Centerra Gold Inc. (CGAU) Q2 2019 Earnings Report, Transcript and Summary

Greetings and welcome to the Centerra Gold 2019 Second Quarter Results Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded Wednesday July 31, 2019. I would now like to turn the conference over to Mr. John Pearson, Vice President of Investor Relations. Please go ahead.

Thank you, Mary. I’d like to welcome everyone to Centerra Gold's 2019 second quarter conference call. Summary slides that are available on our website to accompany each of the speakers’ remarks. Today's call is open to all members of the investment community and media. Following our formal remarks, the operator will give the instructions for asking a question and then we will then open the phone line to questions. Please note that all figures are in U.S. dollars unless otherwise noted. Joining me on the call today is Scott Perry, President and Chief Executive Officer, who is joining us remotely; and in the room here is Gordon Reid, our Chief Operating Officer; as other members of our management team who are usually on the call are traveling and are unable to join us today. I would like to caution everyone that certain statements made on this call may be forward-looking statements and, as such are subject to known and unknown risks, which may cause actual results to differ from those expressed or implied. Also, certain of the measures we will discuss today are non-GAAP measures and I refer you to our description and definition of non-GAAP measures in the combined news release and MD&A. For a more detailed discussion of the material assumptions, risks and uncertainties, please refer to our news release and MD&A issued yesterday after the market close, along with the unaudited financial statements and notes and to our other filings, which can all be found on SEDAR and the company's website. And now I will turn the call over to Scott Perry.

Okay. Thank you, John, and good morning, everyone. Thanks for dialing into our Q2 earnings conference call. As John mentioned, I'm actually in Kyrgyzstan right now. I've just been with out board of directors in Turkey where we were visiting our Öksüt operation. As most of you will know this is going to be our next operating gold mine, commencing production in January of next year in 2020. We had a great tour at the operation. Very pleased with what we saw and I'll talk about this in more detail coming up, but now visiting our Kumtor operation here in Kyrgyzstan. So I'm very pleased to be with you on this call. I think our Q2 results were a strong set of results. As John mentioned, I'm just referencing the accompanying slide deck that's on our website and I'm just starting off on Slide number 5. So firstly in terms of safety, we had two lost time incidents during the quarter and Gord Reid will touch on these in more detail, but we also had some significant milestones during the quarter and subsequent to the quarter. During the quarter at our Kumtor operation, contractor workforce achieved one year with lost time incident free of operations, which is a fantastic milestone. And then in terms of the entire property in approximately 15 days from today, they'll be celebrating one year of lost time incident free operations across the entire property, across all classes of manpower. Just another sort of milestone that really demonstrate to the whole company that we can conduct our business in a zero harm environment. The second bullet point there just at Mount Milligan following the commencement of the freshet season on spring melt, our milling operations returned to full capacity. You can see during the quarter, we averaged just over 53,000 tonnes per calendar day. This is tracking ahead of our guidance for Q2. I'd also note, that in the month of June in the quarter, we're actually averaging in excess of 60,000 tonnes per calendar day. In terms of our metal production levels, in the third bullet point, it was a strong quarter in terms of gold output, just under 200,000 ounces of gold and copper production of just over 20 million pounds. Again, this is tracking well ahead of our guidance. What you see that resonates in terms of our unitary costs, in the fourth bullet point in terms of out all-in sustaining costs on a byproduct basis. Company-wide our all-in sustaining cost was $716, made through very profitable high margin production. As a result, you can see our Q2 net earnings results was $33.4 million or approximately $0.11 per share. Our cash generated from operations were approximately $91 million. Likewise, cash generated from operations before working capital was approximately $101 million. Strong profitability coming – the strong profitability and the strong cash flow, we utilize a lot of that cash flow to fully repay. Our revolving line of corporate credit facility, as at the end of the June, the balance on this facility is nil. At June 30, we finished the quarter in a positive net cash position. You can see our cash balance is approximately $140 million and in terms of our overall treasury position, we have a total liquidity of $715 million moving forward. Third last bullet point, given the strong production in Q1 and Q2, we have increased our company-wide gold production levels for the calendar year referencing the mid point of our revised guidance, we've now increased it to 728,000 ounces and this reflects the very strong first half contribution from Kumtor. Likewise, given the stronger gold output, we're also lowering the company-wide all-in sustaining costs. The mid point in that guidance is now being reduced to $728 per ounce. I mentioned that at the start of this week, myself and the board of directors, we actually hosted all of sort of board meetings at Öksüt and it gave the board a great opportunity to tour the operation and just see how well construction is progressing. You would've seen in our guidance that we're now committing to a first gold pour in January of 2020, which is excellent in terms of our performance relative to schedule. But also we're very pleased with just our performance against budget, we’re now guiding that, we'll be pouring first goal, and in terms of the total project construction costs, we now expect it to be coming in $20 million under budget. So I think it's fantastic for the Öksüt team and for Centerra to demonstrate the ability to deliver these growth projects on time and on budget. Just the last bullet point here, just with regards to the strategic agreement that we've actually signed and put in place with the government of Kyrgyzstan and we're now looking to close that agreement. You would have noted in that disclosure that there's been a short extension of the long stop date to August 10. We at Centerra and the government are now working towards closing on/or prior to August 10. Just moving onto the next slide, on Slide 6, just in terms of our environmental, social governance update. Just some of the key bullet points here. We obviously recognize that to maintain strong operations we must uphold our commitment to responsible mining. First and foremost is our commitment to our employees. In the second quarter, we concluded the first phase of our gender diversity initiative, which is called Leading from Within. A full model program which commenced in November of 2018 provides the women across our company with practical tools to help them reach their fullest professional and personal potential. Just referencing the next bullet point there. Later in the second quarter we also conducted a company-wide employee engagement survey to allow us to measure and understand our employee engagement and satisfaction. While we are an employer of choice in the regions where we operate, we know that there is always room for improvement and that our success is tied directly to the strengths of our people. As such, we'll be reviewing the survey results closely in the coming month and using it to guide policy and program development in key areas like leadership developments and gender and diversity. During the quarter we had no social incidents, which resulting in nearly 72 months of consecutive incident free operations. Similarly, we had no reportable environmental incidents during the quarter. I think this is a testament of course to our team's hard work and the robust grievance mechanisms and stakeholder engagement plans that we have implemented at each site, which is the foundation of our overall social management performance. At Öksüt, we are pleased to report that Öksüt continues to be in full compliance with all environmental and social requirements set out by the European Bank for Reconstruction and Development and the International Finance Corporation through the Equator Principles. This is obviously a key to our project finances. So in May all employee and contract security personnel completed annual training of the voluntary principles on security and human rights, across our communities and operations. And then finally, just referencing the last bullet point. Finally, in response to the Church of England Pensions Board request the tailings inflammation, Centerra published its first tailing safety management disclosure. In this report we outlined our five-step mitigation process to ensure our tailings facilities perform as designed and that we maintain public community and environmental safety. Our aim is to update this disclosure on an annual basis. We believe that our commitment to being a responsible miner is critical to our ability to deliver financial results and achieve operational excellence. Just moving on to the next slide, on Slide 7, just moving into some of the key financial results. You can see the waterfall chart here in the top left of this slide. This is just a graphical illustration of our first half cash flow performance. You can see Kumtor and Mount Milligan have been performing very strong in the first half of this year in terms of their cash flow contributions. And then the red illustrate how it'd been utilizing that cash flow. We’ve aggressively paying down our debt. As I mentioned in my opening remarks, $500 million revolving line of credit facility, we have now fully replied that down to zero. You can see the $35 million – $35 million funding for Öksüt development as well as the remaining expenditures there in terms of funding for our development projects, exploration and G&A. The one thing I note from this is, I think what maybe differentiates Centerra is the amount of cash flow we generated from our operations is more than sufficient to fund the construction at Öksüt as well as the debt repayments that would demonstrate in the first half of this year. The chart on the top right there is just our treasury profile. So in the middle there you can see total liquidity of $715 million. That allows us to put forward our go forward business plan, it’s a fully funded internal business plan. And then you can see the cash continuity profile there in the bottom left. You can see the red columns represents sort of debt outstanding balance and you can see we've been very aggressively reducing that throughout the periodic profile there. The chart on bottom right is our positive retained earnings. Again we’re demonstrating growth in our positive retained earnings, we now have in excess of $1.1 billion in positive retained earnings. And I think, referencing the red line chart there, which is the profiling sort of gold price environment, you can see that regardless of whether it be in like gold price cycles, Centerra’s business model, its portfolio of assets has always been having to demonstrate profitable production, which I think speaks to the quality of the assets and inherent high margin. Just moving on to the next slide, on Slide 8, just some of the other sort of financial items to note. During the quarter Centerra recorded $340 million in revenue, which consisted of $245 million in gold sales, $36 million from copper concentrate sales, and $59 million from the Molybdenum Business Unit. The 40% consolidated revenue increase compared to the prior year period was driven by the 41% increase in ounces sold, especially noting at Kumtor at 69% increase in that gold ounces sold. At Mount Milligan, there was a slight decrease in gold ounces sold, based on gold rates process during the quarter, whilst Mount Milligan had an increase in copper pounds sold by 47% with 18.7 million pounds of copper sold during the quarter. The Molybdenum Business Unit also had an 18% increase in molybdenum sales. Consolidated operating cash flow before changes in working capital was $101 million, which was a 113% increase to the corresponding prior year period. The Kumtor mine generated $106 million and the Mount Milligan mine generated $11 million. Bottom line, the company recorded $33.4 million in earnings or approximately $0.11 per share. Just moving on to Slide 9, from a cost perspective, Centerra had another strong quarter recording all-in sustaining cost of $716 per ounce. Kumtor reported an all-in sustaining cost of $562 per ounce, whilst Mount Milligan reported an all-in sustaining cost of $938 per ounce as Mount Milligan operations wrapped up during the quarter. During the quarter, Centerra reported in $91 million in cash provided by operations or $0.31 per share. The operating cash flow generated during the quarter enabled Centerra to reduce its debt by approximately $70 million, which resulted in us paying off the outstanding corporate facility in full and finishing the quarter with available liquidity of $715 million. With that, I'd now like to pass the call over to Gordon Reid, our Chief Operating Officer. And Gordon just walk us through some more of the operational highlights.

Thanks, Scott. Good morning, everyone. On the safety front, we experienced two last time injuries in the quarter. I discussed the first lost time injury on last quarter's call in which a contractor employee at Öksüt experienced significant internal and external injuries when he fell approximately six meters to the ground while working at the primary crusher construction site. The worker is currently recovering at home. The second lost time injury in the quarter occurred at Kemess, when a worker was struck on the back of his head by a frozen piece of dirt that had fallen from a backhoe bucket. He was treated offsite and recovered at home. He is currently back to work with no follow on effects. Our total recordable injury frequency rate for the quarter is 0.43, and year-to-date is 0.311, which compares to 0.49 for the corresponding year-to-date period in 2018. On a positive note and as Scott mentioned earlier on June 20, 2019, the Kumtor contractor workforce achieved one full-year without a lost time injury. Well done. I'd like to draw your attention to Slide 12. Our operations had a solid quarter with Kumtor producing 151,000 ounces of gold at an all-in sustaining cost of $562 per ounce sold, ending the first half of the year with production of 301,000 ounces of gold at an all-in sustaining cost of $557 per ounce sold. We have increased our production guidance to Kumtor to 550,000 to 575,000 ounces of gold produced and lowered the guided all-in sustaining costs to $635 to $685 per ounce of gold sold. There has been no significant ground movement near or under the mill building since the grounding stability experienced in Q1, which resulted in a change in the mine plan for cut-back 19. We will continue implementation of active measures to strengthen the mill foundations and to further enhance pit slope stability. Our Mount Milligan operation produced 48,500 ounces of gold for the quarter and 20.4 million pounds of copper at all-in sustaining costs of $938 per ounce sold. For the first half of the year, Mount Milligan produced 82,000 ounces of gold and 31.8 million pounds of copper at an all-in sustaining cost of $889 per ounce of gold sold. Mount Milligan average 53,500 tons per calendar day in the quarter. Mill throughput was ramped up in Q2, as water became available from the spring freshet resulting in averaging over 60,000 tons per calendar day in the month of June. The water capture from the 2019 spring melt runoff was less than anticipated due to very dry spring conditions, creating a risk to the level of production in early 2020, until the 2020 spring melt occurs. This will be similar to what we've experienced in early 2019. We reaffirmed costs and production guidance at Mount Milligan for 2019. Discussions continue with regulators, First Nations and other local communities on the long-term life-of-mine strategy to ensure Mount Milligan has sufficient process water to operate at full capacity from and after November 2021, when the current medium term water approvals expire. On a consolidated basis, Centerra has increased production guidance to 705,000 to 750,000 ounces of gold and lowered cost guidance to $713 to $743 per ounce of gold sold. At Kemess the water treatment plant remains on track for commissioning at the end of the year with the performance test anticipated in the spring of 2020. Work continues on evaluating potential optimizations to the technical economic analysis. Similarly, at Greenstone, work continues on derisking the project as negotiations with local First Nations groups continue. Work also continues on evaluating optimizations to the technical economic analysis. Moving to Slide 12. Construction at the Öksüt Project in Turkey is 64% complete with first gold pour now anticipate in January 2020. The total construction cost is now expected to be completed approximately $20 million under budget. These are recent pictures from the Öksüt Project. Mining is scheduled to begin before the end of August, subject to receipt of normal course permits and approvals. I'll now pass the call back to Scott.

Okay, thanks Gord. Just referencing Slide 14, we just have a couple of slides on our revised guidance. You can see the slide here on Slide 14, the column on the left, we're just illustrating where we stand here today. The column in the middle just illustrates our new revised guidance and the column on the far right was our prior guidance as at the beginning of this year. I think the key highlights here, obviously in terms of gold production, you can see, we're increasing the guidance at Kumtor, which reflects the very strong start in the first half of this year. Likewise, in terms of our all-in sustaining cost, which is in the middle section of this slide, you can see given the strong start in the first half of this year. Kumtor has being operating at $557 per ounce on all-in sustaining cost basis. So likewise, just given the increased gold output and the strong start to the year, we have favorably decreased Kumtor’s all-in sustaining cost guidance. As Gordon mentioned in his remarks, Mount Milligan up in the top section there, you see on a year-over-year today basis. It's been a strong start to the year relative to the midpoint of guidance. And so again, we’re turning out our full year guidance at Mount Milligan, but in terms of gold output, copper output and all-in sustaining costs. I just move onto the next slide on Slide 15, still on guidance and still the same sort of illustration in terms of the other columns being year-to-date actuals in the left, in the middle column being on new guidance and the column on the far right being our prior guidance. Our total sustaining and growth capital overall remains at $275 million, the change is noted on the slide and detailed within our actual guidance narrative in MD&A. I guess one item I'd like to highlight is the Öksüt. See in terms of our capital cost update, we’re reducing the 2019 spend from $123 million to $100 million. This reduction is result in the advanced stage of project construction, the deferral of certain non-essential construction activities to after commissioning as well as a reduction of $10 million in our contingency within the 2019 budget. Projects in the great stead have been performing very well against schedule. And we're now overall projected to be coming in $20 million under budget at a total cost of $200 million for the project total construction cost. I'd also like to highlight a change in the capitalized stripping, which is predominantly due to the mine plan revision during the quarter at Kumtor, whereby we’ve now divided cut-back 19 into cut-back 19 East and cut-back 19 West and we'd shifted part of the mining fleet to focus on additional waste stripping in cut-back 20, which is capitalized until the ore is subsequently released. So that's what's driving this increasing capitalized stripping. The change in depreciation in terms of our non-cash cost guidance is simply a result of the higher production levels at Kumtor. Just moving on to Slide 16, what we're illustrating here is the world industry cost curve in terms of all-in sustaining cost metric and just illustrating where Centerra current operating assets in terms of our new revised guidance are reflected against that world industry cost curve. And you can see that generally speaking, our assets are kind of position around the lower-cost quartile mark, I think that always positions the company well in terms of our ability to demonstrate profitable productions and ongoing sort of earnings contribution and positive free cash flow. We're very excited about Öksüt as we mentioned a number of times here. We're now expecting first production in January of 2020. As you can see on the slide here on the far left, Öksüt as per our feasibility study, we're expecting a lot than mine all-in sustaining costs here at $490 per ounce. So potentially this could be our lowest cost asset, which is going to very favorably compliment what we believe is already a low operating cost profile for Centerra. Just moving on to Slide 17, and this is where I'll kind of wrap up. What I'd really highlight here on Slide 17 is the third and fourth bullet point. So the third bullet point is just our revised guidance for this year. We’re expecting gold production of up to 750,000 ounces at an all-in sustaining cost as low as $713 per ounce. I think as you're seeing in our first half results, that's going to really make for a profitable year in terms of earnings. It's going to make for a good year in terms of cash flow generation as well as ruling out our balance sheet. As we look forward to next year, we think we have fundamentals of growing even better if you will, because we will have our third operating asset online in terms of Öksüt. Öksüt is contributing what we believe will be high-quality low-cost production. Our fundamentals are going to improve that much more in terms of profitability, gold production and cash flow generation. With that, I'd like to sort of end our sort of formal prepared remarks. And I'd like to pass the call back to the operator, to Mary to open it up for Q&A.

Thank you. [Operator Instructions] The first question comes from the line of Fahad Tariq [Credit Suisse]. Please go ahead. Go ahead please.

Hi. Good morning. Sorry about that. Thanks for taking my questions. For Kumtor, you've seen good grades in the first half of the year. How should we be thinking about grades in the back half of the year? And how much of the higher production guidance is really the result of the revise mine plan for cut-back 19?

Gord, do you want to take that question?

Yes, thank you. The impact of the grade, the process grade really is not driven by the change in cut-back 19 that the, what we – most of the processing has come out of stockpiles at the beginning of the year. So what we saw in the first half of the year was a slightly higher grade. And those grades came out of the stockpile slightly higher. It's a bit of a science trying to blend the grade for the high grade, medium grade, low grade and they air on the high side. So we put in a little bit higher grade than anticipated. And we did also get that positive reconciliation in the high grade stockpile, which is now depleted. So for Q3, we will be processing lower grade material out of the stockpiles until we get into the ore and cut-back 19 West. We planned to get into that material, the higher grade material in Q3 – later in Q three, which will then feed the mill for the rest of the year. And then you could look at our guidance and that's what we anticipate to get in the second half of the year.

Just from my perspective, it’s Scott. Another part of your question is with regards to the gold output production on the second half of this year. The other thing, I’ve highlighted in Q3, we have our annual scheduled mill liner shutdown. That'll be a 60-day shutdown. So you may appreciate that our throughput levels be probably lower in Q3 and tends to be a modeling. I'll be expecting gold output in Q4 to be larger than Q3.

Okay, that's helpful. So is it fair to say that cut-back 19 East versus the West, the East being deferred to next year, that there isn't much of a grade difference between those two parts of the ore?

Yes, I think in terms of when we recalibrated the mine plans, the cut-back 19 East and West where we divided that cut-back into two phases. We're not seeing any material impact in terms of a scheduled gold production levels for this year or even next year and beyond.

Okay. That's helpful. And just one more from me on Öksüt, in the release, you mentioned deferrals certain non-essential construction activities to after commissioning. Just curious what kinds of costs are included in this? It looks like it's about $13 million, lower CapEx as a result of this deferral?

Gord, will you able to touch on that?

Yes, it's basically the extension of the heap leach pad. Yes, 1C is deferred to later. We don't need that to later in the mine life. So that's been deferred.

Great. Thanks. That's all for me.

The next question comes from the line of Dalton Baretto from Canaccord Genuity. Please go ahead.

Good morning guys, and congrats on a great quarter there. I hate to touch on the one negative here, but I'm a little bit concerned about these recurring water issues at Milligan. None of your peers that operate open pit copper mines in DC seem to be experiencing these issues. So I guess, I just have two questions on this. Number one, what's different about Milligan that's causing these recurring issues? And number two, what options do you have over the rest of the year to kind of prevent curtailment in Q1? Thanks.

Yes. Hi, Dalton, it's Scott Perry. I'll respond to your question. Since we've taken ownership of the asset, I think very shortly after ownership, we established that we weren't comfortable with the overall water balance inventory that we had at Mount Milligan. We've been working with the regulators over the last two years on this looking to establish access to additional bodies of water, which I think we've been successful in terms of establishing such access. The problem which has being challenged as for the last two years as we've gone through the freshet out of the spring melt season, the amount of water that we've been expecting to realize has been a lot less robust than what we were originally projecting. And so it puts us in a bit of a handicap situation, if you will. And that we had not been able to totally replenish water balance inventory to a level where we can say, okay, we've now got more than sufficient water moving forward such that we don't have to rely on water sources in terms of precipitation or other additional sources. So that's kind of the dynamic and the challenge that we've been dealing with. As we highlight in our disclosure today with the MD&A, this season spring melt was again, a lot less robust than what we're expecting. In terms of the region in DC, where we're operating, the regulators, the authorities, they had classified it or categorize it that we are officially in drought conditions. If I look at our water balance inventory at the end of July and the mine site is finalizing this survey right now. And we have slightly more water than what we had last year at this exact point in time. But nonetheless with our press release, we just want to make sure we're being very transparent that if these – I want to say unseasonal very dry conditions do continue that could impact us in terms of precipitation that we may be expecting in the second half of this year. If that was an under a worst case scenario that could put, that could create a risk in terms of our production protocols if you want to next year. Having said a little bit, July was a very wet and rainy month. So in terms of about water inflows, it was sort of in line with what we would have been expecting. We do have that additional groundwater sources that we have access to them, continuing to establish additional sources. We have the water source from our base in under drain towers as well as upstream runoff. And I think lastly, I'd just highlight that here we are in Q3 and the mill continues to run it at full capacity and full productivity run rate. But nonetheless, we just wanted to highlight that there is a risk there, we should have very dry conditions in the second half of this year. It would create a risk in terms of our Q1 production protocol.

Okay, great. So just maybe as a follow up then, are you – based on what you know right now, are you, what sort of probability what you put on a curtailment and Q1?

Dalton, it's not possible for me to answer that question, because there is so many different assumptions that you'd have to take into account when you think about our water projection moving forward. We've got to make an assumption with regards to precipitation moving forward – an assumption with regards about the water that we're going to realize from our base and under drain towers, from upstream sources, from groundwater sources. There's a lot of variables that go into this. But I think the one risk that we really wanted to flag with this disclosure is that it's been a very dry from a seasonality perspective. If that should continue in the second half of this year, if we should get a lot less precipitation than what would be typically expecting as post seasonal averages. It does create a risk in terms of the Q1 production profile, but I cannot give you a likelihood assessment.

Okay, no problem. And then just maybe one more on Kumtor. We talked about a recovery improvement project with tower mills. Has that been sanctioned yet?

No, I think, when you say, we talked about that, you referring about disclosure or…

Just in the past it's been mentioned that we were talking about maybe putting a tower mills and some more leeching capacity to improve recoveries.

Right. Yes, so I think earlier in the year, there was a sell-side analyst and investor that took place at Kumtor. I think when the guys were talking about continuous improvement opportunities in terms of the mill facility, one of the ideas – one of the studies and the guys were looking into is, in terms of potentially increasing no recovery efficiencies, they're doing an evaluation as to whether or not additional leach tankage and the installation of a tower mill could – would that positively improve our gold recovery efficiency rights. What's the trade off there in terms of the capital investment versus the overall economics? That is a study that's underway as we speak at Kumtor. But that study has not been finalized, we had a chance to share that with the board. I would be hopeful that the guys will have that study finalized in time for our budget cycle, which is typically in November and December. And that's when we may have the opportunity to discuss that with the board. So giving you a long answer, but it has not been sanctioned.

Okay. That's great. Thanks very much.

[Operator Instructions] And the next question comes from the line of Bryce Adams from CIBC. Please go ahead.

Good morning. Thanks for taking my questions. I just want to follow-on quickly from where Dalton left on Mount Milligan. So in the month of June, Scott, you mentioned throughput was above 60,000 tonnes a day. I was just wondering how you balance that with the ongoing drought conditions and your outlook for the long-term throughput in Mount Milligan.

Yes. Thanks for the question Bryce. I understand the context of your question. What I would highlight is, here we are in the month of July and we're operating at full capacity. In terms of our internal projections and forecasting, we expect we'll be operating at full capacity for the remainder of this year. You see that reflected in terms of our guidance, where we’re reaffirming, guidance for Mount Milligan. But again, I'm going to be repetitive. I have to highlight that if the current very dry seasonality conditions should continue, if we should see a very – just a lack of water inflow from precipitation, we can see that it creates a risk throughout 2020, Q1 production profile. Obviously what we're very cognizant of is that we want to make sure that we're caring more than a sufficient water balance into our Q1 period, which is the winter season. We want to make sure we've got more than sufficient water to always keeping the mill operating. So that's really the risk of a flag – it’s a risk to our potential production levels in Q1 of 2020.

When you talk about full capacity that is referring to 55,000?

Yes. That’s our targeted guidance for this calendar year. We always guided that, as when the spring mill season commences, we'd very quickly see ourselves ramping up to 55,000 tonnes per calendar day. And that's what I would put forward or categorize as our full capacity run rate.

And is there a thought to maintain 55,000 without going over that throughput level in order to maintain water for next year?

Sorry, Bryce, can you repeat the question?

I think you said in June you are above the 55,000 tonnes a day. So I was just asking is there a thought to not go over 55,000 just run the two mils at 55,000 and would that help maintain water levels going into Q1 next year? Or is it unrelated to that?

No. I'd say, our current operating strategy at Mount Milligan is we want to see the team operating the mills at the highest productivity rate that they can achieve. So by way of example, if they could repeat the performance of June in the month of July here as well as in August, would certainly be encouraging them.

Okay. That's all for me. Thanks for taking the questions and congrats on the good quarter.

Thanks.

The next question comes from the line of Robert Remsik, Private Investor. Please go ahead.

Thank you for taking my question. Congratulations on a strong quarter. I am slightly ignorant, but I'll ask the question anyway. Is there an obvious reason why $7 million in higher sales in the second quarter generated approximately $17 million less net income than the first quarter?

So Robert, look, I have to apologize. I'm actually in Kyrgyzstan, I don't know if you've heard that in my opening remarks. And I don't have everything in front of me that I should, what would normally have. So I can't respond to you right now, but if you would not mind calling us after the call, if you could call John Pearson, we'd probably be in a position to answer that question. But I apologize Robert.

Okay. Thank you for the response. And good luck in Kyrgyzstan.

Thank you.

There are no further questions on the phone lines.

With that, I’d like to thank everyone for joining us today on the call and thank you, Scott, for dialing in. So we'll end the call now. Thanks.

That does conclude the conference call for today. We thank you for your participation. Please disconnect your lines.