Alamos Gold Inc. (AGI) Earnings Call Transcript & Summary

Good morning, and thank you to everyone for joining our Island Gold Phase 3 Expansion study webcast. My name is Scott Parsons, and I'm the VP of Investor Relations. Before we get started, I'm going to provide a brief overview of our schedule this morning. As we will be making forward-looking statements in today's presentation, I would like to remind everyone to review our cautionary notes. Also, all figures in the presentation are in U.S. dollars, unless otherwise noted. I'll now introduce our presenters today. From our Toronto office, we have John McCluskey, President and CEO; Jamie Porter, CFO; Peter MacPhail, COO; Chris Bostwick, VP Technical Services; and from our Island Gold operation, we have Austin Hemphill, General Manager; Raynald Vincent, our Chief Geologist; and Nathan Bourgeault, Chief Mine Engineer. In terms of our schedule, John will be providing an introduction. Jamie and Peter will provide an overview of the current operation. Raynald is going to give us an update on exploration before we move into a detailed review of the Phase 3 expansion study. This will be led by Chris, Austin and Nathan. Last, Jamie will close out the formal portion of the presentation with our capital allocation outlook, after which we'll open up the webcast to questions. With that, I'll now turn the call over to John McCluskey, our President and CEO.

Thank you very much, Scott. Welcome to the call, everyone. Alamos has grown significantly over the past 5 years. In 2014, we were producing 140,000 ounces of gold per year from our Mulatos mine. In 2015, we acquired Young-Davidson. And in 2017, we acquired Island Gold. Both assets have been the key components of our evolution into a diversified North American gold producer. And both assets are continuing to drive a transformation of this company with the best yet to come. In the case of Young-Davidson, we just completed a tie-in of the lower mine this past week, the final step of a multiyear expansion, which will be a step change for this operation. In the case of Island Gold, the asset has grown in every sense since we acquired it. Today, we'll be outlining a Phase 3 expansion of the operation, which will transform the asset into an even bigger, longer life and more profitable operation. We have now delivered on 3 significant catalysts this year, and we're well positioned to deliver on the fourth being strong free cash flow growth starting in the second half. As outlined in our press release last night, our team has done a thorough evaluation of a range of scenarios to take Island Gold forward, capitalizing on our exploration success. The installation of a shaft and expansion of the operation to 2,000 tonnes per day is the best option in every respect. The shaft expansion has the strongest economics, it's the most productive with the lower cost, more than offsetting higher capital in the initial stages. And it best positions us to capitalize on future reserve and resource growth, which we're confident, will continue. Island is a great operation. This next step will create a better operation, with production increasing to average 236,000 ounces of gold per year at industry low all-in sustaining costs of $534 per ounce. And as Jamie will speak to later in the presentation, this expansion will not take away from our strong free cash flow outlook, in fact, it greatly enhances it over the medium term and over the long term. At $1,450 per ounce gold, Island will generate average free cash flow of $170 million per year. At spot prices, this increases to $250 million per year. I'll now turn the presentation over to Peter MacPhail to provide an overview of the Island Gold project. Peter?

Thanks, John. Good morning, everyone. Jamie and I just have a few slides here, and then we'll pass it on to the team that has pulled this all together. Slide 9, please. Here we go. Just a quick refresher on the asset. It's located just outside of Dubreuilville, in Northern Ontario and about 80 kilometers from Wawa. It's quite easy access right off the Trans-Canada Highway. Alamos acquired it in 2017 through a combination with Richmont Mines. It's a high-grade underground mine with a reserve grade of 10.4 grams per tonne. We currently have about 1.2 million ounces in reserve, another 2.5 million ounces in resource, and that's growing. The exploration success hasn't slowed down. Next slide, please. This is one of my favorite slides in the deck. It really details the exploration success over the past several years. In terms of ounces in all categories, Alamos has doubled the inventory in the past 3 years since acquisition to 3.7 million ounces. The reserve grade, which is a solid black line, has also significantly increased to 10.4 grams per tonne. This success has basically been accomplished by doubling the exploration spread from where it was under Richmont to $20 million a year. We wanted to really find out how big this could be before we're committing to a shaft. And we feel we've now crossed that threshold. We fully expect the deposit will continue to grow. So the economics being presented today are really just a point in time. Next slide, please. This slide illustrates the chronology of the mine, moving up the ranks in terms of where it sits in relation to the grade profile of other Canadian operations. From 2014 to current, it has evolved into one of the highest grade gold mines in the country. Next slide. This is another good slide, which illustrates the quite significant growth in production over the past 4 years from a run-rate of 40,000 to 50,000 ounces per year to as high as 150,000 ounces last year. What you're seeing here is the effect of both increasing grades and increasing mining rates from historically 500 to 600 tonnes per day through 900, 1,100 and more recently, 1,200 tonnes per day, our new permitted run-rate. And in conjunction with the increased production, all-in sustaining costs have come down nicely into the $600 to $700 per ounce range. I think, with that, I'll turn this slide over to Jamie to talk more to the financials.

Thank you, Peter. As Peter mentioned, we've been very successful in increasing production at Island Gold. We've effectively doubled the ounce production from pre-acquisition levels. And with that, we've managed to drive costs lower. Those lower costs combined with a $500 per ounce increase in the price of gold since we acquired the mine 2.5 years ago, leading to tremendous margin expansion. As Peter indicated, Island Gold is already a very low-cost mine with all-in sustaining costs at around $700 an ounce. Post expansion to 2,000 tonnes per day, our all-in sustaining costs will average $534 per ounce, making this one of the lowest cost and most profitable mines anywhere in the sector. If we go on to the next slide. The margin expansion that I just referred to is combined with production growth to result in growing free cash flow. In the 2.5 years since we've owned Island Gold, we've generated in excess of USD 100 million of free cash flow, with $65 million of that in 2019 alone. And that $65 million of free cash flow in 2019 was net of $20 million of exploration spending. Fast forward to when we're operating the shaft at 2,000 tonnes per day and our cash flow effectively triples at current gold prices to in excess of USD 210 million per year. If we move on to the next slide, this really showcases the value that we've created through the acquisition of Island Gold. The gray boxes on the left-hand side represent our acquisition cost as well as the consideration paid to repurchase the 3% NSR, $55 million earlier this year. We compare that to the value of the mine today at both a $1,450 and a $1,750 gold price. And you can see that using a $1,450 gold price, Island Gold is worth over $1 billion. Add to that, the cash that we've generated to-date represents an 80% increase in the value of the asset. If we update that for $1,750 gold price, it's almost 150% increase in the value of the asset from what we've -- from our initial acquisition cost. And we've done that, as Peter indicated, through growing production by expanding mineral reserves and resources. And that -- this is based on what we know now. This deposit has gone from 1.8 million to 3.7 million ounces, showing no signs of slowing. So at this point in the presentation, I'd like to turn it over to the gentleman that's been responsible for that reserve and resource growth, our Chief Geologist at Island Gold, Raynald Vincent.

Thank you, Jamie. First, I will present you a slide of the mineralization at Island Gold and then the exploration results and the exploration programs that are currently ongoing at the Island Gold mine. Next one -- next slide, please. So here you have 2 photos. On the left, you have the face from the 820 west cell, where we are doing tonnes of mining. So that's a high-grade face with a grade of 277 gram per tonne, uncut, over 3.5 meters. Cut, it is 76 gram per tonne. On the photo on the right is the photo of the -- from mineralization. It is quartz veining within altered metavolcanic rocks and the gold is located in the quartz of vein associated to the 2 mines and other potential minerals. For this specific gold, the grade is 152 gram per tonne over 5 meters of true widths. Next slide, please. I will present the evolution of the exploration work at Island during the past 10 years. So the first deep drilling, we were calling it deep drilling program, it started in 2010. And at that time, the overall reserve resources of the mine were a bit below 0.5 million ounces. And we did an exploration program, it was each at one mine at that time. And the overall results, which is the first 11 holes, were almost all below 5 and 10 gram per tonne. Next one, please. So at the end of 2016, when Alamos acquired Richmont, the majority of the reserve resources were located between 500 meters level and 1,000 meters level. So the resources at 500 meters level, there was almost nothing left and the -- all the resources or most of the resources were located below at 1,000 meter level, the resources, they are in blue on this slide. And the overall gold content was a bit over 1.8 million ounces. Next slide, please. At the end of 2019, here is the situation, overall, resources of about 2.7 million ounces. Again, the majority of the resources, they are below 1,000 meter level. And the reserves, they are allocated between the 500-meter level and 1,100-meter level. Next slide, please. This is the exploration result that we released last Monday. So the highlight, we are -- in the eastern part of the deposit between the 2 resource blocks, we intersect 44.3 gram per tonne gold over 2.3 meters in hole MH21-04. In hole 620-MH2-01, we intersected 29 gram per tonne, uncut; 26.7, cut, over 4.9 meters. And near the reserve resources in the extension area, we -- in hole, at the 840-level, we intersected 21 gram over 4.3 meters as well as 52 gram over 10.3 meter in hole 840-566-01. And we just received also a result from the MH22-04 below the deepest resource block west of the -- in the western part of the deposit, we've gotten 25.4 gram per tonne over 5.6 meters. The cut grade was 23.1. And the rest, they represent the drill rates that are -- drill holes that are currently in target at Island Gold mine. Next slide, please. On this slide, it is to show you the -- where we are doing our exploration program. The green areas represent potential areas where, we believe, we can increase the resources from now through the end of the year. So the star, the green star represents the all-in progress from the underground drilling program. The red star represents the drilling that is currently ongoing from surface using directional drilling. Maybe just to end this -- my part of the presentation, I just want to remember our people that within 10 years, we have spent -- with all the programs that we did, we -- the deposit growth from 0.5 million ounces to over 3.5 million ounces. And for this type of the deposit -- the gold deposit, it is well-known that generally, the lateral extent is -- in terms of -- being mentioned as less than the vertical extent. So you can see at the bottom of the slide, the black arrow represent 2 kilometers wide. So we are finding the mineralization at Island over a 2-kilometer length -- site lengths. So drilling at depth, we hope that the mineralization will still be there according to the fact that originally the gold deposits generally there are extending more vertically than laterally. So now I will pass over to Chris Bostwick, who would present the Phase III study.

Thank you, Raynald. And good morning, everybody. Next slide, please. To start, I'd like to focus -- outline our focus since we acquired Island Gold in 2017. After a very successful integration of Island into Alamos, we immediately expanded the exploration effort, and we continued to drill at an accelerated rate. The results have been obvious with the significant increases in our reserve and resource base in each of the last 3 years. In 2018, we completed the Phase 1 expansion to 1,100 tonnes per day. And last year, we received our permit for the Phase 2 expansion to 1,200 tonnes per day. And in 2020, we are now mining and milling at that rate. Last year, we started on the process of evaluating a Phase 3 expansion, the results of which we are presenting to you today. Throughout this period, we've continued to expand our CI initiatives, leading to increased productivity all through the operation. Next slide, please. Here, we are looking at our quarterly mining and milling rates for the last 5 years. Our Phase 1 expansion completed in September 2018 saw tonnage rates grow from 900 tonnes per day to 1,100 tonnes per day, with amended permits in hand and no additional capital, we are now at 1,200 tonnes per day. In Q1 of this year, we mined at a record of 1,240 tonnes per day despite having a shortened quarter with Island temporarily shutting down in late March due to COVID-19. Next slide, please. I'll reiterate here what John said earlier and that the shaft expansion of 2,000 tonnes per day is the best option under all scenarios. It results in superior economics as $1 billion, an after-tax NPV, and a 17% IRR at $1,450 gold. And at closure, the spot, $1.45 billion in NPV and a 22% IRR at $1,750 gold. The shaft gives the strongest operating performance of 236,000 ounces of average annual production at an all-in sustaining cost of $534 an ounce. These are 72% higher and 30% lower than 2020's previous issued guidance. The shaft gives us the best exposure to both higher gold prices and continued exploration success of depths. And the shaft offers less operational risk and more protection against lower gold prices with less of an impact on future cut-off grades. Next slide, please. Assumptions used in the study include a mineable resource that includes all of Island Gold's year-end 2019 reserves and 80% of its resources. I'll discuss how we got there in some later slides. We used a base case gold price of $1,450 and a $0.75 exchange rate. The life-of-mine plan and cash flows all began at the start of 2020, and all scenarios evaluated include a detailed mine design, significant ventilation upgrades in the capital and the addition of a paste backfill plant. Next slide, please. On the mine planning side, we've gone through a very detailed process. Five scenarios are generated with each scenario undergoing multiple optimizations. The mine design was catered to each scenario with unique material handling systems and ventilation circuits fully designed. The mining sequence was resource driven and generated the annual physicals and equipment requirements, and mine costing was from first principles guided by site costing and productivity's experience. Next slide, please. We have a high degree of confidence in the capital estimate as the design engineering was completed to a pre-feasibility level by a very reputable group of engineering consultants using labor rates and productivities from recent projects. Next slide, please. Notable among these consultants is HATCH, who did the infrastructure engineering, including the headframe and wasting plant. Cementation with the shaft sinking, who incidentally undertook our recently completed Young-Davidson lower mine expansion. HALYARD with the mill expansion and GOLDER with the paste plant, tails dam and permitting support. GOLDER also designed the Young-Davidson paste plant and tails dam. Next slide, please. The following 3 slides discuss how we got to our 80% resource conversion. Here on the left side, we see Island's 2019 year-end reserves and resources that totaled 3.7 million ounces. In the middle is the undiluted resource that made it into stoping shapes, and were deemed economically accessible to mine. We then applied our standard dilution factors and recoveries by zone and if they still met our cutoff grades, they appear on the right side of the table and were used in the study. Note that the overall Phase 3 mine plan grade of 10.45 is close to Island's 10.37 gram per tonne year-end reserve grade. Next slide, please. This depicts a waterfall chart of what we just discussed. The blue bars represent Island's reserves and resources. The first orange bar represents 375,000 ounces that are not included due to being not mineable, not economically accessible or diluted grade falling below the cutoff. The second orange bar represents a loss of 105,000 ounces from mining recovery, netting the 3.2 million ounces used in the mine plans. Next slide, please. To put the 80% conversion rate into a historical context, we've charted the last year 6 years' conversions. On the far left of the graph in the blue bar in 2019 -- sorry, 2013, Island had 1 million ounces of inferred. By 2017, in the stacked bars beside it, Island added 1 million ounces of new reserves. Moving forward to 2016, we were again at 1 million ounces in resources, and we have converted 83% of them to reserves since we acquired the property. Most of the proven and probable reserves of Island were at onetime inferred resources. Our inferred is generally added via surface directional drilling on a 100-meter dice-five pattern or an approximately 70 x 70 meter drill spacing. Conversion to M&I and proven and probable was mostly undertaken with underground delineation drilling from exploration drives in the footwall. Generally, we need to get 3 to 4 new holes between each pair of inferred holes with underground drilling top grade to indicated. Next slide, please. As mentioned, we began working on Phase 3 last year at a scoping study level. We identified 3 potential material handling methods. Ramp haulage, conveying and a shaft in 3 likely tonnage rates: 1,200; 1,500 and 2,000 tonnes per day. At a scoping level, we saw, moving to the right on the table, increasing capital costs and decreasing operating costs, as well as increasing NPV. Some other important observations from the scoping studies were that a 1,500 tonne a day ramp option required an additional ramp to surface. With the ramp and conveyor options, personnel transportation times became excessive at depth, impacting productivity. There will be a limit as to how far our ramp can go. And significant lateral development is required to get the conveyor to surface and the conveyor option comes with much higher operating risk. However, the shaft can be expanded to depth, significantly reduces personnel travel time and helps reduce ventilation capital and operating costs. Next slide, please. So 5 options were taken to a PFS level evaluation. We looked at a ramp 1,200 tonnes per day option with and without paste fill. We looked at a ramp 1,600 tonnes per day and a shaft at 1,600 and 2,000 tonnes per day, all with paste backfill. 16,000 tonnes per day (sic) [ 1,600 ] tonnes per day was chosen for 2 of the options because through early mill optimization work, we determined that we currently have 16,000 tonnes per day (sic) [ 1,600 ] tonnes per day of installed grinding capacity. And like the scoping level work, the PFS work has shown the shaft 2,000 tonne per day option confirms the strongest economics. With that, I'll hand it over to Austin and Nathan, to go into the details of the shaft expansion.

Great. Thank you, Chris, and good morning, everybody. I'm Austin Hemphill. I'm the Mine General Manager here at Island Gold. I've been at Island for the last 2 years. Prior to this, I was 6.5 years at our Young-Davidson operation, where I oversaw the Northgate midshaft project as well as the sinking in the MCM shaft. Can we go to the next slide, please? Okay. A couple of common options to all the scenarios we considered here are paste plant, which improves mining recovery and improves the mining sequence. We also have a power upgrade common to all options. With the ramp options, majority of the power upgrade is being used for ventilation and for the shaft option predominantly towards the hoisting plant. Number of surface infrastructure improvements to support the long-lived asset as well as the tailings expansions for our future production. And all options extended the life-of-mine from between 8 to 14 years, with the $104 million of capital being spent in the next 4 years. Next slide, please. Couple of infrastructure unique to each of the situations is the ramp option is obviously requiring a significant increase in our mobile fleet. A significant amount of ventilation upgrade is being required to support the fleet. The 1,600 tonne and 2,000 tonne option is requiring mill expansions. And the shaft option requiring a sinking of a shaft as well as construction of a hoisting plant. Can we go to the next slide, please? With the paste plant, we're able to realize approximately 100,000 additional gold ounces through mining recovery by mining existing pillars or pillars that would have been left behind the future mining. Additionally, this gold will carry a value of approximately $145 million. This also allows us for a faster stope cycling time as -- and allowing us to realize the higher mining rates. We estimate approximately 56% of the tailings to go underground. And we'll realize about a $13 million life-of-mine savings for the tailings raises. Can we go to the next slide, please? With the paste plant investment, we were able to support the 2,000 tonne a day mining rate. The plant itself requires approximately $34 million investment, which would be spent over the 2021 through 2023 years with commissioning in the plant in the fourth quarter of 2023. We're estimating approximately $13 per paste tonne placed. And we're requiring approximately 1.5 years of engineering construction, realizing a 32% after-tax IRR, that just makes sense in all options. Can we go to the next slide, please? Now power investments [Audio Gap] required for all options as shown here about 500,000 of KCFM through to nearly 1 million. Next option we look at under the shaft option is, again, we'll have approximately 25.5 megawatt peak demand in 2017 (sic) [ 2027 ] and majority of that going towards the hoisting plant, 7.5 megawatts, as well as an additional 1.8 megawatts required for the upsized mill. This more than offsets the cost required for the ventilation, as you can see in here, it was only about 700,000 CFM ventilation requirement with a $14 million capital investment common to all options for this power upgrade in 2021 through 2022. Can we go to the next slide, please? Common infrastructure investments required for all options again. They are related to basically supporting our long-lived assets. First of all, we'll complete the kitchen facility here, which is a major modernization and expansion in capacity as well as construction of a new administration building, expansion of our existing warehouse capacity, with all these projects totaling approximately $29 million spend through the 2020 through 2024 period. Can we go to the next slide, please? Tailings facility. We're presently in the midst of a tailings raise. We began it in 2019 and we're continuing to finish it in the later part of this year. $22 million of total spend for this project here provides a significant and sufficient capacity to support our near-term expansion in the mineral resources and reserves, with $13 million of the $22 million being spent this year. With that, I'll hand off to Nathan Bourgeault, our Chief Engineer.

Thank you, Austin. I joined Island Gold in December of 2017. I've been the Chief Mine Engineer here for the past 2 years. Prior to joining Alamos, I was a member of the construction and operation team on a number of different projects, both on the contractor and the owners' team side of the fence. Next slide, please. As previously discussed, the shaft provides a significant -- significantly higher production rate, an average of 236,000 ounces per year and all-in sustaining cost of $534. The shaft option does require a higher capital spend upfront. And as you can see over the life-of-mine, it's only incrementally higher. This is more than offset by a lower operating cost resulting in a lower combined capital and operating cost overall. The shaft was the lowest cost for all the scenarios studied and contributes to a stronger economics with the highest NPV. Next slide. Looking at the ramp 1,200 option, showed an increasing operating cost at depth and does require additional capital to bring the mineral resource below our existing infrastructure into the mine plan. These capital costs are tied directly to increase in ventilation infrastructure and mobile equipment. As you can see from the long section for the ramp 1,200 option, we would require one additional fresh air raise and an additional exhaust raise. Next slide. Looking at the mobile fleet for the ramp 1,200 option, our -- we'd be transitioning from our existing fleet of 8 haul trucks at our existing mining depths through a requirement of 18 haul trucks at a peak, as we mine deeper in the mine. This is directly tied to a longer travel time to get deeper into the mine. Next slide, please. In the ramp 1,600 tonne a day option, we also saw that -- saw the increase in operating costs associated with mining deeper, also tied to an increase in power of propane and labor costs. There's also additional capital costs required to achieve -- to access the resources at depth similar to a ramp 1,600 option, and also to increase our mining throughput. You can see from the long section that in the ramp 1,600 option, we required 2 additional fresh air raises and a second ramp system that both supports material movement and ventilation in this option. Next slide, please. Looking at the ramp 1,600 mobile fleet, we'd be transitioning from our current fleet of 8 haul trucks to a peak requirement of 25 haul trucks at depth. This is both due to the travel time required to get deeper in the mine and also increased throughput. Next slide. Looking at the shaft 2,000 tonne per day scenario provides the lowest operating cost of all of the scenarios that we studied. Though, as mentioned, it does have a higher upfront capital cost, but this is more than offset by lower OpEx. It's expected that mining rate will increase in 2025 after the shaft is commissioned. Compared to the ramp scenarios, this -- the shaft option would only require 5 haul trucks to maintain the 2,000 tonne day mining rate after the shaft is commissioned. As you can see, the only additional infrastructure that would be required in this scenario is the shaft, which has also served as a fresh air raise. Next slide, please. The shaft -- the proposed shaft location is located just south of the existing mine site. The site itself is a flat plateau with many rocky outcrops and offers the opportunity for minimal rock excavation during the construction period. You can see on the plant view where the mill and the existing portal are located just northeast -- or northwest of the mine site for the proposed shaft location. Next slide, please. The hoisting plant is a conventional and proven design capacity of 4,500 tonnes per day at the initial depth of 1,373 meters with an ultimate design depth of 2,000 meters. Next slide, please. This long section is showing the proposed location of the shaft with respect to the mineral resources that were included in the study. Note the shaft location is on the eastern side of the deposit, and it does allow early access to some of the highest grade material in the resource space. It's important to note that we're not stuck at the 1,373 elevation, we have the flexibility to go deeper as this deposit continues to evolve. The ultimate shaft depth would not need to be finalized until sometime in early 2024. Next slide, please. Shaft also includes the service hoisting plant. That will -- with an ultimate design depth of 2,000 meters as well, and it will allow us to move roughly 280 people per hour into the mine, greatly reducing the amount of time it takes to travel and get all of our personnel to the base. Next slide. The headframe is a 59-meter steel headframe with both hoists located in a common hoist house. Next slide, please. The shaft arrangement is a 5-meter diameter shaft with a concrete liner. There's 2 12-tonne skips in the service cage, both in dedicated compartments, which will allow us both concurrently travel and move material while we're skipping ores. Next slide, please. Conventional blind sink was selected as it improves the schedule reliability and flexibility. A raise bore shaft was studied, but it was found that it would displace ore haulage and reduce throughput below the 1,200 tonne per day rate throughout the life of the project period. Next slide, please. The underground ore and waste handling and loading pocket is a conventional and proven design, very similar to the system that was just commissioned at our Young-Davidson operation in batch 1. Next slide, please. Shaft ventilation system offers a reduction in ventilation requirement, especially compared to the ramp options that were studied with the shaft acting as a fresh air source. Combined with the reduced mobile fleet, this will result in greatly improved air quality underground in the mine. Next slide, please. In the mill expansion, there's a couple of key component changes that would be required. We'd require an upgraded crushing circuit, a second parallel ball mill, a new CIP circuit with carbon screen and the new elution circuit. Expected costs for the upgrade at the mill is $40 million to expand to 2,000 tonne per day rate. Next slide. It's important to note that the mill expansion is a conventional design and build and represents an expansion of the existing facility and not the construction of a whole new facility. Next slide. Looking at the total material moved by year, you can see our peak material movement is 3,300 tonnes in the current study with the 4,500 tonne per day capacity at the 1,373 depth. This will give us more than enough capacity to continue to expand the mine as the deposit walls at depth. The ultimate design capacity at the 2,000-meter depth, as noted in the previous slide, of 3,500 tonnes per day, total material. Next slide. As mentioned, the shaft does have a higher life-of-mine total capital as compared to the ramp option, roughly $118 million of additional capital compared to the ramp. But does have a -- does offer a $338 million savings in operating costs compared to the 5 scenarios. This will result in a $220 million lower total operating costs and capital costs being realized with the shaft expansion. This is driven primarily by improved efficiencies and more effective time at the face on the operating costs side. Next slide. Looking at the sustaining capital, the increase in growth capital is partially offset by a lower sustaining capital on the shaft option. This is a function of a decrease in mobile fleet and capital development in the shaft options, as compared to the ramp options, with an average annual sustaining capital cost of $37 million in the shaft expansion option. Next slide. Looking at growth capital, there's a higher growth capital, driven specifically by the mill expansion, the shaft construction in the underground or in waste handling system. It's expected the total cost for the mill expansion and the shaft installation to be $272 million and results in a $319 million higher growth capital with the shaft expansion as compared to the ramp. Next slide, please. The overall capital cost for the shaft is expected to be USD 232 million. This compares very well when benchmarked against other recent shaft projects in our region. The expected timing of the shaft with early work starting in Q3 of 2021, shaft sinking starting Q1 of 2023 and the shaft in commissioning in Q2, 2025. Next slide, please. Looking at the shaft unit cost summary, there's a 21% decrease in total unit operating cost for the life-of-mine with the shaft expansion option. This is driven by improved travel time, as mentioned, more effective materials handling system, so cheaper and quicker and easier material moving through the mine and a higher throughput. And with that -- next slide, please. With that, I'll hand it back over to Austin, Island Gold mine's General Manager.

Okay. Thank you, Nathan. I'll go ahead on Slide 68, please. Okay. On this slide, you'll see the shafts location that are highlighted on the eastern side of the deposit. As well as if you look down towards the deeper part down to the east as well, you'll see the ore body, color-coded by grade, with red being the highest grade of 20 grams per tonne or higher with the grade being identified by the different cooler colors. The shaft location positions us almost ideally to access this higher grade deposits significantly earlier than we would be able to do with the ramp. Can we go to the next slide? Okay, on this slide, you can see that we're able to pull this high-grade forward by a significant number of years versus the ramp options. This allows us to increase the revenue stream significantly as well as start to recover some of the higher capital investments required for the shaft project. Can we go to the next slide, please? As we can see here, the annual gold production post project delivers approximately 236,000 ounces there, which again is a 66% increase versus 140,000 presently realized in the ramp 1,200 tonne per day option. Can we go onto the next slide, please? Now the shaft mining costs, we're able to maintain both a lower, but also a more stable mining cost. You can see that the mining costs here for the shaft 2,000 stay approximately $100 or less per tonne, whereas, the ramp options increase as time goes on with a ramp of 1,200 tonne per day in an $127 average of the life-of-mine or $131 per tonne immediately post project and $127 a tonne for the ramp 1,600, which allows us to realize a 27% reduction in unit mining cost versus the ramp 1,200 tonne per day option. Can we go to the next slide, please? And again, this continues into the total operating cost as well. As you can see, the shaft option stay below $200 per tonne, both life-of-mine as well as immediately post project with post project being $178, whereas, the ramp 1,200 being $235 and 1,600 being $220. This is, again, is about a 24% reduction versus the present ramp 1,200 tonne per day option. Can we go to the next slide, please? And again, this carries on to the cash cost. As you can see, the average life-of-mine for the shaft option is $422 or immediately post project is $403, whereas, the ramp options are both significantly higher with the 1,600 being $100 higher post project with the ramp 1,200 being almost $140. So this allows us to realize again a 25% lower cash cost relative to the ramp options. If we can go to the next slide, please. And this is where, again, we were able to realize a significant difference on the all-in sustaining cost. As we mentioned before here, approximately $534 average mine-site all-in sustaining cost for the shaft options versus over $700 for each of the ramp options, realizing a 30% reduction versus the ramp 1,200 tonne per day option for the shaft. Can we go on to the next slide, please? Now this is where, obviously, the shaft really demonstrates its strength versus any of the ramp options. As we can show here in the shaft 2,000 tonne per day column, you can see that at 750 meters depth, it's costing us approximately $96 per tonne to mine, whereas, down at 1,500 tonne -- 1,500 meters, I'm sorry, it's only $102. So we only realized an increase in mining cost of approximately $6 per tonne, whereas, compared to the ramp 1,200 tonne per day option, at 750 meters, we're very similar to $106. However, at depth, we increased significantly to $159 or $57 a tonne. As you can see, this is over a 50% increase in mining cost versus the shaft option. And these numbers are very similar for the ramp 1,600 tonne per day option, with the shaft obviously, providing us a significantly more stable mining cost. Can we go on to the next slide, please? So as we look at the tonnes and grades per vertical meter, you see that from 1,000 meters and deeper, we're able to realize a significant increase in both tonnes and grade at depth, and when the shaft best positions us to realize the benefits of these higher tonnes and grades as we continue to go deeper. Can we go on to the next slide, please? This is where, again, we get to the serious benefit of the shaft. It minimizes the amount of travel time, as Nathan mentioned previously. As we can show on the slide here, the time at the face with the completion of the shaft brings our effective time at the face to over 120% of what we're able to realize presently, with this ramp options continuing to deteriorate over time as the mine gets deeper and deeper and the travel time increasing. And similarly, with an additional time at the face, we're able to increase our productivity on the development case. On the meters per employee shift, you can see we're able to significantly increase ourselves by almost 20%. Can we go on to the next slide, please? And this increase in productivity is more obviously realized on the production side. We're able to increase our tonnes per employee hour from 5.5 to over 7 at peak post shaft completion, and whilst also minimizing the additional staff required. As you can see, the shaft option, we stay well below 400 personnel being required, where the ramp 1,600 peaks out at almost 500. Can we go to the next slide, please? And again, similarly, we see the same with our primary production equipment. As you can see that we peak out both earlier and at a lower level with the shaft option requiring just over 30 units of primary production fleet, whereas, the ramp options increase over time with the increasing haulage distances peaking out at almost 45 units with around 1,600 tonne option. The underground trucking hours, similarly, you can see the precipitous drop in trucking hours required upon completion of the shaft versus, again, the increasing numbers required in the future with the ramp options over time. Can we continue on to the next slide, please? Now with the economic review -- sorry. We're able to see the shaft 2,000 tonne per day option generating a significantly higher net present value. Whilst the revenues from both options are very similar at $4.5 billion, the operating costs are $300 million less for the shaft. And the total capital cost, again, whilst slightly higher for the shaft option, results in a total operating cost and capital of $2.6 billion for the ramp option versus only just below $2.4 billion for the shaft option. Cumulative free cash flow, again, after tax rate, we've realized on the options of shaft (sic) [ ramp ] being only $1.5 billion, whereas, the shaft being $1.6 billion. As you can see, the after-tax net present value for the ramp being about $870 million, over $1 billion for the shaft option. Now if we increase the gold price near spot, you can see that the actual after-tax NPV for the ramp option increases to about $1.3 billion, while the shaft continues to distance itself increasing to $1.45 billion. You can see the after-tax IRR of the shaft versus the ramp increasing from 17% to 22%. And again, quite simply, the shaft 2,000 generates the highest NPV, it accelerates revenue and it lowers our operating costs more than offsetting the higher CapEx. Can we go on to the next slide, please? And you can see here with the shaft being completed in the 2025 period, it only takes us approximately 2 years to offset the higher capital cost. And from every year thereafter, we're able to realize the benefits of the significantly lower operating costs, significantly increasing our free cash flow. Can we continue on to the next slide, please? Now the shaft option is quite simply is the strongest alternative. Obviously, it provides us superior economics, a significant increase in production over 72% versus our present 1,200 tonne per day option, provides us the lowest cost, positioning us in the lowest quartile for both cash costs as well as all-in sustaining costs as well as to derisk the mine by minimizing our exposure to gold price fluctuations and also any kind of labor or other commodity issues that might develop. And it also positions us ideally for any future expansions of the resource below the 1,500 meter depth. Can we continue on to the next slide, please? Again, you can see with some various scenarios we ran at different gold prices at the present $1,450, again, we touch on the NPV of the ramp 1,200 being $874 million versus a shaft of $1.0 billion. You can see, this significantly increases with an increase in gold price. If we were able to realize that $1,850 gold price will be $1.4 billion for the ramp and $1.6 billion, again, for the shaft, resulting in an IRR even higher at 22% -- 24%. Can we continue on to the next slide, please? Okay. And then we also have to consider the upsides. When we look at the life-of-mine averages, we can see there over $233 difference on the sustaining cost per ounce. One of the things we've got to look at is for every 1 million ounces we get into the depth, how much can we realize? And again, with the project being set at 1,500 meters, at that depth, for every 1 million ounces we're able to realize, we're able to realize an additional, basically, revenue of $315 million, which is a significant gain versus the present ramp option. And obviously, the successes we've seen so far at Island, if it's sort of continue at depth, the differences would be even greater. Can we continue on to the next slide, please? One of the other benefits here is we're actually substituting diesel horsepower for electrical horsepower, resulting in a significant offset in our greenhouse gas emissions. This is net reduction of 35% versus our 1,200 tonne per day ramp option and significantly more from the 1,600 tonne per day ramp option. It provides us, obviously, the lowest carbon emissions as well as improvement of air quality underground. Can we continue on to the next slide, please? Now shaft expansion requires a better permitting, but it's nothing we haven't done before. And we've got significant successes, both at Island Gold as well as at our Young-Davidson mine. And as we're presently configuring this process, we're able to avoid triggering a federal permitting process and stay within the provincial architecture. Can we continue on to the next slide, please? And again, as we can see in the project schedule here, as has been touched on in the previous slides. Quarter 2 commencement of -- 2020, the commencement of engineering has already begun. And we believe the shaft project to be completed in the second quarter of 2025. Again, that's where we start to realize all the benefits here, both the increased productivity, significant reductions in operating costs and the tremendous increases in cash flow. And with that, I'll hand back over to Jamie Porter. Thank you.

Thanks very much, Austin. That's a great overview of the project. I'm going to briefly walk through the free cash flow profile under various gold price scenarios, after which I'll make some comments with respect to capital allocation. So if we can move on to this next slide. This really showcases the free cash flow of the shaft 2,000 expansion at a $1,450 gold price and shows that even at gold prices $350 per ounce lower than where we are today, Island continues to generate free cash flow for the next 1.5 years, after which, we require about USD 150 million of modest investment in order to get the operation fully ramped up to that 2,000 tonne per day level. Once we're there, 2025 and beyond, we're generating in excess of USD 170 million on average for the remaining 10-year life of the mine. If we go to the next slide, we're showing effectively the same free cash flow profile, but at a $1,750 gold price. And at $1,750 closer to current spot, Island effectively self-finances the capital required to expand the operation, 67% from 1,200 tonnes per day to 2,000 tonnes per day. And results in average annual after-tax free cash flow of USD 210 million per year after 2025. Moving on to the next slide. We show effectively the same thing, but on a cumulative basis. So what I like about this slide is on the far right-hand side, if you look at the orange bar, that represents cumulative after-tax free cash flow from this Phase 3 expansion at a $1,750 gold price of $2.3 billion. That's almost 4x our acquisition cost of $624 million, just demonstrates, again, the value that we've added through this acquisition. So with that, I'll make some comments with respect to capital allocation and turn the presentation back to Scott to walk through the mechanics around the Q&A. We have -- just in the second half of this year, we've just now really transitioned to a period of strong free cash flow growth. If you walk through each of our assets, at Young-Davidson, we just announced the completion of the lower mine expansion. What that means is higher production, lower unit costs and less capital, which will translate into free cash flow of well in excess of USD 100 million per year. And Island Gold, as I've just indicated, we have another 1.5 years of free cash flow before we need to start investing significant capital in the Phase 3 expansion. And at Mulatos, we anticipate being able to self-finance construction of La Yaqui Grande. So Mulatos will generate sufficient operating cash flow to be able to pay for La Yaqui Grande. What that translates into is significant free cash flow going forward of -- in excess of $150 million per year, pre-dividend, that will be available to continue to return to shareholders in the form of higher dividends. To strengthen our balance sheet, we anticipate repaying the $100 million that we drew on our credit facility and bolstering our cash balance further. And it will also be available to continue to advance our other organic projects within the company. We move on to the next slide. This really shows the -- demonstrates that we have a long history of returning capital to shareholders. If you look at the period from 2010 to 2014, we generated in excess of USD 400 million in free cash flow from Mulatos in that 4- to 5-year period, of which we returned 25% or $100 million to shareholders in the form of dividends. From 2015 to 2019, we entered a period of growth. We are very active in countercyclical M&A, merging with AuRico, in 2015, when the gold price was at around $1,100 per ounce. We followed that up with the acquisition of Richmont when the gold price was $1,250 per ounce. So we've diversified, we've transitioned from a single-asset company with 1 mine in Mexico to mid-tier, diversified gold producer with 2/3 of our production in Canada. We've completed that diversification, that reinvestment phase, and we're entering that harvesting phase, again, where we'll start generating tremendous free cash flow. We have the ability to continue to increase our dividend. We've increased it 200% since 2018, and I'd anticipate a significant growth in the dividend in 2021 and beyond. So with that, I'll turn the presentation over to Scott to commence the Q&A part.

Thank you, Jamie. We will now open up the webcast and call for questions. [Operator Instructions] I'll now turn the webcast back to our panel of speakers, and we'll wait a few moments for questions to queue up.

Great. First question comes from Cosmos Chiu at CIBC.

Can you hear me?

We can hear you.

Great. I guess my first question is -- again, I guess, first-off, congratulations. At least to me, the numbers look good. I'm sure a lot of work was put into this study here. But my question is on the sequence of events or upcoming sequence of events. Austin sort of touched on it. But I just want to get a fuller understanding of some of the critical path items coming up. I see that the shaft sinking isn't going to happen until Q1 2023. What needs to happen before you start sinking that shaft? And could you start sinking that shaft earlier and would that help?

It's Chris here. So one of our constraints is permitting. We need to get the permits in hand. And as has been mentioned, we expect those in hand at 18 to 24 months' time frame. We're actively working on that. Other things that have to happen upfront are detailed engineering for the shaft infrastructure. And as well, all that ordering of some long lead time items for the shaft, which would be the hoist, construction in Galloway, ordering the mill -- or sorry, the grinding mill and a few other items. So there's not that much opportunity to get the shaft underway any earlier than we've described.

Great. And Chris, while I have you here. I guess, again, this is kind of further out, but in terms of the -- when you tie it in, are we going to see any kind of potential downtime or lower capacity, lower production as we kind of experienced at YD?

No, not at all. So we have the capability, while we're commissioning the shaft of continuing to hold the surface at the current rates that we're seeing right now.

And I guess you just completed the shaft sinking at YD. I know it's not a perfect comparison. It was raised boring at YD versus more conventional shaft sinking here at Island Gold. But could you maybe touch on kind of like the cost or compare the cost and advancement rates at YD versus Island Gold? And I know you also consider raise boring at Island Gold, but that turned out not to be the best alternative.

Right. So yes, we are doing a conventional sink at Island. The advance rate will be about 9 to 10 feet per day, which is obviously slower than raise boring, but the -- in order to raise bore shaft, you need access to the bottom of the shaft, and we're not there yet. So we'll be able to concurrently sink the shaft and get our ramps deeper at the same time, and there's no requirement to tie those into each other.

And then on the shaft capacity, I see that at the -- at least, at the initial depth, you're looking at 4,500 tonnes per day in terms of the shaft capacity. It looks like the maximum that you need is about 3,300 tonnes per day. It looks like you're hoisting most of the waste up -- back up to surface, and that is included in the 3,300 tonnes per day. Could you talk about some of that latent capacity? Is it just to prepare you just in case there is another expansion? Or is it just to make sure that even if you go deeper, further shaft sinking here, you will still have that capacity but a maximum tonnage that you need?

Yes. Yes. So we sized the hoisting plant to allow us at a greater depth, say, 2,000 meters to still maintain a full production rate of 2,000 tonnes a day or less waste.

And then one last question here, if I may. Thanks for all the analysis. It was great to look at the details behind the different alternatives. Clearly, the 2,000 tonnes per day was the winner. But was there like a close #2 in terms of alternative? Was it 2,000 tonnes per day shaft the runaway clear winner here?

So the other two options that we looked at on an expansion basis were -- we didn't present the economics for the ramp 1,600 and a shaft of 1,600. And both of those came in on an NPV basis, roughly, halfway between the ramp 1,200 and the shaft 2,000. So there was nothing else that was close to the -- from an economics perspective, that was close to the shaft 2,000 option.

Thanks, Cosmos. Our next question comes from Chris Beer at RBC. Chris, please go ahead. Chris, you may just need to unmute your line.

Scott, can you hear me?

We can hear you now.

Okay. Congratulations. Great, very detailed thorough review, much like the Young-Davidson presentation 2 years ago. My question is you had 1 or 2 slides there on the exploration and depth. Is there a way, I guess, after Q2, maybe or -- to look at sort of the grade reconciliation? The grade continues to look better at depth. And clearly, there's some shoots that way. But there's a lot of mineralization laterally extensive as well. Has there been some success, I guess, higher during COVID, but to drill further east rather than at depth?

Maybe I can answer this question. Our drilling programs are focused on increasing the resources at the Island Gold mine. It's why we are drilling near the actual resource block. To the east, we did some ores along the -- with all the formations are only going through it once at a time and we did intersect a few interesting gold values such as 9 gram per tonnes over 2 meters in ores that are 1 kilometer away. But we're not focusing on these right now. The focus is really on increasing the resources. And it is why we are -- in the slide, you saw the 3 red stars that -- that's the holes that are currently in progress. And we are focusing really in extending the deposit down there, so hopefully, to the 2,000-meter level.

Chris, the trickiest thing to do when you're already operating a mine that's quite profitable under the current scenario is to drive enough -- get enough data together to drive a decision to try to make it better. And since we acquired it, we knew that the emphasis had to be on growing reserves and resources, and we've been trying to do that as aggressively as possible. And we felt by the end of 2019 that we had sufficient ounces in place. It happened faster than we expected, but -- and we are very happy for that. But we had enough to drive this Phase 3 study. But in order to continue to bolster it and to demonstrate really sound economics going forward, the emphasis is going to remain on expanding those reserves and resources that we can quickly access.

Congratulation. You have a grade that continues to look great.

Thank you, Chris. We're now going to turn the call over to the conference line. We do have a few questions queued up. Operator, can you please open up the line for our first question? Operator, can you please open up the line for our first question, please?

The first question is from Kerry Smith from Haywood Securities.

Congratulations, everybody. I think continuous time, you're going to be very happy that you put that shaft in, for sure. Mike, I have a couple of questions. One is in that 2,000 tonne a day mill expansion, what sort of excess capacity do you think might be in that circuit? Like do you think it would be capable of an extra 10%? Or is it pretty much designed for 2,000 tonnes a day? And that's how you think you can squeeze out of it? I know you've had pretty good success at pushing the plant harder than what notionally was designed for currently. Just wondering if there might be a little bit of extra capacity that could be utilized.

Kerry, well, I'll take it, Chris. It's Peter here, Kerry. Yes, I mean, every mill I've ever been involved in, particularly versus design throughput, there's always a bit more, we just don't leave ourselves at -- on the line there. But I mean, the mine at 2,000 tonnes a day is a solid mine. Great. If we can get more out of it, we'll imagine we'll figure out a way to put it through the mill.

Okay. And just on the permitting, you'd said in the deck that there you wouldn't require an EA, either at the provincial or the federal level. Has that been sort of certified or signed off on by the province or that's your understanding just through discussions with them?

Yes. No, that's our understanding. We'll need to put in a -- our project description here fairly soon. And -- but we don't -- we're -- so this is brownfields. We're not increasing the tailings footprint. We're not -- the only impact -- disturbance would be around the new shaft site. And it's pretty clearly a provincial jurisdiction sort of thing. There are a few minor federal permits, but nothing that's going to require a full-blown environmental impact statement or something like that. It's kind of modification of existing permits and a few new disturbance areas.