Superior Gold Inc. (SUPGF) CEO Chris Jordaan on Q1 2022 Results – Earnings Call Transcript

Superior Gold Inc. (OTCPK:SUPGF) Q1 2022 Earnings Conference Call May 25, 2022 10:00 AM ET

Company Participants

Chris Jordaan – President and CEO

Russell Cole – General Manager Plutonic and VP, Operations

Paul Olmsted – Chief Financial Officer

Andrew Bigg – VP, Business Development and Long Term Planning

Mike McAllister – VP, IR

Conference Call Participants

Philip Ker – PI Financial Corp.

Pierre Vaillancourt – Haywood Securities

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Superior Gold’s First Quarter 2022 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will a question-and-answer session. [Operator Instructions]. As a reminder, this conference call is being broadcast live on the Internet and recorded. I would now like to turn the conference over to Chris Jordaan, President and Chief Executive Officer. Please go ahead, Mr. Jordaan.

Chris Jordaan

Thank you very much Mr. Operator and good morning to everyone and thank you for joining us to discuss Superior Gold’s first quarter 2022 results. As a reminder, please refer to Slide 2 of our presentation, which is posted on our website to view our cautionary language regarding forward-looking statements. In addition, please note that all amounts discussed are in U.S dollars unless otherwise noted.

Moving on to the next slide, joining me today on the call is Paul Olmsted, our Chief Financial Officer; Russell Cole, Vice President of Operations and General Manager of Plutonic Operations; Andrew Bigg, our Vice President of Business Development and Long-Term planning; Mike McAllister, our Vice President, Investor Relations. I would like to start off with the highlights of the first quarter and 2022. Firstly, the safety performance improved markedly with total recordable injury frequency rate reducing 21% quarter-on-quarter, reduction of 16,747 ounces of gold, with sales of 15,823 ounces of gold at a realized price of $1,910 per ounce.

Total cash costs were $1,558 per ounce sold and all in sustaining costs were $1,721 per ounce sold. That’s up 12% and 15% respectively in the first quarter of 2022, which was in line with management’s expectations as we completed a successful 15-day mill maintenance shutdown within the quarter. Our all in sustaining costs also required sustaining exploration and capital expenditures. We generated cash flow from operations of $3.49 million before working capital changes and $400,000 after working capital changes and exited the quarter with a robust cash position of $20 million. An improved understanding of the geology, ecology, and mineralization at Plutonic has led to the establishment of two new mining fronts as demonstrated by the exciting new drill results at the Baltic Gap, Deep, Mining Front, and at the Western Mining Front. All of these are in close proximity to existing developments and infrastructure. Additionally, the Eastern Mining Front and Indian access has been added to the fold for continued exploration and potential mining fronts based on the recent gold results recorded in Q1. I would now like to hand over to Russell Cole, our VP of Operations, to elaborate on the operational highlights.

Russell Cole

Thanks, Chris. As we mentioned, the Plutonic Gold operations produced 16,747 ounces of gold during the first quarter as compared to 17,603 ounces in the same period in 2021. This decrease is really the result of the planned and successful mill maintenance shutdown and was in line with our management expectations. Operationally, we achieved a stope grade of 2.6, which is slightly below our targeted stope grade of 3, although this was what we expected. Our milled grade for the first quarter of 2022 was flat over the comparable period in 2021. We expect our mill grade to improve as we progress into 2022, reflecting the impact of both higher underground grades and replacing our lower-grade legacy stockpile material with higher grade open pit feed. Gold recoveries remained strong during the first quarter of 2022 at 85%.

In summary, the operations generated a strong cash flow despite the 15-day shutdown whilst delivering a solid production result. I will now hand over to Chris to recap the improvement journey of Plutonic, which started in FY 2020.

Chris Jordaan

Thanks, Russell. Moving on to the next slide. It’s worth to detect the quarterly improved performance of the business on the operational and financial fronts since the second quarter of FY 2020. Overall, we’ve seen a steady improvement in results following the operational improvements we’ve implemented at Plutonic. While the first quarter in FY 2022 was softer due to the planned shutdown, it was in line with management’s expectations and we maintain our annual production guidance of 80,000 to 90,000 ounces for this year. The quarterly production has been increasing from a low in the second quarter of 2020, an increase as expected for the last — later quarters in this year. Despite the shutdown in Q1 of this year, it outperformed all the quarters in FY 2020. Our net cash position has been quite strong in the first quarter at $20 million, representing a 15% improvement from the end of the first quarter in 2021, reflecting improved operating performance and repayment in full of our gold loans at the end of the second quarter in 2021. I now would like to hand over to our Chief Financial Officer, Paul Olmsted, to discuss our financial results for the quarter.

Paul Olmsted

Thanks, Chris. During the first quarter, revenue totaled $30.2 million from the sale of 15,823 ounces of gold, a decrease of 984,000 from $31.2 million from the sale of 17,538 ounces of gold in the first quarter of 2021. Gold revenues were slightly lower as a result of 1,715 fewer ounces being sold due to the mill shutdown, offset by an increase in the realized gold price to $1,910 per ounce from $1,777 per ounce.

Cost of sales were $26.7 million for the first quarter of 2022, a decrease of $0.2 million from $26.9 million for the first quarter of 2021. This was primarily due to the variance in the change in inventory category. Change in inventory reflected increases in gold in circuit, resulting from the timing of sales versus production at the end of the quarter, the buildup of stockpile inventory due to the planned mill maintenance shutdown in the quarter, and the timing of production, which occurred near the end of the first quarter of 2022. The change in inventory reflected a decrease in stockpile inventory.

In addition, the decrease in gold royalties was a result of fewer ounces sold in the quarter, partially offset by a higher gold price. These decreases were partially offset by higher mining costs from the addition of surface mining costs from the mining of Plutonic East and the Perch open pits, which began in the second quarter of 2021 as well as the increase in site services costs, reflecting increased contractor flight accommodation costs associated with the planned mill maintenance activity.

Adjusted income for the quarter of 2022 decreased by 355,000 to $1,424 sorry, $1.424 million or $0.01 per share compared to adjusted net income of $1.779 million or $0.01 per share in the three months ended March 2021. During the three months ended March 31, 2022, cash from operating activities before working capital changes was $3.489 million and $828,000 increases over from operating activities before working capital changes of $2.661 million for the three months ended March 31, 2021. The increase in cash generated from operating activities was predominantly a result of the repayment under the gold loan in the three months ended March 31, 2021 which, as Chris mentioned, was fully repaid in June 2021. And that was offset in part by lower operating earnings in the three months ended March 31, 2022, in comparison to the same period in 2021. Again, the lower operating earnings was primarily due to the mill maintenance shutdown and in line with management expectations.

At the end of the quarter, the company had $19.9 million in cash and cash equivalents. Of particular note is the fact that the gold loan was fully repaid at the end of the second quarter of 2021 and the company currently has zero term debt. And despite the 15-day mill shutdown, our working capital position has increased to $11.1 million over the December 31, 2021 position, a continued improvement. I will now turn the call back to Chris to continue.

Chris Jordaan

Thank you, Paul. Our production guidance remains as stated for 2022 of between 80,000 and 90,000 ounces [Technical Difficulty] expected softer first quarter due to planned 15-day shutdown, as I mentioned before. The company aims to increase the annualized production rate to 100,000 ounces per annum annualized in the second half of 2022. Our all-in sustaining cost is guided to range between $1,415 and $1,600 per ounce. We recognize that this range is about the Q4 2021 all-in sustaining costs of $1,416. However, we have conservatively guided our range for 2022 in consideration of potential inflation impact as well as potential disruptions from COVID-19 as Western Australia loosen restrictions and opens its borders. Our exploration expenditure range has increased year-on-year as we ramp up our exploration efforts in new open pit targets as well as continuing with our underground progress.

Moving on to the announcement of the December 2021 Mineral Resource and Reserve, I would like to hand over to Andrew Bigg, our Vice President, Business Development and Long-Term Planning.

Andrew Bigg

Thank you, Chris. Today, we also released our mineral reserve and resource update with an effective date of December 31, 2021. We’re extremely pleased to provide this update of mineral resource and mineral reserve estimates, which continue to deliver on our stated goal of further improving the quality of our resources and reserves, extending the mine life and maximizing the potential of the Plutonic Gold operations. I will just draw you to some of the key highlights, these include proven and probable mineral reserves increased by 66% against 2019 to 630,000 ounces of contained gold at 3.5 grams per ton, demonstrating a significant increase in the life of mine. Measured and indicated mineral resources inclusive of mineral reserves increased by 2% to 1.92 million ounces of contained gold at 3.5 grams per ton. Inferred mineral resources increased by 29% to 3.97 million ounces of contained gold at 3.8 grams per ton, pointing to a significant inventory of gold to fuel long-term production at Plutonic. And we further refined our geological model utilizing three-dimensional modeling that now incorporates all historical geological data.

The mineral resource and reserve estimate for Plutonic gold operations incorporates all available data from expanded two-year exploration program in conjunction with historical geological data in a newly interpolated block model. We believe the subjective approach to mineral resource estimation is an improved indicator of the future opportunities of Plutonic and is continued evidence that Plutonic is a large mineralized system with long-term potential and current assumptions. The new interpolation methodology described herein is believed to better predict the spatial distribution of the mineralization and grade estimation. As a result, mineral resources and mineral reserves have been identified in areas previously disregarded.

Since converting to the new models, which continue to be refined, mining from reserve has increased from typically 8% to 12% in the previous five years to 55% in the first four months of 2022, and 100% from resource slide shows [ph]. Our underground drilling continues to add mineral reserves and inferred mineral resources and outlines new areas of mineralization in the Western Mining Front, Baltic Gap and Indian access as reported during 2021. I strongly encourage you to see today’s full news release for all details and further explanation of the updated reserves and resources. I’ll now hand back over to Chris.

Operator

Chris, I believe you on mute.

Chris Jordaan

Apologies. I’ll start again. Sorry about that. Thanks, Andrew. As a reminder, we believe the key investment highlights of Superior Gold are that, firstly, it’s a low-cost operating mine with established infrastructure that includes significant [indiscernible]. The business has a clear and concise optimization and expansion plan with unique strategic advantages, evidence of Plutonic gold endowment with exploration upside, billing capacity, and regional positioning near potential external ore sources. Finally, one of the most compelling attributes is the re-rate opportunity we represent compared to our peers.

In order to achieve a rerate, our growth strategy targets delivering on three goals. Goal one is to establish a safe, stable and predictable operation between 70,000 and 85,000 ounces per annum, which we have delivered in 2021. We are now targeting 80,000 to 90,000 in this year as a next step on our way to deliver on goal two, that is to create an operational scale and reduce all-in sustaining costs by increasing production to 100,000 ounces per annum, with a current 1.8 million tons per annum operating processing facility and inch towards 150,000 ounces per annum by restarting the currency shut down of 1.2 million tons per annum milling service. This is expected to be achieved by increasing oil production from Superior Gold’s underground and open pit mines augmented by external sources. The third goal is to invest sharply in the exploration of known high potential targets to expand the resource and reserve and life of mine, which is now evident in the December 2021 mineral resource and reserve announcement this morning. I will explain in more detail how we plan to deliver on these goals.

Moving on to the next slide, as I said, our growth strategy at Superior Gold is straightforward and well defined and we’re delivering on three goals. These three goals will be achieved by working through four phases. The first goal is targeted to put in place a strong base of further growth, therefore, delivering safe, stable and predictable operations. We started working to reestablish steady-state production from the underground mine and are encouraged to see its return to the state of improving positive cash flow from 2021. In addition, the near-mine resource expansion drilling and mineral exploration that started last year has as predicted provided future mining comps for cost-effective feed to the mill.

The second goal is targeted to deliver an operation of scale that produces north of 100,000 ounce, 150,000 ounces per annum at reduced costs and improved cash flows, whilst being strengthening the balance sheet. The second goal is going to be achieved in two phases. The first one is in achieving the second goal of set to increase production towards 100,000 ounces per annum by supplementing to now established underground feed with open pit production from a number of near-mill, past-producing open pit projects, including Plutonic East, which commenced on schedule in the second quarter of FY 2021 moving on to Perch, which started in Q4 in FY 2021 and now entering in the second quarter in mines to beat [ph]. In addition, we have optionalities of Hermes and Hermes South in the short to medium term. The next phase is planned to increase production towards the 150,000 ounces per annum. Here, we plan to recommission our second mill that is currently on care maintenance. New sources of feed may come from exploration of our existing properties and/or from several other sources along the Plutonic Minami [ph] gold belt.

The third goal consists of delivering on the exploration of known high potential targeted areas. There’s also a potential for new discoveries as we invest in exploration at Plutonic and we have certainly been very encouraged by our recent building results as has been reported, specifically in the Western Mining front, Baltic Gap, and more recently, the Eastern mining front and Indian access to name a few. It is important to share how we are tracking to deliver this strategy. Firstly, Superior Gold has delivered to [indiscernible]. In 2020 gold production exceeded the upper level guidance at 77,000 ounces. The underground production increased over the year as the Q4 underground mining rate was achieved at 900,000 ounces per annum.

We now move on to goal two in 2022. The first phase will target to increase the quality of the open pit ore by executing on our early entry opportunity in the main pit. That is called Main Pit Deep, which started in the second quarter of 2022. This will see the open pit ore grade increase towards 2.5 grams per ton in some areas. The underground mine will expand its operations into new markets and by doing that provide 30% of the ore from underground from new areas as opposed to 100% regular [ph] mining in 2022. The underground is scheduled to deliver 900,000 ounces in 2022 that’s up from 835,000 kilo tons in FY 2021 and at an exit rate of 1 million tons per annum in the fourth quarter of 2022. Apologies, so the underground is scheduled to deliver 900,000 tons, not ounces.

Gold production is guided between 80,000 and 90,000 ounces for this year, and we exit at an exit rate of 100,000 ounces per annum in the second half of FY 2022. The operational plan for FY 2022 is therefore designed to edge towards delivering the first phase in delivering operations of scale. We announced the updated December 2021 mineral resource and reserve to date, and that’s concurrent with our Q1 financial results, and we continue to work on the life of mine plan expected to be completed later in this year. I will now hand over to Russell to expand our approach to COVID, space translation, and underground optimization. Thanks, Russell.

Russell Cole

Thanks, Chris. Above everything, the health and safety of our people is our top priority. COVID-19 continues to challenge Western Australia as it opens its borders and it is impacting — and it is impacting our operations in 2022. However, the health and safety of our employees is paramount, and we continue to employ in transit and on-site controls to ensure cases on-site are minimized to reduce this impact. In order to comply with the legislation, all employees and contractors are fully vaccinated by February 1st in 2022. We also are putting a lot of effort into introducing a new safety culture that is committed to a workplace free of accidents. Our people and safety risk transformation program commenced in October 2021 and focuses on safety, leadership, and critical controls management. For example, that’s on-the-job safety, process safety, and material risks. Early successes as a result of the aforementioned program is our — has reduced by 21% quarter-on-quarter.

We continue to focus on unlocking the value of the underground operations through production growth, margin optimization, and systematic exploration. First, we are focused on optimizing our grade from the underground, an average stope grade of better than 3 grams is our target through better spatial prediction of where the ore is. In mining operations, we have revitalized our underground fleet with the addition of two new trucks, new loaders and we’ll continue to recapitalize the mobile fleet with a new jumbo amongst the replacements for 2022. At the mill, which operates very well, the recommissioning of the gravity circuit continues to have a positive impact on our recoveries, increasing from the low to mid-80s to the high 80s, which is a little dependent but still successful.

During the quarter — during the second quarter of 2021, our open pit mining commenced in Plutonic East on schedule, we then moved into Perch, and now in the Main Pit Deep. Production from these open pits plus longer term the main pit pushback along with operational improvements in the underground is expected to increase production and return the Plutonic Gold operations to a state of significant free cash flow generation. I will now hand over to Andrew to expand on the exploration.

Andrew Bigg

Yes. Thank you for that Russell. Look, this slide here is a reminder, there are significant intercepts in close proximity to existing infrastructure as well as other intercepts like 1 kilometer outside of the mineralized. It should be clear that the limits of mineralization have yet to be found and continued investment in the exploration of Plutonic is definitely warrantied. In the meantime, our focus on the underground is on exploring and developing new mining fronts. We believe that the two new mining fronts being the Western Mining Front and the Baltic Gap, we’ll be keen improving the profitability of this operation in the near-term. We have announced drilling results from three main areas: Baltic, Indian and Baltic Gap. And more recently, Eastern Mining front and Indian access. An update on the Indian access exploration is expected by the end of May 2022.

In August 2021, we provided an exploration update on the third quarter with dual results from the Western Mining Front. The results were highlighted by drill hole UD-24141, which intersected 42.2 grams per ton of gold over 5.6 meters and UDD24376, which intersected 17.7 grams per ton gold over 6.4 meters. We updated drill results from the Western Mining Front in April 2022, and highlights include drill hole UDD24885, which intersected 83.2 grams per ton of gold over 3.2 meters, including 208.7 grams per ton over one meter and drill hole UDD25059, which intersected 4.3 grams per ton of gold over 11.9 meters.

As a reminder, the Western Mining Front is directly adjacent to existing underground infrastructure, thus requiring minimal capital to develop the area. The extension of existing mineral resources are key components of our current strategy to expand into new mining fronts and improve our mining grades, productivity, and reduce the reliance on the mining. Chris will now present the achieved and upcoming catalysts.

Chris Jordaan

Thanks, Andrew. We have a number of upcoming catalysts worth noting. Going forward, we expect to continue to provide regular underground exploration updates. I would like to draw your attention to the latest exploration update scheduled for the end of May this year on Indian access. In addition, results from the surface exploration expense in 2022 is expected to be published in the second half of this year. We announced the positive results of the updated reserve and resource update to date and reserves increasing by 66% compared to the December 2019 reserve, of course, prior to depletion.

We expect more opportunities for improvement as we continue the full potential assessment to unlock the latent capacity in our operations with specific focus on the life of mine optimization now with the completion of the new mineral resource and reserves. This is a very important element in our future as we’re facing and looking at expansion options for our underground mine. In addition to that, we are taking commercial options for additional ore to utilize the latent mill capacity. We also expect to be commencing and announcing the results of heritage surveys, which will hopefully have some positive impact from the Main Pit pushback project and by clearing the timing of the Hermes South project. And over the next 12 months, we have a healthy pipeline of development and exploration catalysts to look forward to. Augmenting this is the Team Andrew, who will now lead as we intensify our focus on growth opportunities with our brownfield and — both brownfield and external to our business. I’m going to hand over to Mike to present on the capital structure and marketing of the business.

Mike McAllister

Thanks, Chris. Slide 19 is a quick summary of the analysts currently covering our stock, our key shareholders, and capital structure. We were very encouraged by the support of some significant long-term goal funds and note that the analysts see a significant upside to our current share price. Trading has increased significantly over the last few months from an average of below 100,000 shares per day to in excess of 200,000 shares per day. In addition, the target price for Superior Gold stock has improved over the last quarter from $1.23 to $1.46. We also maintained a tight share structure with just 123 million shares outstanding. I will now hand the call back over to Chris to close off the presentation.

Chris Jordaan

Thank you, Mike. In closing, I’d just like to highlight the significant re-rate opportunity that exists with Superior Gold as presented on this slide. Now by continuing to deliver on our goals, we believe the company will revalue. As a reminder, our strategy is to deliver on three goals; goal one is to establish a safe, stable, and predictable operation and we’re heading towards 80,000 to 90,000 ounces produced in FY 2022 after delivering 77,000 ounces last year. Secondly, we will now move on to goal two, that is to create an operational scale with reduced all-in sustaining costs by increasing our production to circle 100,000 ounces per annum, which we believe we will achieve in the second half of this financial year. This is expected to be achieved by increase in oil production for Superior Gold underground and open pit mines, augmented by external sources when — in relation to the 1.2 million tons per annum milling circuit, which is currently in care and maintenance. That will be the key lever that we will be pulling on to move to 150,000 ounces per annum.

Goal three is to invest margin exploration of non-high potential targets and then to expand the resource and reserve as well as our life of mine, which we’ve now demonstrated in our new mineral resource and reserve. We remain focused on repositioning Plutonic for long-term success and unlocking shareholder value, and we encourage you to take another look at this opportunity. With that, we conclude the presentation portion of the call. Operator, we can now open the line for questions.

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions]. Your first question comes from Phil Ker with PI Financial. Please go ahead.

Philip Ker

Thanks operation. Congrats everyone on all the success demonstrated over the past several quarters. Just two questions today and just going back to the reserve and resource estimate provided today. Could you provide a little bit more context or background clarity, whatever it may be just on what component of either the reserve or resources was contained within the Western Mining Front?

Chris Jordaan

So what we have included was what we’ve already announced. Now needless to say, post that period, we continued with our underground exploration and mineral exploration. Now at that stage, the reports that talk to results up to the end of November last year is included. Everything thereafter has not been included and that will be seen for forthcoming attractions in this year as we will be going through this process of the mineral resource and reserve again.

Philip Ker

Sorry. Maybe could you quantify, you had 1 million ounces of underground growth and you had inferred and then you had close to 300,000 ounces of reserve growth underground. Is any of that material or what component of that material is from the Western Mining Front?

Chris Jordaan

That’s a good question. I’m trying to wrap up during the analysis, we did have those numbers available. I just don’t have it now. I’m going to ask Mike McAllister to make a note of that, we will get back to you personally on exactly what that number is.

Philip Ker

Because there wasn’t comment. [Multiple Speakers]. So, there was a note that they converted 30,000 ounces to the M&I from the Western Mining Front and the Baltic West, but just looking for a little bit more, I guess, whether some context to either the reserves or the inferred as well?

Chris Jordaan

Yes. Well, the one piece of context that I can tell you is, as I already referred to that we continue to drill and there are more findings needless to say that will augment our resource and reserve going forward. We recognize that the Western Mining Front will be one of the mainstay areas that we will be mining into the future. And in fact, we are there, entering into the Western mining front as we speak given the fact that 30% of our underground ore will be coming from the new mining front. So the turnaround from drill work that we did last year has already been brought into our mining plans. Russell, I don’t know whether you would like to add anything there?

Russell Cole

No, just racking my brain as well as I go through. I think we’ll have a look at what’s in the Western Mining Front and the other areas so we can break those out.

Philip Ker

Okay. And then just looking at Hermes. There was some language here that Hermes reserves were removed because of the, I guess, current economics. But could you just kind of dive into what work is being done to evaluate the economic potential of those over the course of this year and kind of how you see that pan out?

Chris Jordaan

Yes, sure. So in essence, what we’re looking at, there’s quite a lot of capital that needs to be spent to get Hermes South and Hermes to operate. And that relates to mine works, etcetera. In addition, what we’re doing is we’ve identified three targets to the East of Hermes South, which we are — in fact, we’ve already finished our first round of surface drilling, which is part of the surface drilling strategy and expenditure planned for this year. And that’s [indiscernible]. Now Central Ball is the lion’s share of those three targets. We’re waiting for the results to come through. We are hoping that through unlocking the potential in that area, we’ll be able to distribute the capital strain on Hermes and Hermes South to such an extent whereby under our current assumptions, it does become economic. So as I said, that work is currently underway. We’re just waiting for the drill results, and then we’ll do further analysis. But that work needs to be completed post haste.

Philip Ker

Is it a stripping economic factor related to stripping ratio, grade, operating costs, what is it?

Chris Jordaan

It’s — well, firstly, grade is a key element here given the fact that we need to track that material to our processing plant. In addition — sorry, in addition to that it is also the capital that needs to be spent to reestablish the road that leads from those assets.

Philip Ker

Okay, thank you very much. That’s it for me.

Chris Jordaan

Alright. And we’ll get back to you on that other question you have.

Philip Ker

Yeah, appreciate that. Thanks.

Chris Jordaan

Thank you.

Operator

Your next question comes from Pierre Vaillancourt with Haywood Securities. Please go ahead.

Pierre Vaillancourt

Hey guys. Just in the context of the higher cash cost and all-in sustaining costs for the quarter, could you provide some kind of insight into unit cost like per ton unit costs and just how that has changed quarter-over-quarter? And where you see room for improvement there going forward?

Chris Jordaan

Yes. I mean it’s very simply from a perspective of converting ore that we mined. We made — we mined a quarter into gold that we sell to get that fixed cost dilution. Needless to say also sorry, incurred the cost on the shutdown itself. The underground outperformed our expectations from a production tonnage perspective. But needless to say that work culminated in quite a significant stockpile on the pad. Needless to say we didn’t have the opportunity given the shutdown to mill that material, which we will now see coming through in the second quarter. So it’s expected that our all-in sustaining costs would have increased in that period just purely from a perspective of the shutdown and higher fixed costs in that period due to the shutdown.

Pierre Vaillancourt

Right. So where are you at with in terms of unit costs like mining costs, I mean is — are things back on track now, I mean, irrespective of where the grade is, obviously, the grade was lower, there was lower throughput. How are you feeling about that and where — I know the all-in target for the year is, I think, 1,600, what do you think you can do in terms of improving the unit cost?

Chris Jordaan

Yes. So I mean, the first thing first is to get the mill running at full — over the full period. And one of the reasons why we did the shutdown was to enable that mill to run at full design capacity. In fact, we’ve had a number of days, continuous operation at design capacity. So we are comfortable that the shutdown has put us in a position to run the mill at full. The second thing is what we have seen is that our underground ore — ore cost from underground on a per unit basis has decreased. We would see that decreasing even further through fixed cost dilution, given the profile from the underground mine that we plan. And as we’ve announced towards the end of this year in the fourth quarter, we’re expecting a mining right from underground that will equalize 1 million tons per annum, which is quite a significant jump from 835 delivered in 2021, and we’re targeting to deliver 900,000 tons in FY 2022.

So we would expect that cost to drop further down. In addition to that, with Main Pit Deeps — moving into Main Pit Deep we expect more ore to come from there, needless to say, that will put us in a good position to be able to run the mill at full now. That altogether having a full mill edging towards the second half of this year, we would expect fixed costs to drop quite significant — sorry, not fixed cost, all-in sustaining costs dropped significantly. We’re very comfortable with the guidance that we’ve given at $1,600 on the upside. In fact, if the assumptions that we made, which was quite conservative for this year, turn out a little bit more positive than we would have hoped with we’d be able to see cost hedging towards the lower end of that guidance.

Pierre Vaillancourt

Okay. So it sounds like it’s really a volume game, just hopefully scaling up as you advance with the mining plan. I just wanted to also ask you on the Vango situation, the court announcement, I mean, what are the implications for that longer term?

Chris Jordaan

Well, I think it’s sorry, very difficult to speculate exactly what potentially could happen in the future. What we do know is that the judge awarded our case as part of the 2017 ROFR is concerned that has provided us an opportunity to earn 50% of the — settlements. We are in the process — and we are in a process of setting up that JV structure and moving forward on that piece. The second is we have appealed the 2016 ROFR which was not awarded to Superior Gold. And we’re hoping to get soon when that appeal case would be heard. The impact of that would be that we would have the potential to have been up to 40% of the remainder of all tenements in Vango, on a Vango tenement register. Maybe, Andrew, could you elaborate a little bit further on anything there if you would like to add?

Andrew Bigg

Yes. I mean we’re obviously with the award that we have had, we’re looking to set up a constructive relationship with Vango through the JV committee. And as we work through our life of mine plan, anything in the K2 resources or further that is attractive to us will definitely come in, and we’ll look to capitalize on that.

Chris Jordaan

And so far as looking into the future, maybe I can add, we’re not hanging any of our hats on that. Our growth strategy is purely built on our own property and sentiments and also looking down South from where we’re operating it. So anything that could come from the Vango relationship would purely be augmented?

Pierre Vaillancourt

Okay, thanks guys.

Chris Jordaan

Alright, thank you.

Operator

Thank you. Mr. Jordaan, there are no further questions on the phone lines at this moment. Please continue.

Mike McAllister

We have a few questions from the webcast. The first question is, will COVID-related employee absenteeism affect the current quarter’s production?

Chris Jordaan

Russell, do you — would you like to feel that. You’re very close to the operations needless to say, and you live with that day in and day out.

Russell Cole

Yes, certainly. The COVID cases are a little bit tragic and depending on what the government mandates are at the various times we’re probably averaging lower than the 7% or 8% absenteeism rate. So to us at Plutonic, there’s no real impact. We are very lucky. We’ve got a fairly strong program of some checks and balances on our people before they go to site. Once they’re at site during their rotation at site and then before they leave. So we’ve really not seen the impact that a lot of other sites have had. It doesn’t mean we sit back and rest on our laurels. We continue to look at that and then continue to monitor and educate the workforce further and further. And some of that’s putting us in good stead.

Mike McAllister

Perfect. Next question is, are we satisfied and comfortable with the stope inventory?

Chris Jordaan

Just repeat that question. Are we satisfied with…

Mike McAllister

The stope inventory.

Chris Jordaan

Well, I mean there’s probably two valid points from which you can answer that. The first thing is, would we like to increase it? Yes, absolutely. And we will do, the fact that the mineral resource and reserve has just been updated that will follow through into the license mine, which will give us a clear line at what we should set our targets on and what we’ll be going after. In addition to that, I already mentioned earlier in the presentation that we’ll be replacing the number 3 jumbo. That will enable accelerated development and needless to say, open up more stopes into the future. Russell, would you like to add anything there?

Russell Cole

Probably the only thing to add to that now is because our diamond drilling program has become so productive we are now seeing great control, close space great control, complete out to about a three or four month window. So the stope inventory we have during that period is at a pretty high confidence level as well.

Mike McAllister

Great. Last question is this shareholder understands that we are locked in for natural gas under long-term contracts. They’re asking when they’re up for renegotiation and they’re also asking how much roughly we would pay or see as an increase to all-in sustaining costs if we were to be paying spot prices today?

Chris Jordaan

Paul, maybe you can answer that question from a contractual perspective?

Paul Olmsted

Yes. So just on the gas, we’re locked in for about a two and half year period on gas, which certainly provides us some certainty over that period in terms of cost. In terms of the increased cost at spot, it’s hard to say what the actual spot price would be at this point. There would be some impact. But I wouldn’t see it being a material increase, but any dollar that we can save through the long-term contracts is certainly benefit to us.

Mike McAllister

Okay, great. There’s no further questions through the webcast. Thank you.

Chris Jordaan

Well, thank you very much, Mike. Since there are no further questions, I’d like to thank everyone for joining us today. The business will continue to focus on strategic projects necessary to reposition Plutonic for sustainable long-term success. Of course, that will include fully optimizing the underground operations and incorporating new sources of open pit feed to increase our production levels while further advancing our understanding and the expansion of the mineralized zone at Plutonic. We expect that these improvements will drive the continued improvement in our financial performance over the course of 2022 and beyond. I now would like to thank everyone once again for joining us on the call today. Thank you very much, and have a great day.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.

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