived late in the fourth quarter, and now arising in the first quarter this year. So, a few things like that tend to push up, your all-in sustaining cost. Yes, look, if we don’t see the impacts of COVID, we would certainly see ourselves being in the top half of our guidance in terms of throughput, and the bottom half of our guidance in terms of both cash and all in sustaining cost. So, I guess, no surprise there.
Don DeMarco
Okay. So, we’re not necessarily expecting the momentum from Q4 to carry into Q1 per se. But we could see all in sustaining costs of 672 for Q4? We could see a reversion up toward the guidance range albeit maybe the lower half of the guidance range in Q1. But still — that’s still a $200 increase quarter-over-quarter in AISC?
John Lewins
Yes, and I mean, I can tell you, I’ve got two major bits of mobile plant that have just arrived on site. They were both due in the fourth quarter, have now gotten on site. So, cost of those alone will certainly add a significant amount to your all-in sustaining costs probably $100 on their own.
Don DeMarco
Okay. So, we look at Q4 as a very strong positive quarter, but maybe a little bit of an anomaly at this stage, but still hope for that trend to somewhat continue in 2022. But it will stick with guidance. The next question, how much Stage 3 CapEx should we model in 2022?
John Lewins
That’s an interesting question. Look, we’re still getting our heads around the numbers and around what we need to do in terms of putting in orders for long lead items. In fact, I had a meeting today with our main contracting consulting group, looking at exactly those issues, and that’s something that they’re expediting as part of completion of the feasibility study. So, we’re — I can’t give you an exact figure right now, because first off, I actually haven’t put anything up to the Board because we haven’t seen the final numbers yet. We’ve given some sort of indications to the Board of an expectation.
But I would say we’ve allowed for instance for a raise bar in the fourth quarter. So, the problem we get with that, Don, of course is that expansion capital, or is it sustaining capital? Would we put it in fourth quarter if we weren’t going for the expansion? The answer would probably be no, where we have to put it in at some point if we don’t do the expansion and stick to 500,000 tonnes per annum, absolutely. So, it’s capital that’s already laid and already budgeted for this year. And we have a fairly substantial capital budget for 2022, I think in rough terms.
Don DeMarco
Okay.
John Lewins
We’ve the numbers, it’s capital that’s already allowed for significant amount of expansion capital, we’ve also got a lot of sustaining capital. And there is a, as I say, there’s an argument you can make as to whether something is sustaining or it is expansion capital. And that’s a — yes, it’s something that we’re dealing with all the way through and it’s one of the reasons. In fact, we’re really talking about total expenditure over the 3-year period where you’re actually busy with all of the expansion we’ve got, for instance, we got $2.5 million, $3 million on TSF lifting at the TSF this year. And again, that to us will be sustaining capital, but you may argue that in fact, it is expansion capital, because you don’t need to do quite that much. Lifting of the dam [ph] as we’re proposing to do, but I think overall, we’ve got something like $60 million of capital live this year in sustaining and expansion.
Don DeMarco
Okay. All right, John. Well, we’ll keep an eye out for the feasibility study in Q2. That’s all for me. Thanks so much. Good luck going forward.
John Lewins
Thanks, Don.
Operator
The next question is from Sean Ghosal of Stifel. Please go ahead.
Sean Ghosal
Hey, John, congrats for Q4. Just a question on the gravity circuit. And when is it coming online? And how are you seeing the impact on the abilities?
John Lewins
Gravity circuit, we have to modify our export license to be able to export dore. Right now, our export license specifies concentrate. So, we have to modify that. And we’re just waiting for that to come back to be able to operate basically the gravity circuit full time. So, it’s not operating full time at this point in time, because we don’t want to build up too much dore on site. We anticipate it will get between 10% and 30% recovery of gold into our dore and it will vary — varies on whether we’re on K1 or K2 or Judd for the matter. And also, obviously, the — whether we are in higher grade areas or lower grade areas. In terms of payability, producing dore is worth about 4 percentage points improvement in our gold payability.
Sean Ghosal
Okay. Thanks, John for the color. My second question is regarding the timing of the gold sales, you mentioned it and you are facing some supply chain shipment issues. Can you please provide [technical difficulty]?
John Lewins
Sorry, I didn’t catch the first part of that question?
Sean Ghosal
The timing of the gold sales, and you mentioned something about the supply chain and shipment issues that will likely to continue in 2022. So …
John Lewins
Yes, the timing of what — sorry, I didn’t catch the first part? The timing of?
Sean Ghosal
The gold sales.
John Lewins
The what?
Sean Ghosal
The gold. Gold.
John Lewins
Gold sales?
Sean Ghosal
Yes.
John Lewins
Oh, sorry. Okay. Gold sales. Sorry, I’m thinking supply and not sales, that’s why I couldn’t get it. Okay. Look, in terms of export of concentrate, we have had some delays in shipping. They’re not been major, but we have had some delays in the shipping. And we’ve had cases where up to three batches have gone in a single ship. Now — the scenario that we have and the contract that we have with Trafigura, while I can’t go into, obviously, all of the commercial details, an important part of that is that we actually get paid 85% to 90% of what we’re going to get paid when we deliver the concentrate to Lae, to the port of Lae. It actually goes into a sort of bonded warehouse type thing.
So, the impact of a delay in shipping is not particularly serious for us because it’s really about we just put it on a — we put it in a container, we track that container down to Lae. It gets weighed in Lae, and we’ve sampled it under supervision as it’s being filled. It has a number of seals on it. It gets assayed at an independent laboratory. It gets weighed separately. We weigh it, but it’s also weighed in Lae. And based on that certified weight, based on the certified assays, we get a provisional payment of about 90% of what we’re going to get paid. The balance is paid on outturn to the smelter. So therefore, if there is any significant delay in shipping, it’s not particularly impactful for us. And to date, we haven’t really seen very significant impacts in gold sales. We’ve seen some, but not particularly concerning. We’ve seen more impact on deliveries and we’ve on being able to ship out concentrate.
Sean Ghosal
Thanks, John, and congrats for the great quarter again. Look forward to [indiscernible].
John Lewins
Thanks very much.
Operator
The next question is from Chris Thompson from PI Financial. Please go ahead.
Chris Thompson
Hey, John. Thanks for taking my question. A lot of them have been asked. So, congratulations on a great quarter, by the way. And I apologize, I was probably a little late on the call. But just really, really interested in exploration approach by way of testing the A1 porphyry there. Can you provide any color and plans for this year?
John Lewins
Okay. So, in terms of A1 porphyry, the plan is, at this point in time, that we will be on the ground doing surface sampling along the whole strike of Kora South, Judd South. In fact, we’re doing it right now. And that expands to cover all of the sort of A1. And then it will actually carry on that surface sampling program, soil sampling, crop [ph] sampling, et cetera, et cetera. We will then continue on to the South with that high conductivity zone to the South. So that will be going on for probably the balance of this year.
In terms of drilling, the — as I think, I said, we’ve got — we’ve now got 2 rigs up on Kora, Judd South and we’ve got a number of fence lines planned which are every 75 to 100 meters. We’ve got a third rig due come up there in the next quarter. And at this point in time, we are trying to source a fourth rig as well, and whether that would go up there or whether that would go to one of the other projects is still something that we are looking at. But potentially — and again, we are looking at the surface sampling that we’ve got going. The balance of the data that we’ve still got to really properly evaluate from the aerial geophysics. And of course, the results that we are getting from the drilling, all of that going in to give us better vectors for where we should actually be looking at and how we should be looking to drill the A1 porphyry.
And obviously, it’s an interpreted porphyry at this point in time because no one’s actually drilled it. Yes, it’s a lesser cap there. So, I think it’s fairly solid interpretation to say the least, but we haven’t actually drilled it. It’s certainly the intent at this point in time that we will get to drilling it before the end of the year. But I will make the provisor that our focus is to drill sequential fence lines along Kora South and leading to the A1 headwater rather than jump on and start drilling the A1 headwater.
Chris Thompson
Great, John. Thanks. Thanks for that. And just I think I quote on Michael’s question earlier on, relating to Blue Lake there. What’s the time line for the next batch of results?
John Lewins
We should have a fairly comprehensive report out second half of the next quarter, which will have all the results that we’ve — from all the drilling programs we’ve done. Some into obviously from the aerial geophysics, et cetera, et cetera. So, it will be fairly comprehensive. And the plan is, I think, Chris Miller, VP Exploration, will be coming across around PDAC, so we will look to get around to the life of [indiscernible] and others and facilitate some sessions on specifically focusing on the exploration side of things.
Chris Thompson
That will be fantastic, John. Great, congrats. Thank you very much.
John Lewins
Thanks, Chris.
Operator
[Operator Instructions] This concludes today’s question-and-answer session. I would like to turn the conference back over to John Lewins for any closing remarks.
John Lewins
Thanks, operator. Look, I think first off, we are obviously pleased that we were able to finish the year on a strong note. It certainly has been a very impactful quarter. It’s probably after the first quarter 2018 when we actually declared commercial production. This to me has been a most important quarter in our short history. When you look at the boxes we take in terms of commissioning Stage 2, getting a Stage 2 throughput, and as a result, having record tonnes processed, record tonnes mined, mineralized material, remembering, of course, we have no ore yet, give us time total material movement record. Record in terms of ounces produced and driving down the costs, obviously, as a result of all of those outcomes.
Then also the aerial geophysics program getting back completed, albeit almost 2 years later than we wanted. But again, something called COVID came in. And then starting the drilling in Kora South and Judd South and seeing some quite outstanding results there. And speaking of Judd [indiscernible] mine out the Judd as well.
So quite an incredible quarter for us in many ways, and a lot more things happening on site as well, but that don’t show up in those numbers. They don’t show up in the presentation even in terms of setting up. So, we’re doing the lift of the tailings dam in new offices of the 800 portal starting the new workshop, starting to throw the pad for the new workshop at the 800 portal, further expansions on the camp, the list just goes on. And all of that’s being done in the middle of COVID we’ve got almost no outside, no foreign consultant contractors on site as well. It’s all being done by our own people and by local contractors.
So, I think it’s a testament to our people, to the operations group and the project group that we have on site that we’ve achieved — what we achieved in the quarter. And I’d just like to record the appreciation of our Board and our execs for our operational people and our contractors on site for what they achieved in the quarter. It’s quite outstanding. And it sets us up very, very well for 2022 when we’ve got so much still going on.
With that, I would just like to thank everyone for attending this morning or this evening, depending on where you are in the world. Evening for me. Thanks for the questions and the interest. It’s nothing worse than sitting here at the end of it, and nobody’s got any questions. You would think, a, my presentation was incredibly good and therefore, I’ve answered everyone’s question or, b, there’s nobody out there and I can’t see them. So, thank you all for your attendance and for the good wishes. And — have a great day, and we look forward to our next engagement. Thank you very much.
Operator
This concludes today’s conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
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