Kinross Gold Corporation (KGC) Q2 2020 Earnings Report, Transcript and Summary

Good morning. My name is Adam, and I will be your conference operator today. At this time, I would like to welcome everyone to the Kinross Gold Corporation Second Quarter 2020 Results Conference Call and Webcast. All participants are in a listen-only mode to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. At this time, I’d like to turn the call over to Mr. Tom Elliott, Senior Vice President, Investor Relations, and Corporate Development. Mr. Elliott, you may begin your conference.

Thank you. Good morning. With us today, we have Paul Rollinson, President and CEO and Kinross’ senior leadership team, Andrea Freeborough, Paul Tomory, and Geoff Gold. Before we begin, I’d like to bring to your attention the fact that we will be making forward-looking statements during this presentation. For a complete discussion of the risks, uncertainties and assumptions, which may lead to actual results and performance being different from estimates contained in our forward-looking information, please refer to page 2 of this presentation, our news releases dated July 29, 2020, the MD&A for the period ended June 30, 2020, and our most recently filed AIF, all of which are available on our website. I’ll now turn the call over to Paul.

Thanks, Tom, and thank you all for joining us today. First and foremost, I would like to acknowledge and thank all of our hard working employees who have helped us deliver strong results while managing through their own unique challenges during this pandemic. The safety of our employees and their families in the communities that we operate continues to be our first priority. I also want to say that our thoughts are with all of those who’ve been affected by the pandemic. Kinross delivered strong results in Q2. And we are pleased with the significant growth in margins, earnings and free cash flow. This morning, you will hear how our Company is technically strong with an excellent operational track record, is managing the impacts from COVID, is delivering very strong free cash flow with peer-leading yield, and has numerous projects to continue adding mine life and a number of exciting exploration opportunities. Before that, I will comment briefly on the quarter and a few key developments. Andrea will provide a financial review, and Paul Tomory will summarize our operating performance. We will also give an update on how we are managing through the pandemic. All the Company’s operations performed well during the quarter. Once again, though, our three largest mines Paracatu, Kupol and Tasiast accounted for over 60% of total production and delivered the lowest costs in the portfolio. More than 50% of our production currently comes from the Americas, the U.S. and Brazil, with the balance from Russia and West Africa. Over 80% of our production comes from five key assets in five separate regions. With our recent acquisition in Russia, and taking into account our track record of exploration success, we expect that these assets and regions will have mine lives of at least 10 years. We also had another strong quarter in terms of free cash flow and generated approximately $220 million during Q2. At current spot prices, free cash flow is expected to remain very strong for the remainder of the year. As a result of our continued strong cash flow, our investment grade balance sheet strengthened further, and we finished the quarter with just over $1.5 billion in cash, in part due to the draw on our revolver. Andrea will comment further on the revolver. However, I would note that we did repay $250 million of the facility subsequent to quarter-end. At this time, we are not formally reinstating our guidance, but continue to work towards our original targets released in February. Our key results for the first half of the year are tracking within the original guidance ranges, albeit at the low end of production due to some pandemic-related impacts. However, we do continue to expect the second half of the year to be the stronger half for both, production and costs. During the quarter, we announced an agreement in principle with the government of Mauritania to enhance our partnership at Tasiast. We are pleased to have been able to negotiate this mutually beneficial agreement with the government and add to our positive momentum and a decade of success in the country. And earlier this month, we released the prefeasibility results on our Lobo-Marte project in Chile, which represents an excellent growth opportunity. Lobo is a large scale long life asset located in one of the world’s top mining jurisdictions. The PFS results show that it has the potential to support our long-term production profile, and increases both, our reserves and reserve life index by 25%, compared with the end of 2019. The project offers attractive returns at consensus long-term estimates, driven by good grades, a modest strip ratio and low unit costs. As we now move forward with the feasibility study, we will continue to prioritize balance sheet strength and disciplined capital allocation. Any construction decision will not be made for a number of years until the feasibility study and permitting have been completed. With respect to capital allocation, our team has managed the Company through a wide range of gold price environments and has always remained disciplined on costs and allocating capital. Current gold and energy prices and FX rates are favorable, and we expect to continue producing significant free cash flow over the coming years. For example, if gold prices stay above $1,800 for the remainder of the year, we would expect to generate over $900 million of free cash flow during 2020. Over the coming months, we will continue to be disciplined with respect to the use of our balance sheet including leveraging our strong technical expertise to uncover attractive high-return investments that make sense for our business and our shareholders, continue producing debt as maturities come up, modestly increasing exploration spend to leverage our numerous prospects to potentially add ounces and mine life, and post-COVID-uncertainty, a potential return of capital. Given our internal opportunities, we feel no pressure to make external investments of any sort, unless we are comfortable with the risk reward profile. We also have several areas within our portfolio that may present attractive optionality for capitalizing on a high gold price without risking significant capital and without altering the resiliency of our business, should prices decline in the future. I’ll now turn the call over to Andrea for a more detailed review of our financial results.

Thanks, Paul. I’ll begin with a few financial highlights from the quarter, review capital expenditures and end with a summary of the balance sheet. During Q2, we produced approximately 572,000 attributable gold equivalent ounces and sold 584,000 at an average cost of sales of $725 per ounce, and an all-in sustaining cost of $984 per ounce. We are particularly pleased with the cost performance, which came at the middle of our original guidance range, despite COVID-19-related inefficiencies and challenges. Our margins increased 53% to $987 per ounce, outpacing the 31% increase in our average realized gold price of $1,712 per ounce. We sold approximately 12,000 ounces more than we produced, including about 15,000 ounces that were unsold at the end of Q1, partly offset by a missed shipment at Chirano due to a transportation delay relating to bad weather. These ounces were sold in July. Our adjusted EPS of $0.15 and adjusted operating cash flow per share of $0.33 were both up significantly compared with the second quarter of last year. Adjusted operating cash flow increased to $417 million from $288 million last year. And as Paul mentioned earlier, free cash flow for the quarter was approximately $220 million, which is twice the level we achieved in the first quarter. We expect free cash flow to remain strong for the rest of the year. Turning to income tax. We recorded an expense of $103 million during the quarter, compared to $47 million in the second quarter last year, with the increase due to higher taxable income driven by higher realized gold prices and higher margin. Capital expenditures during the quarter were $214 million, which was slightly higher than $191 million spent in Q1. However, Q2 CapEx was lower than planned due to COVID-related challenges. As an example, capitalized stripping for the Tasiast 24k project has been slower than planned due to constraints on the movement of personnel as well as the strike. Our original guidance in February had 2020 CapEx of $900 million plus or minus 5% with a reduction of approximately $100 million in 2021. We still expect combined CapEx for the 2020-2021 timeframe to be in line with these original targets. However, the timing of spend on specific projects may be modified. We’ve identified expenditures from 2020 that will likely not occur until 2021, and we’ve identified some expenditures originally planned for 2021 that have strong business cases to be brought forward to 2020. Paul Tomory will provide some examples shortly. However, the point, I’d like to make is our overall capital needs are not changing materially. And we have the flexibility to adjust the allocation of our spending in 2020 and 2021 as we adapt to the external environment. We also expect some puts and takes on operating costs, including continued favorable foreign exchange rates on the Brazilian real and Russian ruble and lower energy prices, higher royalties resulting from higher gold prices, and of course, potential impacts from any future operating challenges associated with COVID-19. With strong metal sales, arising gold price and a $200 million draw on the Tasiast facility, we ended the quarter with just over $1.5 billion of cash and cash equivalents. Including the Tasiast facility and the $750 million drawn on the revolver, total debt at June 30th was $2.7 billion, and net debt was approximately $1.1 billion. On a trailing 12-month basis, our net debt to EBITDA ratio improved once again and is now 0.7 times. As Paul mentioned, subsequent to the quarter-end, we repaid $250 million out of the $750 million drawn on the credit facility. We made this partial repayment for two reasons. Our cash balance continues to grow from the strong free cash flow we’re generating. In fact, we have more cash now after the partial repayment than when we initially drew on the facility in March. And we’re slightly more comfortable with the overall operating and financial environment globally. Nonetheless, we are keeping the remaining $500 million drawn for the time being, as the funds are relatively low cost and to ensure we can comfortably manage a wide range of potential risk. In summary, we’re comfortable with Kinross’ liquidity position and believe we have a strong base to continue to fund our business in the current environment. I’ll now turn the call over to Paul Tomory.

Thanks very much, Andrea. First, I’ll spend a few minutes on some of the key COVID-related topics. And then, I’ll give a brief summary of our operations are doing. I’ll also be discussing some very encouraging exploration highlights and comment on areas where we continue to target meaningful mine life extensions. And then, I’ll elaborate on capital expenditures. Broadly speaking, our portfolio of operations managed very well through COVID-19. We acted early with our task force and took several important measures, which allowed us to minimize the impact to our business. To-date, we have not experienced any material negative impacts and remain on track to achieve our operating and project development targets. That said, we’ve experienced some minor impacts on which I will elaborate as I discuss each asset. As Paul indicated, our three big mines continued the strong performance and accounted for over 60% of second quarter production with a combined cost of sales just below $600 per ounce. Paracatu was once again our largest producer and continues to deliver strong consistent results. Production increased by approximately 15,000 ounces over last quarter, recoveries remained lower than last year but are in line with our expectations and what’s presented in the technical report. They’re expected to improve as we move into higher grade ore in late ‘20 and early ‘21. Strong throughput and favorable currency exchange rates during the quarter resulted in low unit costs, albeit slightly higher than the year-ago quarter due to lower production. Turning to Russia, Kupol and Dvoinoye delivered another excellent quarter and continued to generate robust cash flow. Good throughput, grades and recoveries drove an increase in production by approximately 3,000 to 10,000 ounces relative to last year and last quarter, respectively. Cash costs of just over $600 per ounce improved from Q1, but increased slightly from Q2 2019, as a result of higher royalties associated with higher gold price and were partly offset by favorable currency. Turning to exploration in Kupol, following an excellent year last year, our team achieved one of the best first halves on record, yielding very positive results within the mine footprint at Kupol, from areas like the Northeast Extension, Kupol Deeps South, Moroshka, Providence. As anticipated, many of these new potential mining zones are narrow in width than those historically mined at Kupol, but made possible by Kupol’s ongoing successful transition to narrow vein mining, which should allow us to maintain diluted grades in the 8 to 9 gram per ton range. Exploration will continue to focus on these targets, as well as on proximal Brownfield targets for the rest of 2020 with the expectation of once again adding to the mines estimated mineral reserves and resources with our year-end. With the addition of these ounces from the first half, we expect to be mining at Kupol until at least 2025, further supporting our decades of success in Russia. We remain very-pleased with the results of Kupol mine exploration program, which combined with the successful transition to narrower vein mining has continued to yield impressive additions to Kupol’s mine life. At Chulbatkan, we intentionally slowed down our drilling in the second quarter to better manage COVID protocols in the camp, but are now in the process of ramping back up our exploration activities. At the end of the second quarter, just over 35,000 meters of infill step-out and metallurgical drilling had been completed. The results are encouraging and support our original thesis for the project, which has a large near-surface estimated mineral resource with highly continuous mineralization and is open along strike and at depth. The drill program for the third quarter is focused on further definition in the high grade zone. And we expect to complete this year’s planned 55,000-meter drilling program on schedule. Moving to Tasiast. Despite pandemic related challenges related to the mining rate, and a 17-day strike and work stoppage, Tasiast had a good quarter operationally. The mill delivered average throughput of approximately 16,700 tons per day, during the days it operated, which was slightly higher than the record achieved in the first quarter. However, the strict COVID screening protocols have limited the workforce available. And we have prioritized allocating camp space to those people who work in the mill and in the process circuits. As a result, we’ve had to curtail the mining rate. In the second quarter, Tasiast mined approximately 7.5 million tons, significantly lower than the 22 million tons that were planned in the budget. The principal impact of this result is a deferral of stripping tons and the associated capital dollars, and a commensurate delay in access to the ore from the West Branch for pushback. Production is not expected to be intact in 2020. But, the delay in access to new ore and the longer than planned reliance on stockpiles will result in lower production in 2021 than has been compared in -- contemplated in the original 20k mine plan. However, we expect no impacts to Tasiast’s life of mine production, mineral reserve estimates for overall value, as we were able to adjust short-term mine plans given the availability of very-large stockpiles at the site. As for the construction project, it continues to advance well, civil works are well-advanced and the project remains on schedule to increase throughput capacity to 21,000 tons per day by the end of 2021 and then onwards to 24,000 tons per day by mid-2023. However, if pandemic-related constraints and the global movement of people and supplies persist for a prolonged period of time, the schedule could yet be negatively impacted. However, I’m pleased to say, by the end of June, the Company had reinstated the rotation of expatriate staff in and out of Mauritania, which has improved the situation. Moving on to our U.S. operations. Our three sites continue to move closer to normal as we maintain discipline on pandemic-related protocols and procedures. At Round Mountain, unit cost of sales increased slightly compared to the last quarter and last year due to lower grades and recoveries as planned. We expect production to increase in the second half of the year, particularly in the fourth quarter. Exploration and drilling at Round Mountain continued to focus on the Phase X area, which is the conceptual name for the next major pushback after Phase W. Drilling has intersected significant mineralization in the upper proportions of the shallow section of the Phase X pit shell and confirmed that mineralization extends from Phase W. Further drilling will assess whether mineralization in the upper proportion of the Phase X could reduce the strip ratio. We’ve also initiated early engineering works on what a Phase X pushback might look like. At Bald Mountain, production increased by approximately 15% compared with the last quarter and 20% compared with last year, due to improved grades and recoveries from Vantage. However, costs increase slightly compared to last quarter due to an increase in operating waste mined. At Fort Knox production and costs, both improved compared with Q1 due to improved mill grade recovery and lower electricity costs. Results of Fort Knox are becoming more reliable and we expect Q3 to further improve ore results in the first half. The Gilmore expansion project is advancing very well and the project remains firmly on time and on budget. We are looking forward to stacking first ore on the new Barnes Creek heap leach and completion of the project in the fourth quarter. With Phase W, Vantage, Gilmore, and now potentially Phase X, we are very-pleased to be extending our time in the mining friendly states of Alaska, Nevada. In Washington State, we completed in the quarter a high level engineering economic assessment of the potential for mining at the Curlew Basin at the historical K2 mine, which is approximately 35 kilometers north of our Kettle River mill. The results were encouraging. And as a result, we’ve reinitiated the rehabilitation and development of an advanced exploration defined to allow for underground drilling, targeting incremental high-margin ounces proximal to and as extensions of the K2 and K5 deposits. Moving to Ghana at Chirano, we experienced some unplanned downtime at the process plant due to issues with the apron feeder thickener, and a mill motor, which negatively impacted production. Then, as Andrea mentioned, there were some untimely weather conditions that prevented the scheduled shipment further impacting sales. The plant issues have been resolved and the missed shipment has also been successfully completed. Following successful near-mine exploration extensions in Chirano, we expect meaningful mine life extensions, the additional ounces are likely to be slightly lower grade and in narrower veins that could lead to slightly lower production levels and higher unit costs. However, most importantly, we expect these extensions to be economic at our $1,200 per ounce planning price. Additionally, the exploration program continues to yield positive results. At the over deposits, drilling in the first half of 2020 yielded significant intercepts and has extended the depth of high-grade mineralization. As a result, we have begun development work on an exploration drift to better delineate the potential for an underground mine at Obra. Should this hypothesis play out, we could see mine life extensions beyond 2025. Moving to our Chilean projects, La Coipa continues to make efforts to offset some lost time due to pandemic-related restrictions with good progress on hiring, engineering and procurement. Paul has already covered Lobo-Marte. And finally, as Andrea stated, we are adjusting the timing of our capital program to capitalize on some valuable opportunities our teams have identified and to accommodate the various restrictions across our operations. As mentioned, some stripping at Tasiast has been delayed until 2021. However, as noted earlier, the changes are not expected to impact the overall 24k project timeline. Some of these delayed expenditures will be offset as we bring forward other projects that add value, such as the purchase of some in-pit equipment at Paracatu that will allow for increased production sooner than initially planned. Additionally, we plan to relocate primary crusher at Round Mountain in order to increase mill recovery and lower crushing costs. To wrap up, our priorities continue to be the health and safety of our employees as we manage through this ongoing pandemic; strong, consistent operating results; and delivering our projects on time and on budget. And with that, I’ll turn the call back over Paul.

Thanks, Paul. I want to reiterate our gratitude to our employees, suppliers, communities and host governments that all continue to work together to keep everybody safe and productive. As a result of this hard work, all of our assets remain in operation and our projects continue to advance. Notwithstanding COVID, our business is very well positioned. Our commodity prices and currencies are favorable. We continue to extend our long-term track record of strong and consistent performance across all of our geographies. We have an attractive portfolio of operations, projects and exploration opportunities. And we continue growing our free cash flow and further strengthening our investment-grade balance sheet. With all this, we are set to continue driving meaningful value-creation and share price appreciation over the coming quarters and years. With that operator, can we now please open up the call to questions?

Yes, sir. [Operator Instructions] And your first question comes from the line of Ralph Profiti with Eight Capital.

Good morning. Thanks everyone for taking my questions. Firstly, Paul, on Tasiast 24k. Can you maybe disclose how much of a workforce is needed, say at a minimum, to stay on schedule, when it comes to construction, and maybe sort of where are you now, and how does that workforce need to build up over time?

There’s many aspects to it. So, within the project, there are different scope elements. So, one very large elements of scope is the power plant. And that probably requires the single largest number of people. We’ve delayed that project deliberately. It’s not critical path, it’s not required to get us at 21k. And so, we pushed that out a couple months, primarily to save space in the camp. In general, we’re not particularly worried about being able to ramp up the number of people. There are relatively small scopes of work. The bigger use of space in the camp is in the mining fleet. And that’s where we’ve seen the delay in the stripping as a result of having fewer people in mine. I’ll remind you that the 24k project is a series of pretty small scopes of work thickener, ILR, water, upgrades. So, we were able to manage those sequentially.

Okay. Thanks for that. If maybe I can switch gears and maybe asking a question on the Chulbatkan section that you provided. It does show sort of this higher grade near-surface. And I’m just wondering when it comes to drilling, are you more concentrated sort of along strike as a strategy, and are you finding continuity in that higher grade near-surface elements of how this orebody is coming together?

So, we remain very happy with what’s going on at Chulbatkan. The first half of the year was focused on just -- the continued program, as I said. We did about 35,000 meters. The focus to date has been just that infill program and establishing better confidence in our initial hypothesis. The high-grade portions, we are excited by that whole, but we haven’t spent a lot of time in the first half doing testing on that. That will be part of our program in the second half. So, I don’t want to comment too much right now on further high-grades, until we are able to get into our second half program.

Yes. It’s really just infilling…

Yes, exactly. We’ve really been focused on infilling and getting a better set of data for the resource model that is being built right now. We are excited by the high grades, but we’re going to be getting into that in the second quarter to see if there’s continuity and more of it.

And the reason that’s in the third quarter is we wanted to get the structural geology part.

Correct. Yes.

So, we could have the best chance of success and efficient spending the dollars.

Yes, understood. Thanks for the clarity.

And your next question comes from the line of Greg Barnes with TD Securities.

Yes. Thank you. Thanks to Paul Tomory again. On the 2021 production levels at Tasiast, so you said, they will be done modestly from what was in the technical report. I was just wondering what modest is.

About 40,000 to 60,000 ounces at our current view. We’re still refining the mine plan. There’s a couple of variables that have yet to settle. One is that how quickly can we ramp the mining rate back up. So, the mining rate now is increasing. So, every week, we mine more than the previous week. However, COVID-related impacts remain and it is primarily quarantine related, the number of people we have in the camp there. The COVID situation at Tasiast is continually improving. So, the uncertainty is really how quickly can we ramp back up to planned rates? But, at our first blush, like I said, 40,000 to 60,000 ounces, less than the TR. [Ph] And that’s primarily -- that’s almost exclusively grade driven.

And switching back to Paul Rollinson. Paul, your comments at the end of your opening statement about -- I missed it a little bit, but something to do with you have internal opportunities that you can bring I think forward or potentially monetize I think is what you’re driving at?

Well, I think, I just -- again, I think, this quarter in particular versus other years, we’re pretty excited on the exploration side. We’ve got a lot of new staff. We’ve had some great drilling in the first half of the year. Paul touched on the success at Chirano. We’re very excited about Curlew. There is that aspect to it. The other side of it that I kind of alluded to, as you know, we do our budgeting and our reserves at 1,200. And there is flex obviously in the revenue line where if a project were to green light with your $1,200 hurdle, you’re going to see a lot of optionality or NPV expansion at higher commodity prices without incurring incremental capital. And what I was trying to say was, should commodity prices go back down, we still have positive cash flow, positive IRR. But, we’re going to get the benefit of higher commodity prices by building at $1,200 threshold.

And just finally, Paul, on dividend. I know you’re being cautious around COVID-19 and it’s unclear what the impact will look like over the next 6 to 12 months. But, you’re generating a lot of free cash flow. I know, you’ve got an attractive pipeline. But clearly, that’s something I think that investors would like to see returned.

Yes. Okay, absolutely, and we get it. I think, Greg, we were getting questions on return of capital in January, February, based on what the expectation of the year’s cash flow -- the year ahead cash flow would be. The COVID kind of put everything in the backseat. What we said on our previous call was, it feels to us a little bit incongruent to be reinstating or initiating a dividend when we’ve just drawn $750 million under our revolver to put cash on our balance sheet, just for business uncertainty. I think, the point we’re trying to make here today is we’re not out of the woods yet, but the signaling by paying back that first tranche of 250 of the 750 I think should be taken as a positive signal. We are being impacted by COVID. We are managing through it, but we can’t say for certain that we’re out of it, we’re through it. I’m optimistic though as we continue here, we will work through it. And as I would have said in maybe in January, it’s really not a question of if, it’s a question of when. We are probably a bit on the conservative side, but we are getting stronger, financially every month, every quarter. And my hope -- there’s no guarantees in life, my hope is as we continue to get stronger and we move into the fall, and we work through all of this, we’re going to be well-positioned for that return of capital discussion.

And your next question comes from the line of Josh Wolfson with RBC Capital Markets.

Noting the commentary in the release and on the conference call related to the Kupol exploration results, you gave some sort of commentary about how -- or the magnitude of potential upside at Chirano, is there any sort of quantity could tell us to what that expiration upside could be for Kupol?

I mean, I think what Paul said, which I think is really exciting for us, last year was one of the best years ever, in terms of reserve replacement at Kupol. And I think the point he was making this year, and I’ll let him expand is, we’ve actually been delayed in our spending at Kupol this year. And so, we’re behind where we would be. But notwithstanding that, we’ve had the best year ever. So, we’re feeling really, really good about how things are going from an exploration point of view at Kupol. And not to put Paul on the spot, but I do think he didn’t make the comment about at this stage we’re feeling comfortable about, again, extending mine life.

Josh, as you can appreciate, it’s difficult to put quantums out there. But rather -- how would I say this? The 2025 mine life extension, we’re feeling really good about, we got to do some i dot and t crossing on that in next few months. And you’ll see the reserve update at the end of the year. But we’re feeling pretty good about that 2025. And as you’ve watched Kupol for many years now, we have a very strong record of continuing to add reserves and replace that which we produced. I don’t think, it’s going to end in 2025. We have a lot of targets, we continue to drill, we continue to spend a lot of money, the returns are good. And so, I’m not going to put a quantum out there, but we’re feeling very encouraged by what we’re seeing at Kupol. Let me just talk a little bit about what is happening there. The big wide zones at good high grades are largely depleted, but we’re getting some very encouraging -- the really the heart of this exploration success is finding these narrower veins with very high grades, in some cases 20, 30 grams. Now, the widths are one meter, so you got to dilute those. And originally, our worry was that the grades wouldn’t be high enough and the width is to narrow to support the scale of the Kupol operation. But fortunately, with this very-successful ongoing transition to narrower vein mining, we think we’re going to be able to maintain the diluted grade in that eight to nine range and to continue to extend mine life. So, really what -- the big encouraging thing is that we’re getting good grades in those veins, really high grades, they’re narrow, and we were able to successfully mine them. So, we’re feeling really good about what we’re seeing at Kupol. And to give you a perspective, a couple of years ago, we had almost no narrow veins in active mining. Our plan right now over the next three, four years is to transition to three quarters of our production come from narrow veins. And it’s a phased transition over three, four years. We’re switching the equipment over where our workforce is getting used to the narrower vein. So, it’s not a nice -- it’s not an overnight transition, it’s something phased in over three, four years. So, we’re, what I’ll say is we’re feeling really good about Kupol.

Got it, okay. And then, continuing the conversation on the return of capital commentary, noting where gold prices are today and forecast free cash flow being very high, but also looking at this portfolio of projects and wanting to maintain some conservatism. What’s the right approach or right numbers are again, specifics, if that’s possible, that would make that number of sort of relevant but still not too aggressive?

Yes. Look, I think -- I don’t -- the way we come at it, the way we think about the allocation of capital, really, and we said this, again, maybe back in January, we sort of triangulate around a few considerations. One is obviously the gold price. The other is our balance sheet. And the third would be just the capital opportunities in our business. And check on the gold price, check on the balance sheet. And for us, quite frankly, just to digress slightly, we feel really good. I mean, we as you know, have come through a period of significant reinvestment in our business over the last three years. And when we did put out our guidance, originally back in mid-February, we tried to give a look through to ‘21, ‘22, at least as it relates to capital, investing back in the business. And what we were projecting is, as we’re coming out of that reinvestment period of $900 million plus or minus capital, going down into sort of the $800 million and going forward. And so, we were advertising back in February, growing cash flow as a result of less capital and expanded margins. All of that is -- remains true, and we feel stronger about it than ever. It’s just we can’t predict. As I’ve said, we have been impacted, a lot of it Paul Tomory has spoken about with respect to COVID. We are managing through it. And it just seems prudent to us to just give it a couple more months here to see how we go. So, I think, from what is it, if you’re asking me what is the right sort of dividend if -- as and when we get there? Look, we’ll look at what’s out there. We benchmark off of our peers and our comps. And what I’ve also said is, for us, I think, the signal would be keep an eye on -- there’s a sequence to me that makes a lot of sense here. And as I said, we just made an initial 250 out of the 750 with payment on the revolver. I think, the signal I’d be looking for is when we do repay the balance of that revolver, that’s going to signal our comfort about the COVID risk going forward. Then, I suspect the minute we do repay that revolver, we’ll get an immediate question on a guidance reset, and the return on capital. And I’d like to believe, if everything holds together, that’s the conversation we’ll be having in the fall.

Okay. And maybe just to sort of clarify, you mentioned sort of benchmarking it. One approach, I guess, is looking at yields perhaps for peers. But, I guess, I would note that most of the peer group, I guess, is trying to determine their payout levels based on significantly lower gold prices, which presumably would affect what your levels would be as well? Is that how you would look at things too? Are you more comfortable, I guess, using higher payouts, maybe based on the current environment?

Yes. Look, Josh, I think, we’re inherently conservative. I mean, I think, maybe we’re too conservative. We’re going to be the same when we think about this. We’re going to be reasonable and we’re going to be appropriate. We still budget at 1,200. We still do our reserves at 1,200. And we will contemplate when we do get into that situation, as you well appreciate, you don’t want to be adjusting or turning a dividend on, turning it off. We want to find the right level that’s sustainable for the long term. And, we’ll adjust carefully as we go forward.

Great. Thank you.

Thanks. [Operator Instructions] And your next question comes from the line with Carey MacRury with Canaccord Genuity.

Good morning, everyone. Just maybe another question for Paul Tomory on Fort Knox. Your cash costs there have been averaging $1,200 an ounce. I know there was a pit wall slide a few years back or a year back or so. I’m just wondering, with Gilmore set for completion in Q4, just how we should think about Fort Knox going into 2021 from a production and cost stand point?

Yes. And you quite correctly pointed out Fort Knox had a bit of a rough go over the last few quarters. But, we’re coming out of it. The asset is doing very well right now. We expect production to start ramping up here quarter-by-quarter to fall in line with what’s in the technical report. Yes. That’s it. It’s -- we’re feeling a lot better about performance of Fort Knox.

So, if I recall the report, I think cash costs were somewhere around maybe like $800 to $900 an ounce, is that still what you’re expecting?

Yes. It depends on the year of course. It’ll be correlated to production. The higher the production, the lower the cash cost. But, in aggregate, over the life of mine, that’s correct.

Okay, great. And then, maybe just some as Phase X at Round Mountain, do you have resource ounces in that phase or is this a new…

No. So that -- yes, there’s a big chunk of MI&I [ph] at Round Mountain, a lot of that is in Phase X. And you’ll recall when we did Phase W, we planned and designed all of the infrastructure, the situation of the truck shots, the crusher relocations and all that. We designed it to accommodate what we were calling at that time, W2, and we just rebranded that X. So, this would be the next major pushback for which most of the capital, other than the stripping, has already been spent. It’s just a little bit deeper. But, what’s really significant in this last quarter is that we’re starting to find mineralization in the upper portions of X. And that -- the reason we’re really encouraged about that is of course that would reduce the strip ratio and potentially bring a $1,200 pit shell into state. We’re not quite there yet, but it’s moving in that direction. So, a lot of the inventory we have currently in MI&I is an X. While I’m on this topic of Round Mountain, there’s another phase, they’re called S, slightly smaller that we’re also working on. So, there’s a couple of potential mine life extensions that we’re working on at Round. And for the most part, those ounces are in our resource inventory.

Just wondering like the quantum of ounces, are we talking like millions of ounces…?

It’s in our resource there -- I mean, that X pushback with S, we’re hoping to get about 1 million ounces there, 1 million to 1.5 million ounces. But, it’s still very conceptual, it’s early days, and I don’t want to get ahead of myself on it. But that’s conceptually what we’re looking at.

Okay. That’s fair. And then, maybe just back on Chulbatkan, given the exploration you’re doing there this year, should we be expecting a resource update next year, or is that too soon to think about that?

We intend to update the resource model this year. And so, there will be a resource update with our year end.

And your next question comes from the line of Tanya Jakusconek with Scotia Capital.

Sorry. I just wanted to come back to this capital allocation, Paul, so that I understand it correctly. And maybe another way to ask you is, what minimum cash are you going to be comfortable holding on the balance sheet to run your business, so that we can kind of benchmark that to looking at excess cash flow going to dividend payments and running your business? Thanks.

Yes, sure. I mean, this cash and there is total debt and just balance sheet metrics, if you will. I think, from a running the business point-of-view, we get that question from time-to-time. And I would say, generally, our answer’s been sort of for the day-to-day running of our business, we want sort of minimum 350 to 500 of cash on the balance sheet. What we’re really talking about here, though, is just uncertainty. And that is why we pulled our guidance. It’s just uncertainty. And yes, we feel better today at the end of July than we did in mid-March, having worked through this thus far. And certainly, as you know, with this kind of spot environment, as I alluded to in my opening remarks, if you extrapolate the spot environment to year-end. If I were sort of doing a back of the envelope, I project our net debt EBITDA is probably down in the -- I’ll call it say, 0.3 kind of range from 1.7 today. So, everything’s headed in the right direction. For us, it’s really just making sure -- as Paul alluded to -- and then, maybe I’ll let him speak a little bit more specifically to Tasiast. What we’re finding is, as we’re testing employees, most of them are asymptomatic, and they get on the bus to go to the site, and we find out they’re positive, and we have to quarantine. And so, it’s those kinds of headwinds. And what we’ve been concerned about for example is just share headcount in, for example, the mill. And until we can kind of comfortably say we’re through all of that, we’re not going to -- and again, I would say, we’re not -- it’s a situation where the mill hasn’t been impacted yet. But, we need to know that we’re likely not going to be impacted before our uncertainty levels comes down. We’ve been very fortunate in Brazil so far where Brazil as a country has been making a lot of headlines on how they’ve been dealing with COVID. We’ve been well ahead of it with our protocols. But having said that, in the State of Minas Gerais and in the City of Paracatu, we are seeing some upticks in COVID cases. So, that’s our point here. It’s really not so much about the cash and the balance sheet. I think, we’re in great shape today. We’re getting stronger. It’s really just about the uncertainty of business impact before we get there.

So, whatever, the gold price is a gold price, and you’ll generate that amount of cash flow, as long as you see a workable environment going forward, say post COVID, and you kind of run your business with a minimum of that $350 million to $500 million on cash on the balance sheet. You have your sustaining capital, your development capital. I think you have one debt repayment in September of next year. But, anything above and beyond would be open to returning to shareholders. Would that be fair?

That’s right. I think, as I said earlier, we triangulate around the free considerations of gold price, balance sheet and internal capital opportunities. And, I think all three of those were if not for COVID are probably green light.

Okay. And maybe just a question for Paul T. I’m just interested in a going forward basis. I’m just trying to understand what sort of costs are now sticking with this COVID impact for the business?

Well, actually, I’ll just let that to Andrea. We’ve got some pretty specific numbers on that.

Yes. You would have seen in our disclosures that we did classify some costs in our operating costs.

Yes, I did.

The biggest bucket being in Russia and at Tasiast. And, obviously, those are our two, those are both camp based sites. In Russia, it’s more -- more specifically sort of direct compensation related costs to pay people more that were at site for extended periods of time, probably saw that peak in Q2. So, we’ll have some of that going forward but not to the same extent. And then, at Tasiast, Tasiast in total was about $10 million of that other operating, 6 of that was related to the strike and 4 related to COVID. And in both of those buckets are what we refer to as abnormal -- more abnormal costs, so just as a result of production not being at normal levels.

I’m sorry. I was just wondering more going forward that there’s going to be that additional transportation, there’s the testing, there is the additional PP&E. These are costs that we’re going to have to take on now for the business going forward until we get a vaccination. So, what should we think of those ongoing costs to be and where are you going to allocate them, in your cost structure or other?

Okay. So, I’ll talk about what we expect and Andrea will talk about the accounting. So, by far the biggest components of those costs are the camp costs and the associated overtime payments. Basically, as we bring people onto site two weeks early, they sit around in camp and you pay them. So, you’re consuming space in the camp and you’re paying people over time. So, that’s the by far the largest component of that cost. That is an ongoing situation at Kupol and Dvoinoye -- at Kupol, Dvoinoye and Tasiast and to a much lesser extent at Chirano. I don’t see that going away anytime soon. It may decline a little bit at Tasiast, but I don’t see going away at Kupol. We put everybody into quarantine going at Kupol, so we can keep the site completely clean. So, I would expect that that continues through this quarter and into the fourth quarter. At Tasiast, it’ll go down. As the COVID situation for us at Tasiast has crested, we’re on a down slope I would expect there it to go down a little bit. But, I see these costs hanging around in the next couple of quarters. And as for accounting, Andrea?

Yes. I mean, you’ll -- as you would have seen any other operating costs, there’s not really anything overly significant out of any of the other site. And there are items that what you and Paul referred to. So, we’d expect those to continue. But again, the two significant areas are really Tasiast in Russia as Paul said too.

So not significant at other sites, basically.

Okay. Thanks.

Thank you.

[Operator Instructions] And it looks like we have no further questions at this time.

We have no further questions at this time.

Okay. Thank you. Thank you, operator. Thanks everyone for joining the call today. And we look forward to catching up in the coming weeks and months. Thanks, everyone.

And this concludes today’s conference call. Thank you for your participation. You may now disconnect.