Oct 23, 2014
Executives
James R. Porter - Chief Financial Officer John A.
McCluskey - Chief Executive Officer, President, Director and Member of Technical & Sustainability Committee Manley R. Guarducci - Chief Operating Officer and Vice President Andrew Cormier - Vice President of Development & Construction
Analysts
Rahul Paul - Canaccord Genuity, Research Division Adam Melnyk - National Bank Financial, Inc., Research Division Mark Mihaljevic - RBC Capital Markets, LLC, Research Division Jeff Killeen - CIBC World Markets Inc., Research Division Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division Anita Soni - Crédit Suisse AG, Research Division Adam P. Graf - Cowen and Company, LLC, Research Division Michael J.
Gray - Macquarie Research
Operator
Good afternoon. I'll now turn the meeting over to Mr.
Jamie Porter, Chief Financial Officer. Please go ahead, sir.
James R. Porter
Thank you, operator. Thanks, everyone, for attending Alamos' Third Quarter 2014 Conference Call.
In addition to myself, we have on the line today, John McCluskey, President and CEO; and Manley Guarducci, Vice President and Chief Operating Officer. I would like to remind everyone that our presentation will be followed by a Q&A session.
Before we begin, please note this disclaimer concerning forward-looking statements. We refer all participants to our forward-looking statements and resources disclosure in our press release and MD&A and caution that mining and exploration are subject to a number of risks and uncertainties, particularly with respect to the mining and processing of ore, recovery rates, operating plans and the conversion of mineral resources to proven and probable reserves, to name a few.
There can be no assurance that forward-looking statements made in the press release and conference call, based on information on hand today, will prove to be accurate. Future results and events could differ materially from those anticipated in such statements and should not be relied upon.
Also, please bear in mind that all of the dollar amounts mentioned in this conference call are in U.S. dollars unless otherwise noted.
Now John will provide you with an overview.
John A. McCluskey
Thank you, Jamie. Good afternoon, everyone.
I trust most of you have had the chance to review our third quarter results issued earlier today. Our third quarter coincides with the rainy season in Mexico, and this year was more severe than most.
On top of above average rainfall through July and August, we were impacted by the residual effects of 2 hurricanes late in the season, leading to record levels precipitation in September. Despite the difficult conditions, we delivered a solid quarter, operationally, with strong crusher throughput and higher-than-budgeted grades resulting in 52,000 contained ounces stacked on the pad, the most in more than a year.
Gold production of 28,000 ounces reflected sharply lower recoveries as the severe rain resulted in dilution on the heap, delaying the recovery of the significant portion of the stacked ounces. This is a timing issue, and we expect to see the benefit of these stacked ounces in the fourth quarter.
Underground development of San Carlos continued to the third quarter with the focus on completing development of the first stopes. We continued to stock pile development ore during the quarter, and by the end of September, we had accumulated approximately 25,000 tonnes with average grades well above the current reserve grade of 7 grams per tonne.
I'm also pleased to report that the mill modifications undertaken to optimize recoveries from this ore have been completed, and we began processing high grade from San Carlos during the first week of October. We will be ramping up high grade mill production from San Carlos through the fourth quarter, and combined with the deferred production from the leach pad, we expect a significant improvement in fourth quarter production and remain on track to achieve the low end of our full year guidance.
We remain focused on advancing what is one of the strongest growth profiles of our peer group. We made significant progress in Turkey, having been granted EIA approval for our Agi Dagi project in August.
While we can see much of the market focus remains on Kirazli, this was a significant event in both demonstrating the government support for the project and its commitment to the mining industry. We continue to push for a positive legal resolution for the challenge against the previously approved Kirazli EIA, while in parallel, we've now completed and filed with the Ministry of Environment a cumulated impact assessment, which will be used to support EPL process.
At our Esperanza project in Mexico, we're continuous in support of planned EIA resubmission in 2015, and at our Quartz Mountain project in Oregon, we expect to start an expanded 8,000 meter drill program by the end of this month. With more than $375 million in cash and no debt, we have the means to develop this pipeline and the flexibility to pursue additional accretive growth opportunities.
And with that, I'll now turn the call back to our CFO, Jamie Porter, who will comment on our third quarter financial performance. Jamie?
James R. Porter
Thank you, John. As John mentioned, we produced 28,000 ounces of gold in the third quarter.
Gold sales totaled 30,000 ounces at an average realized gold price of $12.84 per ounce, which is $2 ahead of the average London PM Fix price, for revenues of $38.5 million. Cash operating cost of $719 per ounce and total cash cost of $784 per ounce in the third quarter were both above our full year guidance.
They'll remain below the low end of our guidance on a year-to-date basis. All-in sustaining costs of $11.48 per ounce were also above our full year guidance range, reflecting lower production in the quarter, however, expected to decrease significantly in the fourth quarter with the increase in production.
Despite the lower production in the quarter, we continued to generate healthy margins and cash flow, with operating cash flow before working capital changes of $9.9 million or $0.08 per share. We reported a loss in the quarter of $2.2 million or $0.02 per share, reflecting the lower production in the quarter, attributing both to the heavy rains.
This included a $2.1 million foreign exchange loss due to the weakening of the company's operating currencies against the U.S. dollar.
Relative to a year ago, earnings were impacted by lower gold pipes and fewer ounces sold. Amortization of $357 per ounce remained high in the quarter, reflecting higher amortization from the Escondida Deep zone.
Those are expected to decrease significantly as we transition to high-grade production from San Carlos. The effective tax rate for the quarter of 39% was above the statutory corporate tax rate in Mexico of 30%, reflecting the impact of non-deductible expenses in Canada and Turkey.
The tax rate for our Mexican operations was consistent with the statutory tax rate, factoring in the after-tax impact of a 7.5% royalty. We will be paying our 10th consecutive semiannual dividend of $12.7 million later this month, bringing the total amount of return to shareholders over the past 4 years to more than $102 million.
Despite sharply lower gold prices, which has reduced profitability, cash flow and liquidity across the industry, our balance sheet remains one of the strongest in our peer group, with over $375 million in cash and no debt at end of September, representing nearly $3 per share. The lower gold price environment has emphasized the strategic importance of financial strength and flexibility, and we will continue to evaluate our capital allocation decisions accordingly.
We remain well positioned with a strong pipeline of development assets that work in the current gold price environment, and we have the cash and ongoing cash flow generation to fund this growth internally. At this point, I'll turn the call back to John.
John A. McCluskey
Thank you, Jamie. Alamos' COO, Manley Guarducci, will now discuss quarterly operating results.
Manley?
Manley R. Guarducci
Good afternoon. As John mentioned, the 52,000 contained ounces stacked to the pad in the third quarter was the highest in more than a year.
This was driven by grades of crushed ore and stack of 1.08 grams a tonne in the quarter, 27% higher than the annual budget of 0.85 grams a tonne. On a year-to-date basis, we've mined and stacked ore grade in 1.01 grams a tonne or 19% above our annual budget.
Total pressure throughput averaged 16,400 tonnes per day in the third quarter, below our annual budget of 17,700 tonnes per day, reflecting the above-average rainfall and lower high-grade mill feeds. Production of 28,000 ounces was reflective of a sharply lower recovery ratio in the quarter of 51% relative to our annual budget of 75%.
Recoveries were impacted by the severe rainy season, which diluted the pregnant solutions on the leach pad. The rainy season also lasted longer than normal, with 2 hurricanes coming through in September, contributing to a record-month of rainfall.
This delayed the recovery of a significant portion of the ounces stacked to the fourth quarter. With the expected completion of the rainy season, we have now shopped the pad and expect to realize a significant improvement in recoveries and production.
While the magnitude and duration of the rainfall was well above average, the seasonal impact we experienced in the quarter is not unusual and something we have experienced every year to varying degrees. Over the past 7 years, Q4 production has averaged nearly 30% higher than Q3, though this has ranged as high as 52% in 2010 and 56% in 2012, with more severe rainy seasons.
At Escondida Deep, tonnes mined and milled were consistent with revised expectations, and grades of 8.47 grams a tonne were largely in line with the reserve grade. The current mineral reserves of Escondida Deep had been exhausted.
However, the existing underground development can be used to support future exploration activities designed to test additional high-grade targets. The primary focus in the core remained on advancing underground development of San Carlos to support the ramp-up of underground mining rates in the fourth quarter.
Three primary headings are being developed with approximately 600 meters of development completed in the quarter for a total of 1,050 meters year-to-date. We continued to stockpile development ores through the quarter, with 25,000 tonnes accumulated by quarter end, grading above the current reserve of 7 grams a tonne.
As a reminder, this ore was being stockpiled until upgrades of existing mill circuit were complete to ensure optimal recoveries are achieved. The upgrades have been completed, and we began processing high-grade from San Carlos during the first week of October.
The focus will now be on ramping up both mill throughput and underground mining rates to approximately 500 tons per day by year-end. With the ramp up of high-grade mill production and deferred production from the leach pad, we expect significant improvements in fourth quarter production and expect to achieve the low end of full year production guidance.
At La Yaqui and Cerro Pelon, you will have noticed we pushed back our timelines slightly. At Cerro Pelon, this reflects a delay in closing the agreement, though we expect to have this wrapped up in the next few months.
At La Yaqui, we encountered mineralization where the leach pad was to be located and are undertaking additional condemnation drilling. As we previously disclosed, in Turkey, we are waiting for a ruling from the Turkish High Court with respect to the Ministry's appeal of the Canakkale Administrative Court's decision to cancel approval of the Kirazli EIA due to the lack of a cumulative impact assessment.
A ruling is expected in the next 3 to 6 months. In the meantime, we have submitted a cumulative impact assessment for Kirazli, which is currently under review by the Ministry.
We received formal approval of the Agi Dagi EIA in August, with forestry and operating permits being the next steps in this permitting process. A new legislative process was recently implemented in Turkey whereby a legal challenge to an EIA must be filed within 30 days of the approval by the Ministry.
This deadline has passed, and we're not aware of any legal challenges filed. As such, we do not currently anticipate the same legal challenges that have faced the Kirazli EIA.
Kirazli is envisioned as the first of the 2 projects to be developed with an initial production expected 18 months from the receipt of the outstanding forestry and operating permits. Baseline work continues at Esperanza as part of the planned resubmission of the EIA in 2015.
Further, we recently achieved a significant milestone having secured agreements to acquire water concessions sufficient for all future mining activities. We expect to commence drilling at Quartz Mountain later this month after being delayed by high forest fire hazard levels during the third quarter.
The initial program will occur in 2 consecutive phases and has been expanded to 8,000 meters. The aim of the program is to test the geological model and commence validating the existing resources.
With that, I'll turn the call back to John.
John A. McCluskey
Thank you, Manley. That concludes our formal presentation.
I'll now turn the call back to the operator, who will open the call for your questions. Operator?
Operator
[Operator Instructions] First question is from Rahul Paul from Canaccord Genuity.
Rahul Paul - Canaccord Genuity, Research Division
Manley, with the mill, you said you expect improvement to increase to 500 tonnes day by the end of the year, but I didn't see much of a commentary beyond that. So what kind of throughput would you expect at steady state?
And when do you expect to get this?
Manley R. Guarducci
Right now, we're ramping it up to 500 tonnes a day, Rahul, as I said. And it's due to the -- now we're more comfortable in what we're seeing underground and also what the mills can do.
And based on the current mining rate, we're probably going to hold it for 500 tonnes a day going forward. That's what we're currently looking at, although we're not finished doing our mine plans and budget for 2015.
Rahul Paul - Canaccord Genuity, Research Division
So is the mine the bottleneck at this point?
Manley R. Guarducci
The mine is the bottleneck, the mill has additional capacity, like we've always mentioned.
Rahul Paul - Canaccord Genuity, Research Division
Okay, and then, also wondering if you could talk a bit more about the results from the tighter space drilling in San Carlos and what you're seeing there compared to your block model.
Manley R. Guarducci
The drilling is being conducted by exploration, and we're in the process of doing our reserves and resources and modeling, Rahul. I haven't been -- we haven't looked at anything with respect to that in the short term.
Rahul Paul - Canaccord Genuity, Research Division
Okay, and then one last question for me. I mean, regarding the 25,000 tonnes of development ores that you said you've stockpiled ahead of the mill at 7 grams per tonne.
I'm just wondering, should we expect possibly lower dilution when you begin mining from the stopes? Maybe high-grade?
Manley R. Guarducci
Should we experience lower dilution? Is that what you -- the question?
Rahul Paul - Canaccord Genuity, Research Division
Yes.
Manley R. Guarducci
The 3 primaries we drove were completely in ore, Rahul. And because of that, there is no dilution.
You'll see dilution only when you're at the, how do you say, peripheral of the ore zones, which I couldn't even begin to tell you what that exact distance is, but it's not going to be significant compared to what you see now.
Operator
The following question is from Adam Melnyk from National Bank Financial.
Adam Melnyk - National Bank Financial, Inc., Research Division
A couple of questions here. First of all, the grade this year has been above budget, particularly in the third quarter here, at 1.08 grams.
Was that -- expected to have that kind of quarter-over-quarter variants? And I guess, sort of a follow-up on that is, how is the positive reconciliation this year compared to the positive reconciliation that you've experienced in previous years?
Manley R. Guarducci
Adam, the grades in the third quarter, based on our budget, was slightly higher than the quarters for the rest of the year, but really insignificant. We continue to have positive reconciliations as we have in the past.
And for Q3, the Mulatos Pit gave us a 16% reconciliation -- positive reconciliation with respect to ounces.
Adam Melnyk - National Bank Financial, Inc., Research Division
Okay, I guess in terms of the number, 19%, I think it was for the year on the positive reconciliation, is that a higher percentage than you've experienced in previous years? I think off the top of my head, it is.
Manley R. Guarducci
Yes, it is. The 16% is quite a bit higher than what we've averaged over previous years.
That's correct.
Adam Melnyk - National Bank Financial, Inc., Research Division
Okay, any insights on that, that you can provide us?
Manley R. Guarducci
No. We just continue to experience positive reconciliations in the Mulatos Pit, which has been consistent.
I think, historically, we've been running at about a 12% positive reconciliation. So this continues to be good news for us.
Adam Melnyk - National Bank Financial, Inc., Research Division
Okay, perfect. And in terms of the grade of the San Carlos stock pile, can you get more specific?
I understand you're telling us it's above reserve grade, but can you give us a sense of the order of magnitude to which it's above reserve grade? And also, were you expecting to mine higher grades early in the San Carlos mine plant?
And how does the grade so far reconcile versus the model?
Manley R. Guarducci
Adam, I'll answer this in a couple of points. One, the development of the first stope did go through some higher than the reserve grades, okay?
So that's one reason that the grades are higher. Two, it's too soon to give a reconciliation or the exact grade of that stock hub because I believe in processing it through the mill and getting a better representation using the head grade calculation.
Adam Melnyk - National Bank Financial, Inc., Research Division
Okay, so I guess reading between the lines there, so far, so good, in terms of any kind of early indications on the San Carlos model?
Manley R. Guarducci
Correct.
Adam Melnyk - National Bank Financial, Inc., Research Division
Okay, okay. And I just want to follow up on one of Rahul's questions there.
In terms of the mill being -- ramping up to 500 tonnes a day and then you're comfortable sort of staying at that level, I was under the impression that the mill with San Carlos was eventually going to be targeted at a higher throughput. So it sounds like if the mine's a bottleneck, is this a new information you've learned now that you've gone underground and actually started mining there that limits the throughput versus the previous expectation?
Or am I mistaken about that previous expectations for throughput?
Manley R. Guarducci
No. The mill can do more, as we've always mentioned.
And yes, there is -- just the sequencing of the underground, we believe it to be more comfortable at 500 tonnes a day, rather than increasing it to 750.
Adam Melnyk - National Bank Financial, Inc., Research Division
And that's based on having gone underground and seeing how the mine performs?
Manley R. Guarducci
It's generally based on amounts of working headings at a single time and the battlefield sequencing and everything else.
Adam Melnyk - National Bank Financial, Inc., Research Division
Okay, okay. And I guess another question before I get back in the queue, the mining costs have ticked up.
And a part of the disclosure in the MD&A you talked about the diesel cost, at least being partly responsible for that. And I know diesel is regulated in Mexico in terms of the pricing, but are you seeing any relief on your pricing?
And any read through to the mining cost based on what's happened to the oil price so far in October?
Manley R. Guarducci
In Mexico, the diesel, you can pretty much count on it, but it's going to increase between 0.8% and 1% per month. It's done that for quite a few years and it continues to do so.
We have not seen any relief this month, nor have we for this year. The increase in prices, yes, diesel's a factor, it's one of the major costs in the mining, but also the overall rates as we're hauling now from Victor and further San Carlos.
That increased our mining cost.
Adam Melnyk - National Bank Financial, Inc., Research Division
Right. And if you back out the underground from those mining costs, I think when we ran site earlier this year, Manley, we talked about around $3 a tonne for a contractor cost.
How has that contractor performed relative to expectations on a productivity and cost front?
Manley R. Guarducci
The contractor's performed well compared to expectations. They're doing what they're expected.
And more importantly, our mining costs, they're in line with what we budgeted for.
Operator
Following question is from Mark Mihaljevic from RBC Capital Markets.
Mark Mihaljevic - RBC Capital Markets, LLC, Research Division
Just first, quick one, you've mentioned that you've started to shock the pad, and you also mentioned that you started to get -- or go into the gravity circuit -- or San Carlos or going to the gravity circuit again. So can you just give us some indications on how the first three weeks have shaped up?
It's going to be a big quarter, so just want to see how you're tracking.
Manley R. Guarducci
Okay, Mark. Well, we shock the pad every year.
The only difference this year is, normally, we start it in the middle of September, whereas we started this in October because it was still raining in September. But as I mentioned in my speech there, it's something we do every year.
We don't expect any differences. The gold will come out.
With respect to the mill, we started putting ore through it in the first week of October, and commissioning has just taken a little bit longer than we expected, but things are wrapping up -- ramping up now, as expected.
Mark Mihaljevic - RBC Capital Markets, LLC, Research Division
Okay, perfect. So now you mentioned that you don't -- you haven't heard of any challenges with Agi Dagi permitting.
Is there an ability to resequence that if you do get the forestry permits for that one quicker because there is no challenge? Could you sequence Kirazli first or Agi Dagi first, and then do Kirazli following that?
Manley R. Guarducci
Yes, it's up to us to resequence it. However, the ideal situation would be to start Kirazli first, that's how we've always envisioned it.
But there's nothing restricting us from resequencing it, if we choose to do so.
Mark Mihaljevic - RBC Capital Markets, LLC, Research Division
And I guess, do you have any indications on potential timing for the forestry and permits for Agi Dagi?
Manley R. Guarducci
No, we don't have an indication, and it's just something we continue to monitor and take day by day.
Operator
The following question is from Jeff Killeen from CIBC.
Jeff Killeen - CIBC World Markets Inc., Research Division
Just in regards to San Carlos, Manley, I think you have mentioned effectively zero dilution in the first sequence of mining. Just wondering if you could comment on the mining plan as it stands today.
And when would the mining plan suggest that San Carlos grades would sort of gravitate back towards the reserve grade?
Manley R. Guarducci
Okay, Jeff, yes, when we ran the primary, let's call them scram grips [ph] into the stope, there's no dilutions, correct. And we budgeted for -- over planning, the mine plant showed the 10% dilution when we get around the perimeter of the ore block, call it, per se.
Okay?
Jeff Killeen - CIBC World Markets Inc., Research Division
Okay, very well. And so according to the mine plant, as it stands today, when would you start mining some of the more periphery stopes?
Manley R. Guarducci
We will start mining those, probably, near the end of the quarter. We've got quite a bit of ore in the primaries, and then the secondaries are in order as well, and then next step would be taking the sides out of it.
Jeff Killeen - CIBC World Markets Inc., Research Division
Okay, very well. And then, with regards to underground throughput, like what do you think is the critical factor here to potentially move it above 500 tonnes?
Is it just a better comfort level with the reserves itself? Is it understanding loading cycle time?
Or like what do you think would potentially loosen that bottleneck?
Manley R. Guarducci
Getting and developing a couple of more stopes, getting a better feel for the contractor, just getting a little bit more comfortable underground, but principally developing more stopes and getting a better understanding of what we can expect with respect to cycle times on backfilling and everything else.
Jeff Killeen - CIBC World Markets Inc., Research Division
Okay, and then your experience -- like, what kind of time frame would you feel comfortable in being able to understand those factors? Would it be 2 operating quarters?
Or is it still too early to tell?
Manley R. Guarducci
It's too early to tell right now. I'd give it a couple of quarters.
As I mentioned, let's develop a few stopes and see what we got.
Jeff Killeen - CIBC World Markets Inc., Research Division
Okay, very well. And then in regards to Cerro Pelon, as you noted, there was some delays in getting the agreement closed.
Are you able to comment on what those delays might be? Or when you would expect that deal to close?
Manley R. Guarducci
Yes, during legal due diligence, the owner of Cerro Pelon had an obligation that he was required to meet, and we want to make sure that, that obligation is completed. And it's scheduled to be taken care of as of the 24th of October, and then we just want to make sure it's gratified by a judge, that's all.
Operator
The following question is from Trevor Turnbull from Scotiabank.
Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division
Yes, I was wondering about the recoveries that you expect in the mill. I know that, overall, once you run material through the mill and as well put the residual or the tails on the leach, I think you're looking for 75%.
But for the stuff on its first pass through the mills, should we looking -- was it 63% that we used to talk about?
Manley R. Guarducci
Yes, just the gravity circuit itself and the ILR is, I'm going to say, 58%, Trevor, off the top of my head, okay?
Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division
Okay.
Manley R. Guarducci
I just don't remember the exact number right now. What I can tell you is, we did batch a small portion of the San Carlos ore through the mill as a test, the way it was, just to make sure our flow sheets -- our testing was accurate.
And without the upgrades, it did come out at what we expected, okay, without the upgrades. I just got the numbers now, 60% for gravity and an additional 15% for the flotation, okay?
Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division
And sorry, then 15% from the flotation?
Manley R. Guarducci
Yes. Slightly that's a total of 75%.
Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division
So sorry, the flotation, just remind me of the flow sheet, so you float it and then it has to be leached?
Manley R. Guarducci
Yes. Then it goes through the ILR, that's correct.
Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division
And so that leach -- that flotation and leach process, does that mean there's going to be a lag on the recovery? Or does it all come out in the same quarter it goes through the mill?
Manley R. Guarducci
No. It all comes out -- it'll go through the gravity circuit and then the concentrate from the gravity circuit and the float will go to the ILRs, which get leached, and that's what you get right away, okay?
And then the tails from the ILR and the tails from the gravity circuit will continue to go to the leach pad and get leached over time.
Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division
Okay, okay. Then with respect to -- had some questions on reconciliation and the grades at the leach pad.
The guidance for the year has been 0.85. Is that kind of what you're factoring in for Q4 when you talked about getting to guidance for the year?
Manley R. Guarducci
For Q4, we all were considering as what our mine plan says, onces on and recovering those ounces, plus the deferred ounces that are going to come out due to the shocking of the leach pad, plus the mill production that we expect.
Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division
Right. So with respect to the ounces to get at it in Q4, that's the mine plan of 0.85?
Manley R. Guarducci
Based on the budget, it's about 0.86, somewhere in there. Yes, it's pretty consistent throughout the year.
That's not including any -- we don't add any positive reconciliations. That's just what the ballpark [ph] says, okay?
Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division
Yes, exactly. But given that the positive reconciliations have been so consistent for so many years, is there a thought that the model needs to be reworked to get that thing within better than 15% kind of tolerance?
Manley R. Guarducci
Well, we look at this, and we've looked at this quite a few times. And I think we discussed this previously, if you look back.
It's just -- I wish we could do it, but it's just something we can't, how do you say it, do it with any degree of confidence that we would feel comfortable then because a large part of it is due to the way it was logged years ago, and it was a visual interpretation versus an analyzed one. And what happens, Trevor, is a lot of the mixed and sulfides that were logged as such ended up being -- or end up being off-sites.
And that's where we see the higher grades and improved recoveries. So it's not something we can ideally change with any degree of confidence that would pass any test that I'd be happy in any way.
Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division
Well, that sounds like you would certainly impact your ability to predict the recovery, but the raw grade, you would think is not so qualitative as just the assay work.
Manley R. Guarducci
No, but our -- we don't just base our, how do you say, our model just based on grade. We have a recovery function in there, a grade function and a net profit formula.
So it's not just cut and dry, a cut-off grade issue.
Operator
The following question is from Anita Soni from Crédit Suisse.
Anita Soni - Crédit Suisse AG, Research Division
My first question is with regards to the inventory. The -- I think it's about 3.5 million that you took off for this quarter for the inventory that's on the leach pad.
Can you just walk me through what's included in that? I guess, by my calculations, I would have thought some more would've come off that more along the lines, about $7 million that's still on the leach pad and costs?
James R. Porter
Yes. So, Anita, it's Jamie.
The -- I mean, our costs follow the ounces as they get produced, right? So 3.5, Anita, reflects the costs that were deferred, associated with those deferred ounces in production.
It also reflects the cost associated with the other stockpile -- the other lower recovered materials that we have as being stockpiles, and it includes an allocation depreciation. So it's got the cash costs associated with working on the leach pad, what went to our low recovery stockpile and depreciation associated with the inputs on each.
Anita Soni - Crédit Suisse AG, Research Division
Okay, I would've thought it would've been more. But that should effectively reverse in the fourth quarter, right?
James R. Porter
Yes, it absolutely should. In fact, you should see it go, hopefully, the other way.
Anita Soni - Crédit Suisse AG, Research Division
Right. In just walking through and doing this sort of no positive grade reconciliations, sort of 0.86 gram per tonne material, are you also factoring in immediate recovery, if any, of the Q4?
Like higher-than-average recovery in Q4 because you're shocking the pads right now?
James R. Porter
Have we considered that as part of the forecast in Q4? Is that the question?
Anita Soni - Crédit Suisse AG, Research Division
Yes.
James R. Porter
Yes, we have, Anita. Anita, the difference between our expected recovery of 70% and the 51% recovery ratio that we actually achieved in Q3, we anticipate getting those ounces out in Q4.
And that's what we have seen historically. You'll see our Q4 recovery ratio is often in the mid-80s compared to 50% to 55% recovery ratio in the third quarter.
Anita Soni - Crédit Suisse AG, Research Division
Yes, I know. I understand that.
But what I was also saying is, you are putting excessive cyanide onto the pads this quarter. You're stacking on this quarter.
Some of that ore may get a little bit of a boost as well this quarter, which eventually, I think in the first quarter, may -- you may see a little bit of a rebalancing on that. That's what I was trying to get at, which I think, Manley answers.
Manley R. Guarducci
Yes, I did.
Anita Soni - Crédit Suisse AG, Research Division
Yes. So just now going back to San Carlos, how are the underground mining cost stacking up compared to what you have thought when we had the tour back in January?
Manley R. Guarducci
Yes, they're within what we expected, Anita.
Anita Soni - Crédit Suisse AG, Research Division
Okay. And last question, back on Mulatos.
In terms of your sequencing, just forget the grade reconciliation, but in your mine plan, as you go towards 2015, as an example, this year, you are below the average reserve grade. Do you plan to be at, above or below average reserve grade next year?
Manley R. Guarducci
We are currently doing the budgets and the mine plans and everything, Anita. It's too soon for me to say.
Operator
The next question is from Adam Graf from Cowen.
Adam P. Graf - Cowen and Company, LLC, Research Division
I think my questions about Mulatos have largely been answered. Question on Esperanza.
Maybe you could give us an update on the timetable for the development and maybe breaking first ground at Esperanza.
John A. McCluskey
Adam, maybe I'll jump in and take this question. It's John McCluskey.
We are effectively redoing an EIA. And as you know, once we start to tangle ourselves in issues that are primarily driven by regulatory decisions, responses from the government, it really makes time lines difficult to predict.
We can tell you that according to our schedule, we will file that EIA towards the end of the first quarter of next year. And typically, we're seeing something like 6 to 9 months of review time taken by the Mexican government.
It can go -- I mean, that's in our -- we've been monitoring what's been going on with other operators in Mexico as well. It can take up to a year.
So just depending on how that goes, that will be in effect on that date. And then, what we are also noting is, again, moderating our own performance ability and what we see going on in other operations, it can take anywhere from 12 to 18 months in order to get a mine up and running beyond that.
And so you start to see, once you push out 2 years, 3 years, it starts to -- the marginal incremental time it takes beyond that, it just becomes very, very difficult to predict. So we've been aiming towards a timeline that sort of looks towards the end of 2017, beginning of 2018.
And we've said that in previous presentations, it's really difficult to make any additional adjustments or fine-tuning on a forecast like that just simply because of the unpredictability and the very wide-ranging feedback you get from the discussions with the regulators when you try to pin them down on it.
Adam P. Graf - Cowen and Company, LLC, Research Division
Maybe a follow-up on that is, given Esperanza and some of the delays in Turkey, if the big capital spending at Esperanza and the big capital spending at Turkey all come in kind of at the same time, are you guys confident that you can build them both at the same time? Or would you both financially and technically?
Or would you try to stagger them?
John A. McCluskey
Well first of all, Kirazli is a relatively modest capital project in the grand scheme of things, comes in at roughly $150 million, $160 million, somewhere in that range. We would be more than capable of building both Kirazli and Esperanza at the same time.
And just looking at the -- our internal sort of, estimates of return on capital, those would be 2 of the most attractive projects that we have. And given that they're, essentially, in different jurisdictions of the world, requiring completely different construction teams and so on, there's no issue with having to rob Peter to pay Paul in order to get them both done.
You're essentially requiring two separate teams in order to get those built. And from a budgeting perspective, we're in fine shape in order to build those two things.
And that's the way I would see it. Those are two of the better projects that we have.
Neither one of them taps in too heavily to our capital reserve. And on a combined basis, you're well under $200 million -- or let me put that more in the range, well I meant to say, well under $300 million, so in the range of about $250 million, $260 million.
I think that's well within our capacity. And between the 2 projects, you're bringing on in excess of 200,000 ounces of annualized production.
And that's -- the cash flow generated from those operations, I think, will help provide additional financing for subsequent projects that we would build.
Adam P. Graf - Cowen and Company, LLC, Research Division
And just one last question. On Quartz Mountain, what's your budget from now through the end of 2015, roughly?
And do you see that project being after Esperanza and all the Turkish projects are online?
John A. McCluskey
We have a budget for -- of about $13 million for Quartz Mountain, and it's based on a fairly expanded drill program. It's basically -- that's a longer-term project for us, the rate of spend is, in some respects, determined on the amount of drilled rigs that we employ.
And we're going to kick it off slowly. And then I think, the intention, as we learn more, is to ramp up the rate of drilling.
But we've been approved, so far, to do about 8,000 meters of drilling, and we intend. Very shortly here -- we're in advanced discussions with the state regulators, the intention is to expand that to 15,000 meters of drilling.
And we'd like to get that completed some time by the middle of next year.
Adam P. Graf - Cowen and Company, LLC, Research Division
And do you think that'll give you enough definition to give you a feel for an initial scoping study?
John A. McCluskey
I would say so. The project was well drilled in the past, so well drilled.
I think there was -- it's something in the order of 700 drill holes put into Quartz Mountain. If we undertake the program we have in mind now, we get that completed, there's enough confirmatory drilling associated with that work that, I think, it gives us confidence in what we've been doing the past.
So I have Andrew Cormier sitting here, who is our VP of Construction and Development. He's been largely involved with overseeing that project.
Maybe I can make him -- let him make a comment or two on what he see is coming up. Andrew, do you want to make a comment?
Andrew Cormier
Sure. Thanks, John.
Yes, we had envisioned that the 8,000 meter program will give us scoping level economics in the project to get some primary tests for growing. The expanded 15,000 meter program that will follow that should give us enough information to support a PEA level study.
At that point, we'd make, obviously, the decisions on how we would proceed going forward based on the results received.
Operator
Our following question is from Michael Gray from Macquarie capital.
Michael J. Gray - Macquarie Research
Yes, just to clarify, on Quartz Mountain, given you talked about it, so is that a total of 23,000 meters it could be up by the end of 2015?
John A. McCluskey
No, that will be -- we would target that to be clear by the end of 2016.
Michael J. Gray - Macquarie Research
End of 2016. Okay.
And just to Turkey with the presidential election in August, John, can you comment on changes to the permitting landscape, specifically the EIA, the forestry operating permits in terms of the bureaucracy and any changes? Essentially, are you more optimistic in permitting pass versus six months ago?
John A. McCluskey
I am. The first positive indication that the industry saw was the new mining legislation that came in, in late June, which was ahead of the presidential elections.
Since then, what we hear more than anything else is -- what we hear through informal discussions with the bureaucrats that are fairly long-term, these are people that had been at this, in this position, for a number of years. So not new faces on the block, not associated with new government.
So they tend to be people that we find consistently reliable, we can sort of depend on what they're saying. And the indications that we're getting from those discussions is that the government is still very much in favor of seeing the mining industry development in Turkey and that steps are being taken on a number of fronts that, typically, refers to a number of different ministries to ensure that mining can develop at a good pace in the country.
So the Ministry of the Environment, Ministry of Forests and Ministry of Energy itself. I mean, all these bureaucracies are, more or less, cooperating together in order to pave the way for projects to get developed in Turkey.
So from a discussion point of view, it's all been rather positive. There have been a number of important breakthroughs for some of our peers over the course of the last year.
And I think all of that supports a more optimistic outlook for us looking forward to 2015.
Operator
The following question is from Rahul Paul from Canaccord Genuity.
Rahul Paul - Canaccord Genuity, Research Division
Manley, just a follow-up question on the mill ramp up. So far, what kind of throughput are you seeing at this point early into the ramp up?
Manley R. Guarducci
What happened, Rahul, is that we're missing a couple of important valves for the flat floatation circuits. We know what the mill can do.
That's not an issue. We did not want to ramp it up without those valves because of the recovery.
We want to make sure we ramp it up when we're good and ready to do it in order to get all the gold out of it that we're going to be putting through it. So I can tell you it's going to do what we think it's going to do, I just can't tell you that it's done it right now.
Rahul Paul - Canaccord Genuity, Research Division
Okay. In terms -- but at this stage, so when it does operate, do you hit 500 tonnes a day allocation?
Manley R. Guarducci
No. Well -- yes, we'll definitely do that.
I'm not concerned about that at all.
Rahul Paul - Canaccord Genuity, Research Division
Okay, but not yet, I guess. Okay.
Manley R. Guarducci
I guess -- I think I got the essence of your question, Rahul. And essentially, it's not a matter of capacity or lack of capacity.
The mill can certainly handle everything that we can throw at it. It's just that we've been feeding it slowly to begin with because it's just -- everything wasn't in place.
Now that it is, you're going to see us start to ramp it up quite rapidly.
Rahul Paul - Canaccord Genuity, Research Division
Okay. What I was trying to get at is, I was trying to get a sense of how quick the ramp up might be to 500 tonnes a day.
I know you mentioned by the end of the year. I'm just trying to get some more color from that.
Manley R. Guarducci
Okay. Rahul, I don't expect it to take more than a couple of more days, and then we start shooting through the stockpile and the development ore, okay?
Operator
The following question is from Adam Melnyk from National Bank Financial.
Adam Melnyk - National Bank Financial, Inc., Research Division
Just a follow-up question on the Kirazli, I guess, maybe the strategy there in terms of permitting. I noticed that you've submitted the cumulative impact assessment for Kirazli, and that's ahead of the Turkish High Court making a decision on your appeal.
So I'm wondering about the time line for that cumulative impact assessment. And also how a positive decision in your favor from the Turkish High Court would affect that cumulative impact assessment?
Would it then be fold, because it's now in the -- of the domain -- would you have to go through with that process? And how those 2, I guess, parallel lines for Kirazli affect each other?
John A. McCluskey
Back in July, we were able to meet with the lawyers for the Ministry of the Environment, who are the -- primarily the lawyers addressing the appeal. And it was their suggestion that if we could complete a standalone cumulative impact assessment, in other words, not modify our EIA, which had already been recognized by the lower court as being complete.
If we could just complete a standalone cumulative impact assessment and attach it to the EIA, then they thought that had a good chance of influencing the court with respect to our appeal. So we did that.
We've been working on it since March, in any case, and we managed to get it completed by September. And we filed that with the Ministry of the Environment.
It's going through a review at the Ministry of the Environment now. And we anticipate it will be approved by them.
And once it's approved, it will be subsequently filed with the court and that, hopefully, gives us a better chance of winning that appeal. Since there was no issue with the EIA itself, the court even recognize that, it seems to be -- the decision seemed to be one of a deficiency.
Even though there was no regulatory requirements in the accumulative impact assessment, they treated it as if it was a deficiency. So in order to answer that deficiency, we've now completed the competitive impact assessment.
And hopefully, the higher court looks at it that way, that, if the only issue was the lack of a cumulative impact assessment, well, now they have one to review. And it's one that has been, by that point, by the time that it's in front of them, one that's been approved by the Ministry of the Environment.
Adam Melnyk - National Bank Financial, Inc., Research Division
Right, okay. So just to be clear on the time line, so the Turkish High Court, at this point, won't make a decision on your appeal until they see the cumulative impact assessment approved by the Ministry of the Environment and they have that before them?
John A. McCluskey
No, that's not the case. In fact, a small risk we run is that they come down with the decision before the ministry is finished with their approval of that cumulative impact assessment, and it doesn't really the make its way to the court prior to them making a decision.
We're hoping the ministry is going to expedite their review in order to make sure that, that doesn't happen. But there is a small risk that it can.
But given that the feedback that we received in July, the feedback was we shouldn't expect a decision until about year-end or maybe even early in the new year, then we felt that the risk of the court not seeing the CIA before they made the decision, we thought that risk was pretty low. So now the whole thing's in process.
And all things going well, the ministry will finish their review, file this with the court, and the court will have mode studies to refer to before they render a decision. And I think we're the only company in Turkey right now that is in this position.
There are actually quite a number of appeals before that court on the same grounds as our appeal. So there is a whole bunch of companies that had their EIAs effectively overturned because of the lack of a cumulative impact assessment.
But I believe we're the only one because I think we were the first one. We were the only one that was able to get a cumulative impact assessment finished and in a position to be reviewed by the appeal court before they rendered a decision.
So it puts us in somewhat of a unique position if we can get that to happen.
Adam Melnyk - National Bank Financial, Inc., Research Division
Right. So just so I'm clear.
If the Turkish High Court rules in your favor before they see the cumulative impact assessment, the key risk to you see there is time, as you have to go through the CIA with the environment ministry? Is that the risk there?
John A. McCluskey
If they rule in our favor, then you might say that the fact that we did a cumulative impact assessment was moot, right? It wasn't really needed.
But if they have not ruled, one way or the other, and we get a cumulative impact assessment in front of them, it was the feeling with the opinion of the lawyers for the Ministry of the Environment that this would help their decision be in our favor, which is why we did it. Now if it happens to go against us, say, we don't get the cumulative impact assessment in place and it goes against us, essentially, we'll be refiling in January.
I guess we'll be refiling the same EIA, but this time, with the accumulative impact assessment with the Ministry of the Environment. And at that point, since both of those documents have already been approved by the Ministry of the Environment, I guess it won't take them long to approve it again, and the process will begin anew.
But this time, we'll be in a position with ministry-approved cumulative impact assessment and the ministry-approved environmental impact assessment. So there's very little -- for the lower court, at that point, to take issue with.
So we think, at that point, we will have a fairly smooth road going forward.
Adam Melnyk - National Bank Financial, Inc., Research Division
Great. And which projects did you use in that cumulative impact and assess?
James R. Porter
It took into consideration an area that considered geography, water sheds and a few other things based on the consultant's interpretation of what a cumulative impact should entail. And there were 20 mining projects and 22 total projects that were considered in the cumulative impact.
And all of the impacts that were noted, they're all -- there was no issues at all. There's common methods to mitigate it, and it was a non-concern.
Just for your information, to give you a little bit more of idea of the scale, the cumulative impact area of Kirazli does not include Agi Dagi because they're essentially separate, in separate geographical areas and watersheds and everything else.
Adam Melnyk - National Bank Financial, Inc., Research Division
And at this point, for Agi Dagi, is Çamyurt included in that environmental assessment? Or would that require a standalone environmental assessment, should those ounces go ahead?
John A. McCluskey
That would be -- we've always considered Çamyurt that would require a separate assessment. But we've always considered Çamyurt to be an expansion of the Agi Dagi project when we look at it.
Adam Melnyk - National Bank Financial, Inc., Research Division
Right, okay. So the environmental assessment you have approved at this point does not cover Çamyurt?
John A. McCluskey
If you look back, the cumulative impact assessment for Agi Dagi was just about finished while we were just in the process of drilling off the first ounces at Çamyurt. So it was just found later in the sequence of events.
So there was no possible way to just sort of just stop the EIA on Agi Dagi, which was virtually finished and start to try to catch up the Çamyurt zone with it. So one of the reasons why we see a more favorable approach to development in Turkey, getting Kirazli underway first and Agi Dagi next, is it just gives us an opportunity to help catch up Çamyurt into the whole sequence of development at Agi Dagi.
Those are the best-grade ounces that we have there.
Operator
The next question is from Anita Soni from Crédit Suisse.
Anita Soni - Crédit Suisse AG, Research Division
Just a quick question with regards to La Yaqui and Cerro Pelon. I noticed the time line for permitting was an additional 3 months from what you had indicated in Q2.
Could you just elaborate on what that's related to? Is that the additional obligation that one of the land owners had?
Or is it related to something else?
Manley R. Guarducci
Anita, I didn't hear you. Are you talking about Pelon or Yaqui?
Anita Soni - Crédit Suisse AG, Research Division
Both.
Manley R. Guarducci
Both? Pelon, we want to make sure that the owner complies with all the obligations he currently has before we transfer the land into our name, okay, and that should be taken care of here shortly.
And with respect to Yaqui, we do have land assets. We have started the baseline studies.
And during our exploration reconnaissance in the area and setting up the condemnation drilling, it turns out that we have some mineralization in the leach pad area, so we want to do additional condemnation drilling to make sure that we don't have anything else there.
Anita Soni - Crédit Suisse AG, Research Division
All right, so it's a good problem to have.
John A. McCluskey
I don't think he'd put it quite the way he wanted to there. Frankly, we all hope there's more gold there, to be honest.
But, in fact, you don't want to be building your leach pad on top of the mineral deposit, if you can possibly avoid that.
Anita Soni - Crédit Suisse AG, Research Division
And just a quick question on the unit mining costs. All of -- slightly higher, obviously, this quarter, all related to rain?
Or is there anything that you think might sort of carry through to 2015 like process costs were higher, crushing and conveying just slightly higher?
Manley R. Guarducci
Okay. The process is mainly the rain, Anita, because of the additional cyanides, which we always have to use, okay.
With respect to the crushing, I mean, we had some onetime items, maintenance items, in there if I recall correctly. And the mining, as we mine more tonnes coming out of Victor and San Carlos, the overhaul will affect the mining rates, as you see happening now, okay?
Operator
This concludes our question-and-answer session. I would like to turn the meeting back over to Mr.
Porter.
James R. Porter
Thank you, operator. We'll conclude the call at this time.
If anyone has any additional questions, please contact Scott Parsons. Thank you.
Operator
As a reminder, if you do have further questions, you may reach Mr. Parsons at (416) 368-9932, extension 439 or at 1 (866) 766-8801.
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