Ero Copper Corp. (ERO) Q2 2020 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Ero Copper Second Quarter 2020 Financial and Operating Results Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Noel Dunn, Executive Chairman of Ero Copper. Please go ahead, sir.

Thank you, and good morning, everyone. The news release announcing Ero's second quarter results is available on our website and on SEDAR, as our financial statements and MD&A for 3 and 6 months ended June 30, 2020. We will be making forward-looking statements on this call that involve risks and uncertainties concerning the businesses, operations and financial performance of the company. We will refer you to our most recent AIF, also available on SEDAR, for a discussion of the risk factors of our business and their potential impact on future performance. Unless otherwise noted, all amounts are in U.S. dollars. Joining me on the call today are David Strang, Ero's Co-Founder, Chief Executive and President; Wayne Drier, Ero's Chief Financial Officer; and Makko DeFilippo, Vice President, Corporate Development. Before we dive into the results of the second quarter, I'd like to acknowledge that while the recent increase in infection rates of COVID-19 in Brazil have increased the risk of outbreaks in the communities near our operations. Our in-country teams have continued to undertake extraordinary precautions to keep our employees, contractors, their families and local communities safe. To date, early and detailed litigation efforts undertaken throughout our organization have done exactly that. During the second quarter alone, our operations contributed approximately $1 million towards community relief and on-site COVID-19 litigation efforts. As a result of these ongoing efforts and our commitment to in-country -- to our in country -- and the commitment of intra-country colleagues, we continue to experience no disruption to our operations, supply chains or sales channels. During the first 6 months of this year, our core assets within the Curaçá Valley performed well. We're also seeing increased production from our NX Gold Mine as planned, which Dave will elaborate on further. From a financial and liquidity perspective, we remain in excellent shape and, frankly, as well prepared as we've ever been to continue to navigate in uncertain times. We ended the second quarter with approximately $52 million in cash. As a reminder, due to the amendment of our credit facilities during the first quarter, we had no material principal debt payments until -- due until March of 2022. As evidenced from our record quarterly cash cost of $0.65 per pound of copper produced and $437 per ounce of gold, produced at NX during the second quarter, our operating business has continued to significantly benefit from the currency tailwind associated with the weakening of the Brazilian real versus the U.S. dollar. The continued volatility in the underlying currencies impacted our GAAP earnings and working capital during the period due to the noncash accounting treatment of U.S. dollar-denominated debt and forward-dated FX option contracts, which are designed to protect the business in the events of a rapidly strengthening Brazilian real against the U.S. dollar. It is worth noting that we achieved the strongest quarterly cash flow from operations in the history of the company, of $42.5 million, despite $4.4 million in cash settlements of derivative contracts during the second quarter. So looking into the future, on the one hand, if we continue to see a persistently weak Brazilian real against the U.S. dollar, our underlying business will benefit, and we will continue to make modest payments on the settlement of existing contracts as we've demonstrated during the second quarter. On the other hand, as we will inevitably see a global recovery from the COVID pandemic at some point, the export-driven Brazilian economy is likely to do well on a relative basis. And we have protected our business against the strengthening of the currency and its impact on our profitability. With that, I will now pass the call over to David to provide a brief review and update of our operations, and Wayne will provide a review of the company's financial performance. Our team will be available for questions immediately following the call.

Thank you, Noel. Just to briefly touch on what Noel mentioned, across our operations and throughout our organization, we continue to prudently manage our business so that we are as well positioned as possible to withstand any unforeseen challenges that may arise as a result of COVID-19. Our commitment as an organization to the health and well-being of our local communities and employees remains of paramount importance to our leadership team, both in Brazil and North America. Our Brazilian colleagues have continued to demonstrate the result to keep our operations safely running while managing and mitigating the impact of COVID-19. And the recent recognition we have been given as a company with respect to our ongoing ESG initiatives is a testament to their hard work and commitment to those principles. In terms of production during the quarter, our results continue to reflect underlying -- solid underlying operational performance. We produced 11,178 tonnes of copper in concentrate at MCSA and 8,739 ounces of gold at NX Gold during the period. Focusing first on our MCSA operations in the Curaçá Valley, we mailed 627,071 tonnes of ore, grading 1.98% copper and achieved average metallurgical recoveries of 90% during the quarter. Across the board, improvements were driven in large part by contributions from the Vermelhos Mine where 253,349 tonnes, grading 3.26% copper were mined during the period. A significant 56% increase in contained copper coming from Vermelhos when compared to the first quarter. At the Pilar Mine, 371,794 tonnes, grading 1.4% copper were mined during the period, essentially in line with the first quarter, albeit with a modest increase in tonnes mined. As Noel mentioned, we achieved a new quarterly record with respect to C1 cash costs of $0.65 per pound of copper produced, reflecting the strong operational performance, continued currency tailwinds and improved byproduct gold and silver prices during the second quarter. During the first half of 2020, C1 cash costs averaged $0.68 per pound of copper produced. We are maintaining our 2020 production guidance for our Curaçá Valley operations and previously revised C1 cash costs guidance of $0.70 to $0.85 per pound of copper produced. Similarly, we are maintaining our previously revised capital expenditure guidance range of $56 million to $68 million and $20 million to $25 million in exploration expenditures through September of this year. As in prior years, we will aim to update our full year exploration spend guidance to include planned drilling during the fourth quarter when we release our third quarter results. Although all of our capital programs have and continue to run normally through the first half of the year, our full year -- excuse me, our full year guidance is subject to an elevated degree of uncertainty as a result of the COVID pandemic. We continue to execute on and advance several key growth projects. Despite significant challenges associated with COVID 19, our project team was able to deliver and fully install our new high-intensity grinding mill in early July, only a week or 2 behind schedule. Instrumentation and control system integration are on track for completion this week and commissioning is underway through a creative effort that involves both on-site teams who underwent strict quarantine measures working alongside a virtual multinational commissioning support team. We expect full commissioning and handover to operations by the end of August. This is an incredible accomplishment with significant contributions from our entire project team globally. And I would like certainly -- I would like to congratulate them all on this call. Looking into the second half of the year on the back of commissioning, we expect to see a significant improvement in overall stabilization of metallurgical recoveries in the mill. Our ore sorting testing campaign, which has been running at a commercial scale since January, is substantively complete, and we have now tested 8 different discrete ore bodies throughout the Curaçá Valley out of our variety of grades. The results are highly encouraging. We will continue to operate the test program through the third quarter on the last planned orebody, while data analysis, process integration and operational optimization work continues to fully quantify the benefits of preconcentration. Based on work to date, we believe that ore sorting will be an integral component to further optimization -- to further optimize the production portfolio for the various operations of the Curaçá Valley as well as new discoveries in the future. Additional detail on the work performed and the results of the test campaign are expected during the third quarter. In addition to ore sorting, I am very excited about the completion of a laboratory upgrade project that will allow us to do multielement analysis in-house, specifically platinum group metals. This project was completed at the end of the quarter, and we are ramping up daily sample volumes over the next several weeks as scheduled. Once fully integrated, we expect this addition to other borrowers to significantly reduce costs but more importantly, turnaround time for platinum group metal assay results, which will be a welcome addition to the ongoing work of our exploration department. On exploration in the Curaçá Valley, we currently have 28 drill rigs operating. Our in and near-mine exploration programs remain focused on the deepening extension of the Pilar Mine where we have continued to intercept very high-grade Superpod mineralization at depth, including the recently announced intercept of 96.4 meters, grading approximately 3.97% copper, the best hole we have ever drilled in the Curaçá Valley. Additionally, at Vermelhos, we are advancing drilling and borehole EM work, looking for down-plunge expansions of the Siriema massive sulfide conduit and continue to execute the fan drill program designed to test for continuity of mineralization beneath the mainVermelhos ore bodies. With a substantive portion of our in and near-mine programs completed, we have been aggressively advancing our regional exploration efforts on 4 recently interpreted mineral systems. While preliminary results from these systems continue to be encouraging, additional detail on these ongoing exploration programs remain planned for the second half of the year. Consistent with our scheduled quarterly updates, results from our ongoing exploration programs will be further detailed in the upcoming exploration update, which we typically release 4 to 6 weeks following our financial results. At the NX Gold Mine, production during the quarter totaled 8,739 ounces of gold and 5,327 ounces of silver from total mill feed of 39,108 tonnes, grading 7.75 grams per tonne gold, of the metallurgical -- average metallurgical recoveries of 89.6%. Gold production, mill throughput and recoveries improved quarter-on-quarter, reflecting the anticipated ramp-up of mining at the Santo Antonio Vein. Operational performances remains -- gains contributed to record C1 cash costs of $437 per ounce of gold produced during the second quarter, an improvement of $157 per ounce as compared to the first quarter. During the first half of 2020, C1 cash costs averaged $511 per ounce of gold produced. As previously noted, we continue to expect full year production to be weighted towards the second half of the year. Our annual production guidance for the NX Gold Mine remains at 38,000 to 40,000 ounces of gold and previously revised C1 cash costs of $425 to $525 per ounce of gold produced. Annual capital expenditure guidance for the NX Gold Mine remains unchanged from previously revised guidance of $7 million to $9 million with an additional $2 million to $3 million to fund its ongoing exploration programs. While not part of our current operating portfolio, an initial review of our buyer team to evaluate the Boa Esperanca copper project has resulted in some fairly compelling opportunities, recall that we effectively inherited the existing design of the project following our acquisition of MCSA. And for the first time, I've taken a very hard and close look at the project with the engineering group. While we had initially planned fairly routine desktop update, several aspects are pointing us to a rework of the entirety of the project from the ground up, and we continue to make progress on that front. With that, I will now pass it over to Wayne, who will provide an overview of our financial performance.

Thank you, David, and good morning, everyone. During the quarter, the company sold 10,586 tonnes of copper in concentrate and 8,739 ounces of gold for consolidated revenues of $70.8 million. While copper sales volumes were in line with the prior period, gold sales volumes continued to improve and were 11% higher than the prior period due to the ramp-up in production from the Santo Antonio Vein. As David mentioned, we achieved record C1 cash costs at both MCSA and NX Gold during the quarter of $0.65 per pound and $437 per ounce, respectively. For the first 6 months of 2020, C1 cash costs averaged an impressive $0.68 per pound of copper and $511 per ounce of gold produced. These results are underpinned by strong operating performance from both of our operations, favorable exchange rates and, in the case of MCSA, higher byproduct gold and silver prices. These factors collectively contributed to a $42.5 million in cash flow from operations, a record quarter for the company and a 13% improvement from the prior period. Adjusted EBITDA was $42.4 million, reflecting a 27% increase over the prior quarter. During the first 6 months of 2020, adjusted EBITDA totaled $75.9 million, which was in line with the first 6 months of 2019, despite a 17% decrease in the average prevailing copper price over the same time period, which frankly speaks to the strength in profitability of our operations. While the weakening of the Brazilian real against the U.S. dollar has clearly benefited our operations and headline financial performance, we continue to see the impact of foreign exchange volatility flow through our second quarter results. Total foreign exchange losses during the period was comprised of cash settlements on out-of-the-money callers totaling $4.4 million, unrealized foreign exchange derivative losses of $8.5 million based on the fair market value of these contracts at June 30 versus March 31 and an additional $3 million related to the translation of our U.S. dollar-denominated debt in Brazil, being the result of our functional currency being the real. While our headline net income for the quarter was $7.5 million or $0.08 per share after adjusting for the unrealized components of these foreign exchange losses, our adjusted net income was $20.3 million or $0.22 per share fully diluted, which far better reflects the performance of the underlying operations. Our total cash position at quarter end was $52.3 million, including restricted cash compared to $45.5 million at the end of the first quarter. The increase is primarily due to strong operational performance, contributing to record cash flow from operations during the period. Our working capital position at the end of the period was adversely impacted by the current portion of the fair market value assessment of our outstanding foreign exchange contracts, the timing of some payments related to the HIG Mill, as David spoke about, associated consumables and critical spares and the current liability associated with the short-term lines of credit that were drawn during the first quarter as a proactive measure against COVID-19. We are very comfortable with our ability to repay or roll these short-term lines given the robust nature of our balance sheet. As evidenced in our results during the first 6 months of 2020, our business continues to run extremely well and generate significant free cash flow particularly at today's metal prices and foreign exchange rates. On that note, I will hand the call back over to Noel.

Thank you, Wayne. Our performance during the second quarter can be summarized as follows: one, proactive and ongoing efforts to mitigate the impact of COVID-19 in our operations to keep them running safely, paired with extraordinary support of our local community response efforts; two, continued advancement of key growth projects despite challenging conditions; three, exceptional operating and financial performance across our core business, bolstered by the ongoing currency tailwinds. Thank you very much for joining the call. We will turn it back to the operator to open the line for questions.

[Operator Instructions] First question comes from Orest Wowkodaw from Scotiabank.

Just curious, you left your operating guidance unchanged. In the first half of the year, though, the throughput has been a lot higher than expected, whereas the grade has been, I guess, a lot lower than expected relative to your guidance. Just wondering how to think about that for the second half of the year, whether we -- you expect that to normalize in terms of throughput coming down significantly and the grade going up or whether we should just focus on the copper production guidance and kind not the details around it.

Yes. Orest, thanks, for your great questions. With respect to the second half of the year, we're very focused on copper production. And so as you can well imagine, with an ore operation like ours, with the high-grade nature of the various ore bodies and the heterogeneous nature of mineralization, we do see a variety in terms of grade as respect to stope sequence. So we're maintaining guidance, as we've highlighted, with regards to copper production. And I think you want to adjust around that with respect to your grades and/or your production in terms of ore being mined. And it's just related to sequencing off stopes. And so as you can see, you would anticipate in the second half of the year in order to maintain that kind of production level of copper that you will see a decrease in ore throughput a subsequent increase in grade, along with an anticipated increase in recovery related to the commissioning of the HIG Mill.

Okay. And can you maybe give us a bit of color on why the throughput -- why you would anticipate throughput to go down? Is that just -- are you mining constrained? Or what's driving that?

We're constrained with respect to stope availability. So that's the constraint that we have in terms of design of what we're trying to do on a month-by-month basis. And so for instance, you would see, in terms of perhaps what we'll see at Vermelhos is some rockfill what we have to do with respect to replacement. As we know, we don't have peso plant up there. So we use rockfill. And so timing with regards to being able to fill stopes with rockfill, et cetera, in terms of that throughput. We're always going to try to produce more when we can with respect to our throughput through the mill, but that's not -- it's not a perfect science on a month-by-month basis with regards to that. So that's why we are maintaining our guidance in terms of copper production that way.

Okay. Perfect. And then just finally for me. Can you just remind us how much of an improvement in copper recoveries you're expecting from the HIG Mill?

We have guided to the marketplace somewhere in the order of 2% to 4%.

Okay. And that would take how long to realize, is that sort of exiting the year?

I would hope that we'd start seeing those improvements, given that we're slightly delayed with regards to the COVID issue and commissioning. I would -- if you look to update your models, I wouldn't do anything before October.

The next question comes from Jackie Przybylowski from BMO Capital Markets.

Just a follow-up on the line of questioning that ore has been on. I know you guys had talked before about a second mill. And I know it's still very early. You haven't fully commissioned the first HIG Mill yet. Can you give us maybe a little bit more color or an update in terms of what you're thinking now about installation of vertical mill or a second HIG Mill? And maybe what the timing would be on that, if it's still kind of consistent in a couple of years or if that's changed at all?

Yes, Jackie. Thanks. With respect to the going and you're talking about continue to increase in capacity of the mill, I think what we want to do now is we want to get the HIG Mill settled in. We want to be able to operate it in such a way to test its capabilities above and beyond the metallurgical improvement is the potential to allow it to help us increase our capacity from our current capacity of about 3.2 million tonnes, and we've guided that we think that could go to $3.7 million. I'd like -- and I think all of us would like to see that mill operating. The great thing about that mill is we've got a variable gearing on it. So the way that we can manage it and operate it gives us massive flexibility to be able to test the upper reaches in terms of its performance. Once we get that comfortable, then we can look down the road with regards to how we want to continue to look at expansion. However, continued expansion beyond that is related to exploration success. Certainly, what we are starting to see now in terms of our operations, with the installation of the HIG Mill now, with the work that we're doing on ore sorting and the opportunities that we're seeing with our ore sorting in terms of our longer-term opportunities to bring on other projects in the district, in a way, that will continue to support our work towards operating at $1 a tonne or better. We're quite excited about that. And so we want to just kind of just settle in. We got a couple of big projects, as I said, the HIG Mill and then the ore sorting. And then we can sort of look down the road and see where we go next in terms of the plant. So that's sort of where our thinking is right now. We don't want to get ahead of ourselves with regards to looking down the road. I think what we want to do is let's embed the HIG Mill. Let's see what our performance is. Let's see if we're able to do above and beyond 3.7 million tonnes of capacity. With ore sorting gives us massive flexibility to upgrade ore potentially and allow us to even produce more copper than anticipated with that capacity of the mill. And so there's a lot of variables right now. We want to work through over the course of the next couple of years before we get too far down the road and going. And we are at -- doing the 5.5 million tonnes.

Got it. And on that ore sorting, can you give us a bit of an update? And again, I know it's probably an unfair question because you're not finished the studies yet, but you've already done work on a lot of different ore types. Are you seeing consistent benefit from ore sorting? Or is there some ore types that behave better than others going through the ore sorter? And so like early -- I guess, early impressions is like how do you see that you're going to be able to incorporate this into your plan going forward?

Well, I think we've got to be careful about selective disclosure with certain people versus the market in general. I think the best thing for me to say is to look out as we're pulling this all together that -- to look out for a news release, I think, we will put out discussing this initial round of testing. As I said in my notes, we're very happy with what's happened with it. Our consultants that we have now brought in to help us understand how we move from a testing situation to a fully integration have been very impressed with the results that we've got. But to be honest, Jackie, I don't think it's fair, and I don't want to get too far ahead. It's getting far about beyond that. We will make sure that we will give the market a full understanding of the results as we can in a timely manner.

The next question comes from Dalton Baretto from Canaccord Genuity.

Jackie beat me to the ore sorting questions, so I've got a pivot now, but I've got a couple more here. So just putting this all together, Dave, and looking forward to the tack report in November, can you give us a sense of what you're targeting to get in there in terms of the drilling, in terms of kind of a mine plan, from a mine life perspective and a capacity perspective? And whether some of this ore sorting stuff will get captured in there?

Great. Good to hear from you, Dalton. And yes, good question with regards to that. Obviously, the most important thing that we want to include in the 43-101 is going to be the deepening project. And that project is now coming together really, really well. And we anticipate, obviously, that, that will form the cornerstone of anything that we do in the technical report. With regards to ore sorting, we would like to be able to integrate that into our 43-101 with respect to where we see opportunity to use it. But it's too early to say with regards to whether I can confirm that, that's going to form the basis of the 43 -- or be included in the 43-101. We are working with SENCO right now with regards to how we go about integrating the projects, the various projects with the use of ore sorting into the mine plan. And if they pass our hurdle, and they get -- and the return metrics are such that they meet our metrics with regards to return, then we will include them. But I can't -- I don't want to be drawn in saying that, that's absolutely going to be included or not yet. But we are encouraged. We are really encouraged.

That's fair. That's fair. And then you've got the lab on-site now, Keel Zone Siriema PGMs. Is the benefit there just a faster turnaround? Or are you expecting a pivot in the exploration strategy around Siriema?

Look, the first and foremost reason why we put a full ICT suite analyzer in the lab was to provide the exploration team with the ability to look at all minerals. With regards to magmatic sulfide exploration efforts, one of the things and all the consultants that we've used and come on the project have really detailed that, and your ability to be able to look at your samples and not necessarily the mines you're looking to mine, but other minerals, cannot be great identifies with respect to helping you target and move towards certain types of ore bodies. With regards to the PGMs and why we've highlighted PGMs is, as you have seen in the past in our exploration updates, we've released PGM results. However, the problem that we have and have had historically with PGMs is we are not able to do every hole and test every hole. And so we've had to be selective with regards to the sampling that we sent out to South Africa to be able to test that and bring that back. What we are seeing with respect to PGMs and the tests that we've sent out to South Africa has suggested that this is a part of our exploration program that has been -- what's the word I want to use, underlooked at, for lack of a better terminology. And so we want to be able to spend a lot more time on the ability to do full suite assaying, the ability to look at all the holes at PGMS, looking at their distribution within our ore bodies. Are they at levels of concentration that suggests that we should be looking at this differently. That's all early stage. But certainly, what we want to be able to do is as opposed to be able to look at 50 samples, we want -- now want to be able to -- we'll have the ability to look at the -- every sample that we put through the lab for PGMs. Does that help?

Yes. That's definitely helping.

I don't want to get too far ahead of ourselves yet. We're -- the PGM work that has happened to date is interesting. It's encouraging. It was unexpected, but a lot more work has to be done because we don't know enough with regards to the distribution of PGMs and how they how they exist in our -- in the Curaçá Valley.

And then I was surprised to hear Boa get some airtime today. What's prompting the overall rework? What are you guys thinking? And what's just the overall thinking on that project, not from a strategic perspective?

The addition to our team of a gentleman named Ricardo Re. Ricardo is a resource king in his -- just as Mike and Pablo with regards to resource estimates and helping our team in Brazil upgrade and be able to do it at a more robust 43-101 level. Ricardo joined our team earlier this year. And as part of one of the projects he was looking at, he wanted to relook at Boa. You started relooking at Boa. He had previous experience with Boa, and a few things he had said to us prompted us to then go back to the upside engineering firm who had done the feasibility study for Glencore. And in those conversations with them, along with what Ricardo had done in terms of his understanding of the resource, caused us to kind of have a very significant pause and say, we've got to really look at this from the very, very beginning. There -- it's early days, but there were significant things that we had seen that we're head-scratching with regards to why Glencore had gone in a certain way when there are things within the deposit -- the existing deposit that's known that would suggest there's a more optimal way of approaching the project. In addition, with Ricardo's work, there is certain significant opportunities to potentially expand the resource. It's now turned out, there are a lot of -- the majority of the drilling was drilling to a meterage as opposed to drilling geologically. And there are significant number of holes in areas that ended, in some cases, high-grade mineralization. So Noel and I have asked Mike to put a program together with regards to some geological and exploration work next year to start looking at it from that. I mean we've always known well ahead a very good IRR, strong return potential. But now that we are looking at it, we're looking at it from a front or sort of first principles basis. We're now seeing that, potentially, there's more to Boa than we ever thought before, which is pretty exciting for the team. But it's early days. A lot of work has to be done.

Got it. Okay. And then just maybe one last one for me. Dave, last year, on the Q2 call, you were kind enough to give us the internal plan in terms of an aggressive ramp-up. I'm wondering if you want to do that again for this year.

Thanks, Dalton. No, I think I'm going to wait until we get the 43-101 out to all of you later this year. [indiscernible]

The next question comes from Stefan Ioannou from Cormark Securities.

Great to see the quarter. Maybe just to sort of follow up on Jackie's ore sorting question. And again, I don't want to split hair. I know you've already provided a lot of info. Just curious, you mentioned that there was 8 sort of batches or big sort of test run through the ore sorting plants so far. Could you maybe like without saying too much, maybe just give us an idea, was it all sort of lower-grade open-type ore? Or did you actually look at some sort of moderate-grade stuff that may be coming from underground that could travel with ore sorting?

Thanks, Stefan. Great question. Yes. When we looked at the 8 different ore types that includes both underground and open pit. They included both high-grade and lower grade. So we try to do as -- we've tried to do as wide a variety of ore bodies throughout the Valley, along with specific areas, Vermelhos, for instance, Pilar and so a couple of other ore bodies where we looked at large -- the ability to look at large tonnage, high-grade and large tonnage low grades. So we've looked at -- we've tried to be as comprehensive as we can with regards to -- we've run I think just over 100,000 tonnes through the plant to date. And so it's fairly comprehensive. We're very, very happy with the amount of work that's been done.

Okay. Great. Great. And then just switching gears over to NX Gold. I know in the past, you sort of mentioned that there was, in addition to drilling on the San Antonio Vein, there was going to be some complementary regional exploration for the first time in a long time. Is that still happening? Or is that sort of -- it's just the focus back on the Vein itself?

Well, we're -- we've been continually working on the Vein itself. And we've also been working on some other areas. And we started our regional program probably, I think, a couple of months ago in terms of doing the work there. So yes, we're starting to expand the program. As I said, we've got 4 to 5 rigs there right now. And I think as we continue here, I think we'd like to see the program expand more, but that's going to be Mike and Pablo's efforts with regards to availability of rigs, crews, et cetera. COVID-19 is one which as much as you want to expand as quickly as you can, you've got to be very careful with regards to, number one, bringing obviously teams into your environment. You haven't operated there in the past. And so finding rigs, finding availability of people because that's what Mike and Pablo are doing right now. But we are -- long answer to a short question, we are stepping out into region.

[Operator Instructions] The next question comes from Raphael De Souza from CIBC.

Most of my questions have already been answered. But just one last one, guys. So with gold and silver prices were being so high right now, any changes to the way you're thinking about NX Gold and the potential divestment?

No. I think, right now, we're very, very happy with NX, where it stands. It's -- obviously, we've still got a lot more work to do, and we're really excited with regards to the exploration program. And we certainly hope when you come out with a new 43-101 at the end of the year, we'll be able to show more extension of mine life. Like anything else, though, we constantly are evaluating opportunity with regards to how do we get the highest value out of our assets. And with regards to NX right now, we're -- I think, Raphael, I want to just leave at we're evaluating number of different opportunities with regards to how to extract more value out of it. But there's nothing in terms of concrete that I would say that we're willing to talk about at this stage. I think everybody who has a gold asset should be doing what we're doing. And I think we're no different to any other company out there, evaluating what's the best way to extract the most value for our shareholders in terms of its operation.

And just one more quick question on NX Gold. So in order to get to your -- I think it's 9 grams per ton guidance. Grades have to pick up quite significantly in the second half of the year. So what sort of grades should we expect for the upcoming quarters?

That's -- I don't want to get drilling into that one, Raphael, with regards to that. But I'll pass it over. And not that I want to drop the bucket and pass it over to Makko. Makko spends a lot of his time working with the NX Gold team above and beyond me. And so Makko, do you have anything to add with respect to that?

Yes, Raphael. Look, I'd say we've obviously maintained our guidance for an extra full year. I think we've always indicated that production was going to be weighted towards the second half of the year. I think as we've developed into Santo Antonio, we've obviously continued to increase production volumes, both -- if you look at throughput has been quite a bit higher than the first half. And so I think you can look at our guidance for the full year and work backwards on kind of where we'll be. I mean, if you look at the range there in terms of production volumes at NX Gold, you can -- as I said, you could back-calculate what the grade ought to be for the second half. And we're working the team and everyone is working to produce that.

The next question comes from Jackie Przybylowski from BMO Capital Markets.

I am sorry, I'm probably going to ask you more questions that you don't want to answer. But I just want to circle back on your regional drill program. You just mentioned, I guess, that you were hoping to deploy more rigs there depending on availability. So my first question is, is that availability on rigs from your existing sort of near-mine programs? Or is that new rigs in addition to the 28 that you have? And then maybe -- just on top of that, maybe if you can give some color, are you using RC or diamond drills or both? And then maybe if you could just talk a little bit about how you're doing the drilling, is it focused on specific targets? Or are you all over the different core systems that you've identified? Or whatever color you can give in that kind of context would be really helpful.

Jackie, when we talk about rig availability, it's primarily from our internal supply of rigs. We did add 1 rig, as you can see from the beginning of the year, we're at 28. It's possible, we may add another one for a specific purpose that we're looking to do. But right now, around 27 to 29 rigs is probably where we're going to be. All but one is core. We have the one big [indiscernible] that we use. That's our scouting rig throughout Valley, and it goes and looks at certain areas. As we've been pivoting to the regional, I think some of the continued exploration success that we've seen, particularly around the deepening project is probably -- we haven't put as many rigs on the region as we anticipated at this particular time, but we will be as we go forward in the second half of the year. We are targeting certain specific areas right now. With regards to the program, primarily in and around the Sirabian district in terms of our first pass and some of the things that we've seen there in terms of the complete greenfields work. And we'll see how we go.

So I guess the gist of my question is, like, will you have enough information from the regional program that you can start adding some of that into inferred or M&A or some kind of resource category?

This year. Yes. This year. That's -- Jackie, that's a good question. But it's hard to provide a reasonable answer. With regards to anything that we do, certainly, once we are into a new discovery. And if you look at Siriema last year and using that as an example, there certainly is the possibility that, that could occur. But generally, we want to -- before we even announced a new discovery, as you know, we want to make sure that, that resource has the ability to come into the 43-101. So that's typically, if you take Siriema as an example, that was 19 holes before we even announced it. And I think by the time we did the 43-101 last year, we're probably into for 25 to 30 holes. So if you see us announce a new discovery, it will be on the basis that there's a high probability that a portion of that discovery will come into the 43-101. If we're not announcing a new discovery, it's not that we haven't necessarily discovered anything. It's just nearly that we continue to do the work to pull the resource together in order to be able to announce it. So as you know, as a company, we're not a company who releases single exploration drill results. We don't think that's appropriate for what -- the type of company we are. And so while we may have intercepted mineralization, we won't necessarily announce those results until such time as we're comfortable that a resource can be built around it. Can somebody ask a question of Noel, please?

There are no more questions at this time, sir. I would like to turn the conference back over to management for any closing remarks.

Noel, do you want to give some closing remarks?

Yes. Look, thank you, everybody. As David said, we have a lot of moving parts in our business, both at NX and the MCSA. And we're having to deal with the COVID crisis at the same time. I think the company is doing exceptionally well. In terms of its operations, we continue to be just absolutely the total praise of all our management team and employees in Brazil, they're doing an incredible job in very trying circumstances. And we have a tremendous opportunity in front of us. We have a lot of things to do. It's a difficult time. But I think the team and the company is performing as best as it can in generating such tremendous returns and profitability. Our cash costs being so low on a global basis that your company is in great shape, and we look forward to speaking to you again in the future. Thank you.

Thank you. This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.