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

Hello, and welcome to the Alamos Gold Young-Davidson Virtual Site Tour and Management Q&A. My name is Scott K. Parsons. I'm the Vice President of IR at Alamos Gold, and I will be moderating our presentation and Q&A today. Before we begin, I have a couple of housekeeping items to review. [Operator Instructions] With that, I will now turn the presentation over to John McCluskey, our President and Chief Executive Officer, for a formal introduction.

[Audio Gap] of the YD operation. This has been a significant 18 months for Young-Davidson, with the transition to the lower mine infrastructure 1 year ago. This year has been a step change for the operation and for the company. Under normal circumstances, we would have had many of you to the site itself to see the operation and the infrastructure in action. But one of the benefits of a virtual tour is that we can accommodate a much larger group while also providing a more comprehensive overview of every aspect of the operation and the complete mining cycle. We have a great video prepared, which does just that. And it also highlights how this new operation is superior operating from the lower mine infrastructure, and you can see quite clearly the productivity improvements. I'll draw your attention to the cautionary note sheet as we'll be making forward-looking statements during this presentation. I encourage you to review the notes. In terms of presenters today, I'm going to hand the presentation to Jamie Porter, our CFO, momentarily to provide a corporate overview, after which Peter MacPhail, our COO, will give you a tour of the -- opening tour of the Young-Davidson operation. Luc Guimond, our General Manager of Young-Davidson, will take us through the more detailed tour, looking at the infrastructure, following which he'll get into a detailed discussion of our performance and outlook. Finally, Scott R.G. Parsons, will provide an overview of exploration results from yesterday and outline the strong potential at Young-Davidson that we are just starting to unlock with our first significant exploration program in a decade. With that, I'll now ask Jamie Porter to begin the corporate presentations. Jamie?

Thank you, John. Good morning, everyone. I'll start with this slide. It provides a really good overview of where Alamos is at today and where we're going over the course of the next 5 years. We're a growing, diversified, intermediate gold producer. We expect gold production of approximately 500,000 ounces this year, which is up 15% relative to 2020, with the majority of that growth having been driven by Young-Davidson. With our Phase 3 expansion underway at Island Gold and with development of our Lynn Lake project, we see the potential to grow production by 50% to 750,000 ounces by 2025. At the same time, our all-in sustaining costs are expected to decline by 24% from around $1,050 per ounce this year to approximately $800 per ounce by 2025. So we're driving higher margins, increased profitability and very strong free cash flow growth. Our strategy as a company is to minimize risk where we can. We focus on operating in safe jurisdictions with 100% of our gold production coming from North America and the majority of that from Canada. We run a conservative balance sheet with no debt and $240 million in cash. And we build our projects at a pace that we can afford such that we can fund our growth initiatives internally. This reinvestment in growth is an important component of operating a sustainable business model that supports growing returns over the long term. This includes taking a balanced approach to capital allocation, which is focused on generating strong ongoing free cash flow while reinvesting in high-return organic growth and supporting higher returns to shareholders in the form of higher dividends and share buybacks where appropriate. We move on to the next slide. This provides a good overview of our asset base. And again, we focus on operating high-quality, long-life assets in great jurisdictions. And that's certainly the case with all three of our mines. 100% of our gold production again comes from North America with 70% of that coming from northern Ontario from our Young-Davidson and Island Gold mines. All of our operations have relatively long mine lives, averaging 12 years between them. Our Mulatos mine has had a 7-year reserve life for over 16 years now while Young-Davidson and Island both have mine lives in excess of 14 years. On top of our producing assets, we have a strong portfolio of growth projects, including our Lynn Lake project in Manitoba, which we anticipate will be our next Canadian gold mine. Collectively, our operating mines provide a solid, long-life production base of approximately 500,000 ounces per year currently. And that's growing to 600,000 ounces per year in 2025 on completion of the Phase 3 expansion at Island Gold. Improvements and expansions at each of our operations, including Young-Davidson, are driving costs lower such that we expect all-in sustaining cost to decrease to $800 per ounce in 2025. With the development of our Lynn Lake project in Manitoba, we have the capacity to take our production up to 750,000 ounces per year by 2025, of which 600,000 ounces would be derived from Canada. Again, this represents very significant 50% production growth from current levels and at lower cost, which will drive tremendous free cash flow growth. This slide illustrates the shareholder value that Alamos has created through M&A and exploration. Mulatos has really been the blueprint for our success. We acquired the Mulatos project for $10 million back in 2003, built the mine for $70 million. And to date, it's generated over $460 million of free cash flow and still carries a consensus value of more than $0.5 billion. That's effectively $1 billion of shareholder value created from a $10 million investment. Island Gold is our most recent M&A success story. We acquired Richmont Mines and Island -- and the Island Gold mine in 2017 for $600 million. Since that time, Island has generated over $200 million of free cash flow and the value of the asset has more than doubled to $1.4 billion, which is the current NAV, reflecting multiple expansions and exploration success. Our Young-Davidson mine was acquired for $950 million in 2015 as part of a merger of equals with AuRico Gold. For the last several years, Young-Davidson has been self-financing its own lower mine expansion, which has been a big driver of the increase in its consensus value to $1.4 billion. With the lower mine expansion Young-Davidson now complete, the mine has a very long runway ahead of it. It will be generating more than $100 million a year of free cash flow. And we see excellent potential to add to the existing large reserve resource base with its exploration story really just beginning. And Scott R.G. Parsons will talk to that later in the presentation. The free cash flow growth that we see -- that we see coming in the years ahead from Young-Davidson and our other mines is going to support higher returns to shareholders in the form of increased dividends while also strengthening our balance sheet, giving us the capacity to reinvest in other high-return internal growth projects. This slide really demonstrates this, it highlights our balanced approach to capital allocation. With the completion of the lower mine expansion in Young-Davidson in July of 2020, we have since generated $144 million of free cash flow company-wide. Over the past 3 quarters, we've used that free cash flow to increase our cash position to $240 million while repaying $100 million that was drawn on our credit facility. We've also increased our dividend twice by nearly 70%. And we've doubled our exploration budget, started construction at the La Yaqui Grande mine in Mexico and we've started the Phase 3 expansion at Island Gold. These are all high-return investments that will, in turn, support incremental free cash flow growth and higher returns to shareholders that are sustainable over the long term. So with that, I'll turn the presentation over to Peter MacPhail, our Chief Operating Officer, who will introduce Young-Davidson.

Thanks, Jamie, and good morning, everyone. As many of you know, Young-Davidson is our flagship operation, the biggest of our three mines, producing around 200,000 ounces a year. It's also one of the largest underground gold mines in Canada. We have a large established reserve base totaling 3.2 million ounces of gold with another 1.3 million ounces of resources behind that and good exploration potential supporting what we expect will be a 20-year-plus mine life. The reserve grade is around 2.4 grams per tonne, which is a bit low for a typical underground mine. But what more than makes up for that is the high tonnage bulk mining, which lends itself to lower costs. And we're seeing that now with the mining rates ramping up, driving production higher and costs lower. Combine that with the decline in capital spending, we're starting to see now the true potential of the operation, which generated $53 million of free cash flow over its 2 full quarters of operating from the new lower mine infrastructure. The other point to make here is that we have significant tax pools in Canada, which totaled $1.2 billion as of the end of 2020. With these pools in place and some ongoing capital spending, primarily at Island Gold, we do not expect to pay any significant cash taxes in Canada until 2025. This is just a slide to show where we're located in northern Ontario. We're just outside of the town of Matachewan and around 60 kilometers west of Kirkland Lake and within the Abitibi Greenstone Belt. This is part of a well-known mining district that has produced more than 100 million ounces of gold from underground mines in the area. Several of those mines have produced more than 5 million ounces, which is a threshold we expect to pass, having produced more than 1 million ounces to date and with existing reserves and resources totaling over 4 million ounces. Next slide here is -- shows a bit of the recent history of YD. Luc and I have been involved with the asset since it was an exploration project acquired by Northgate in 2005, through to the start of construction in 2010, then the acquisition by AuRico in 2011 and then Alamos in 2015. Some significant milestones along the way include its first gold pour in 2012 and then commercial production of the underground operation in 2013. From there, we commissioned the MCM shaft in 2016, completed the raise boring of the lower portion of the Northgate shaft in 2017, and this past July, connected the upper and lower portions of the Northgate shaft as part of the final step in completing the lower mine expansion. I'll now turn this over to Luc to go into more detail on the operations and efficiencies we're seeing with the new lower mine infrastructure. Thank you.

Thanks, Peter. Good morning, everyone, and welcome. Before proceeding with my portion of the presentation, we would like to take you through a virtual tour of Young-Davidson. The video will guide you through Young-Davidson with a focus on mining and milling operations. It will also talk to the limitations of the upper mine infrastructure and the tremendous and benefits of the lower mine infrastructure. With the completion of the lower mine infrastructure, YD is set up for success for many years to come. We hope you find the video informative. Without further ado, please start the video. Young-Davidson is an underground gold mine located near Matachewan, Ontario, about 60 kilometers west of Kirkland Lake. It is one of Canada's largest underground gold mines with a design capacity of 8,000 tonnes per day. a multiyear expansion of the operation was completed in July 2020. This included transitioning to brand-new infrastructure in the lower mine, which is bigger, highly automated and significantly more productive. This infrastructure is expected to increase production, lower operating costs, and combined with declining capital spending, drive strong free cash flow growth. The lower mine expansion has only started to unlock the full potential of the operation. With a large mineral reserve and resource base and significant exploration potential, Young-Davidson will be the foundation for Alamos' growth for many years. Safety is a core value of Alamos and Young-Davidson. We have a strong safety culture, which aims to maintain a safe, healthy work environment for all. And we are focused on continuous improvement with ongoing training to our Home Safe Every Day program. In response to the COVID-19 pandemic, we have instituted a number of health and safety protocols, including implementing PCR testing of all personnel prior to starting their work rotation as well as all visitors. This is a part of our commitment to help protect the health of our employees, their families and the community. Young-Davidson mine has two main points of access to enter the underground mining operations. It consists of a ramp system from surface to a depth of 1,500 meters and the MCM shaft, which consists of a skip cage arrangement with the ability to hoist personnel, skip waste and send material underground to a depth of 1,500 meters below surface. The ramp system accesses the sublevels every 30 meters in the upper mine from surface to the 9410 level and every 35 meters in the lower mine from the 9410 level to the 8920 level. The sublevels provide access to establish the development on each level to allow extraction of the ore body. The MCM shaft is a rectangular excavated shaft that is serviced by a double-drum hoist equipped with 6-tonne skips and cage capacity for 12 people. The MCM shaft has a hoisting capacity of 900 tonnes of waste per day. The second shaft on the property is the Northgate shaft. This shaft is the main production shaft and is equipped with a friction hoist to a depth of 1,500 meters below surface. The Northgate shaft is a circular shaft 5.5 meters in diameter and was excavated in 3 phases to its full depth. The hoisting plant is equipped with 24.5-tonne skips and has a hoisting capacity of 10,000 tonnes per day of ore and waste. The Young-Davidson mining method is primarily transverse open stoping with delayed backfill. The development cycle consists of excavating approximately 5-meter by 5-meter drift openings. The drifts are excavated by utilizing 2 boom jumbles to drill the development rounds, 4 meters in length. The broken material from development blasting is mucked with 8-yard scoop trams to the waste pass system, ore pass system or co-disposed into stopes for backfilling. Mechanical bolters are utilized for installation of ground support with 8-feet-long bolts in the back and 6-feet-long bolts installed in the walls of the excavation. Additional ground support is added with cable bolts in larger underground infrastructure that will be utilized for the life of the mine. The stope backs are also supported with cable bolts for additional support during the mining phase. The production drilling cycle utilizes ITH production drills in the stopes to drill a 30-inch diameter slot raise and a 4.5-inch diameter production hole. All of 4.5-inch production holes are loaded with an emulsion blasting product and initiated from the central blasting system on surface during shift change. Once the ore stoping blocks are blasted, the mucking cycle commences for extraction of the broken ore. The production fleet consists of 12-yard scoop transfer hauling the ore from the stopes to the ore pass located on the level. The ore pass feeds directly to the rock breaker station on the 9025 level. No further rehandling of ore is required once the ore is fed into the pass system as the crushing and conveying system will bring the ore to the Northgate shaft for hoisting to surface. This is a significant improvement from the previously utilized upper mine infrastructure, which required ore to be rehandled multiple times. The paste backfill cycle follows once the ore has all been removed from the stoping block. A paste wall is first installed at the extraction level to confine the paste fill to the stope. Paste fill placement is fed from the surface plant by gravity through 1 of 2 boreholes and is distributed underground by a network of pipes on the levels and boreholes between the levels to bring paste to the desired stope for backfilling. The use of paste fill at Young-Davidson provides three benefits. This includes increased mining recovery or the amount of ore that is recovered from underground and the faster cycling of stope supporting higher mining rates. It also reduces the amount of tailings that would otherwise be going to our tailings facility by more than half. Before transitioning to the new lower mine infrastructure, the upper mine ore pass system delivers ore through 4 ore passes from each of the sublevels to the 9590 level. From the 9590 level, ore is loaded a second time by scoop trams into haul trucks and hauled to the ore rock breaker and dumped on a 24-inch square grizzly. After passing through the grizzly, ore is fed to the 4860 jaw crusher and crushed. The crushed ore is then fed to the loading pocket and conveyed to the skips, which had a capacity of 17.5 tonnes per skip, 40% smaller than the new skips being used in the lower mine. The fine ore bin capacity below the crusher was 500 tonnes with 1 hour of skipping inventory. The lower mine infrastructure from the 9590 level to the 9025 level are fed by 2 pass systems, the west ore pass and the east ore pass, which were excavated in 2 legs. The lower pass systems have improved designs with better alignment between the 2 legs, better geometry as they are excavated circular and additional ground support with the [ shock reed ] applied to the pass systems. The lower mine production from the sublevels feeds directly into the pass systems, which feed directly to the rock breaker, eliminating the second rehandling that was required in the upper mine. The pass systems in the lower mine have a transfer point at the 9305 level for the east and west ore pass. This allows ore flow to be fed into the system above and below 9305 and facilitates constant feeding of the system from different mining horizons. When required, the ore bypass at the 9305 level to the pass systems below. The ore flow is controlled by a chute press frame assembly to control the flow of ore to the rock breaker. The pass systems are kept 2/3 full to ensure long-term stability of the system. The rock breaker station on the 9025 level is fed from 2 chute press frame assemblies that feed directly on to the ore grizzly panels with a 24-inch square opening. The rock breaker station is equipped with 2 breakers, only 1 breaker is required to meet the production requirements of 8,000 tonnes per day. The second breaker is in place as a backup to allow for constant feed during scheduled maintenance. Once the ore passes through the rock breaker, it is fed directly to the crusher on the 8990 level. The crusher is a 4860 jaw crusher, a twin to the upper mine crusher, which has a crushing capacity of 800 tonnes per hour to generate minus 6-inch material. The crusher has excess capacity as it's only required to operate about 10 hours a day to meet the production requirement of 8,000 tonnes per day. Crushed ore feeds a bin directly below, which has a 2,700-tonne fine ore bin capacity to the 8930 level. From the 8930 level below the crusher fine ore bin, ore is conveyed by a 60-inch-wide conveyor feeding 2 ore storage bins at the 9000 level near the Northgate shaft. The conveyor system is a significant improvement for handling compared to the upper mine as it eliminates the higher cost of trucking, the maintenance of the trucks and ventilation requirements. The conveying system significantly reduces unit operating costs. A conveyor can deliver 725 tonnes per hour of ore to the 2 bins, which more than meets the production requirement of 8,000 tonnes per day of ore. The first bin has a fine ore bin capacity of 2,300 tonnes and the second bin has a fine ore capacity of 1,000 tonnes. The total fine ore bin storage below the crusher is 6,000 tonnes, which provides 12 hours of skipping inventory, an increase of 11 hours of skipping inventory and an increase of 5,500 tonnes of fine ore bin capacity compared to the upper mine. This effectively means no downtime between blasting and shift changes. The 2 fine ore bins feed the loading pocket conveyor at the 8940 level, which feed 2 measuring bins. Measuring bins are calibrated by the load cells to hold 24.5 tonnes. The Northgate shaft lower mine skip capacity of 24.5 tonnes represents a 40% increase over the upper mine skip capacity of 17.5 tonnes. The cycle time for a skip to reach the surface headframe is approximately 166 seconds. Processing at Young-Davidson consists of the underground ore crushed to a minus 6-inch product size. Once it reaches surface, it is conveyed to 2 fine ore bins and processed through an 8,000 tonnes per day, single-stage, semi-autogenous grinding circuit followed by bulk floatation. The flotation concentrate is further grounded, thickened and leached in a conventional CIL circuit. The flotation concentrate CIL tails joins the thickened flotation tailings and are leached in a combined CIL circuit. The gold is recovered from the loaded carbon followed by electrowinning and pouring of doré bars. Young-Davidson carbon-in-leach final tailings are treated with an SO2 air cyanide destruction method before sending it to the tailings facility or to the paste plant for further distribution back into the underground workings. The paste fill plant receives tailings from the milling circuit and produces the paste for mine backfill. The first step in the process is dewatering of the tailings in a thickener. This also helps to improve the slurry density to about 75% solids. The thickener underflow is directed into 2 separate paste production lines consisting of the following: a disc filter to further dewater the tailings; 4 binder storage and metering systems and handling systems to deliver a binder to the paste blending system. Each binder storage and metering system may handle different blends of binder, a mixture to blend the paste, paste hopper to feed the distribution system. The paste backfill plant was commissioned in 2014 and is capable of supplying paste fill to the underground voids at a rate of 8,000 tonnes per day. About 60% of the tailings material generated from processing the ore is redistributed back to the underground to fill the voids created from mining of stopes. The remaining tailings material is currently deposited into the TIA 7 tailings facility. The facility was commissioned in 2012 and will reach its capacity limit of 15 million tonnes by mid-2022. The second new tailings facility, TIA 1, is currently under construction and scheduled to be completed by the end of 2021. The new facility will have capacity of 25 million tonnes, enough for all existing mineral reserves and resources with the potential for further expansion beyond that. Both tailings facilities are constructed with center line dam designs and all dams within the facilities are plastic-lined, which support industry best practices for engineered tailings dams. The tailings water is recycled from the facility and pumped back to the processing plant to be reused as process water for the milling process. Young-Davidson is only just starting to show its true potential, having achieved consecutive records for mining rates in the first 2 full quarters following the completion of the lower mine expansion in July 2020. Mining rates are expected to continue to increase into the second half of 2021 to design rates of 8,000 tonnes per day. This is expected to drive production higher, costs lower and combined with lower capital spending, record free cash flow of more than $100 million in 2021. With a 14-year mineral reserve life plus several years of resources beyond that and significant exploration potential with the deposit open at depth and to the west, we expect Young-Davidson will be a strong free cash flow generator for a very long time. Okay. We would like to continue now with the slide presentation. So starting with our #1 core value, that being safety. We have always had a safety-first mentality and a strong safety culture, which is being continuously reinforced with our Home Safe Every Day program. It is an in-house-developed program that has all our employees attend a 1-day workshop to reinforce the safety culture of the company. With regards to our safety frequency rates, we have seen a 38% decrease in our lost time injury frequency rate over the past 2 years and a 46% decrease in our total recordable injury frequency rate. Another core value of the company is social responsibility. We have great relationships with our local communities, including partnerships and long-term agreements in place with the Matachewan and Temagami First Nations. The agreements are centered around employment and business opportunities. Of note, the Keepers of the Circle training program bulleted in the slide refers to a training program for First Nations women. We have supported this program for many years by providing underground common core training to women seeking employment in the industry. Some of the women that have gone through that program have gained employment with Young-Davidson over the years. And where we haven't had vacancies, we provided the skill set, allowing them to find employment elsewhere within the industry. We are also an important contributor to our surrounding communities with $36 million spent on local suppliers over the past year. More than 85% of our nearly 700 employees come from the local region. This includes 10% of our workforce coming from our First Nation partners. With regards to environmental sustainability, we have a good environmental track record at YD with no significant environmental incidents in 2020 and significantly lower greenhouse gas emissions and water usage per ounce of gold produced compared to the intermediate and senior producer averages as seen in the graphs. Our greenhouse gas emission intensity was already low, reflecting the efficiency and style of the operation as well as being located in Ontario and being connected to cleaner grid power. We expect this to -- we expect this intensity to decrease further in 2021 driven by the increased automation with the completion of the lower mine expansion. The same is true of much more -- the same is true of our much more efficient use of water with 100% of our mined water processed recycled and 90% of the mill processed water recycled. This contributes to lower water usage per ounce of gold produced, which is about 1/4 of what the intermediates and seniors use on average. These are metrics we are continuing to look to improve upon. The long section of YD shown in this slide outlines our reserve base in the pink color. Young-Davidson is a highly productive bulk mining operation that can support 8,000 tonnes per day mining rates. This is driven by transverse long-haul open stoping primary mining method at YD with 94% of the reserve extracted by this mining method. The method is highly flexible, allowing for multiple mining fronts to support the high mining rates and given the average width of the ore body lends itself very well to bulk mining. Based on good historical mining results since the start of underground mining in 2013 and good ground conditions associated with the ore body, we have increased our sublevel spacing to 35 meters in the lower mine. Again, this supports high mining rates. This also means less capital and operating development over the life of the mine. Another key factor in delivering on the mining rates is paste backfill. It is the most efficient method of backfill placement in the industry. And the plant is capable of delivering 8,000 tonnes per day to the underground. Mining recoveries of 92% and dilution of 10% have been consistent since the start of underground mining in 2013. And the block model has reconciled well with tonnes and grade. The key benefits of the lower mine expansion is the improved design and greater automation with the new infrastructure. As a result, far less rehailing of ore and waste is required, meaning fewer trucks are needed. The operational efficiencies have decreased our truck fleet from 16 down to 11. Another improvement in our skipping -- is our skipping capacity to almost 11,000 tonnes per day, which I'll go into more detail on the next slide. We are operating 2 shafts, both to a depth of 1,500 meters. We have combined skipping capacity of 10,895 tonnes per day. Moving forward, our requirement is to move 8,000 tonnes per day of ore and 1,550 tonnes of waste, of which we expect to co-dispose 750 tonnes per day for backfill purposes, meaning we only need to skip 800 tonnes per day of waste. In total, our peak skipping requirement of ore and waste will be 8,800 tonnes per day. With the current shaft infrastructure, this gives us 2,100 tonnes per day of excess skipping capacity. As such, we are moving to a double cage configuration on the MCM shaft, which will facilitate more efficient movement of personnel and material to the underground for the long term. Taking a look at our mining history. We achieved commercial production from the underground in 2013. By 2016, we were approaching the design capacity of the upper mine infrastructure of 6,000 tonnes per day. By 2017, we had pushed mining rates consistently above 6,000 tonnes per day, even as high as 7,000 tonnes per day but were limited by the design of the upper mine infrastructure to an average of about 6,500 tonnes per day. We took the Northgate shaft down from February to July last year to complete the tie-in, which impacted mining rates during the first half of 2020. Post completion of the tie-in, in late July 2020, you can see an immediate step change in mining rates, having set 2 consecutive records in its first full 2 quarters, including 7,650 tonnes per day in Q4 of 2020 and 7,800 tonnes per day in Q1 of 2021. In terms of process grades, there is some variability from quarter-to-quarter. But over any given year and over the long term, grades have reconciled well to the block model. This is what you can expect going forward with grades expected to vary by quarter above and below our average reserve grade of 2.44 grams per tonne. The quarterly grade is driven by responsibly mining the ore body and adhering to a mining extraction sequence which follows best practices. In looking at milling operations, the mill has a capacity of 8,000 tonnes per day and can operate at that level when we have the ore as has been the case in previous quarters and the past 2 quarters. Recoveries have improved through the years to currently consistently averaging 92%. Looking at our 2021 guidance. We are expecting a 15% increase in gold production to about 200,000 ounces and substantially lower costs compared to 2020. We are on track to hit our targets with a strong Q1, where we outperformed on mining rates, achieving a record of 7,800 tonnes per day, above our budget of 7,500 tonnes per day. We are continuing to budget mining rates of 7,500 tonnes per day in Q2 before increasing to 8,000 tonnes per day in H2. The second half mining rate increase is driven by the establishment of a fifth mining front that will support the higher mining rates. Combined with higher grades, we expect this to drive production higher and cost lower in the second half of the year. With the completion of the expansion, our capital spending is trending lower and expected to decrease from $100 million this past year to about $70 million in 2021. This still includes a little under $30 million of growth capital with about half of that being spent on completing our new TIA 1 tailings facility. The tailings facility will be completed this year, resulting in further decrease in total capital over the next few years. In summary, we are on track with our 2021 guidance. Looking at unit costs and currency sensitivities. Our costs are coming down with the completion of the lower mine expansion. Pre expansion, we were above CAD 50 per tonne. And post expansion, we are consistently averaging below CAD 50 per tonne for mining unit costs. We expect costs to continue to trend down into the second half of this year, averaging closer to CAD 45 per tonne as we ramp up to 8,000 tonnes per day and ultimately down to a long-term rate of CAD 45 per tonne. As virtually all of our operating costs and capital costs are denominated in Canadian dollars, we are significantly leveraged to movements in the U.S. dollar. From a cash flow sensitivity, a $0.05 change in the Canadian dollar impacts our free cash flow by $15 million. Regarding capital outlook, our capital spending is already starting to decrease as we expect this to continue over the next few years down to a rate of $40 million to $50 million per year before stepping down to $20 million to $25 million per year longer term. The biggest drivers of this decrease is the completion of our new TIA 1 tailings facility this year and moving forward, declining infrastructure requirements and rates of underground development. In looking at our gold production profile and costs pre and post lower mine tie-in, specifically with the completion of the lower mine, we are now only starting to see the true potential of YD with the lower mine expansion driving production higher, costs lower, which combined with declining capital spending will generate strong free cash flow growth. Now looking at cash flow results on a quarterly basis, really since 2015, YD has been self-financing the lower mine expansion, meaning we've been covering all operating and capital costs, including the lower mine capital expansion. With the expansion now complete, YD has already generated $53 million of free cash flow over its first 2 full quarters operating from the lower mine infrastructure. This is a very good indicator of what is to come. On an annual basis, we expect YD will generate record free cash flow this year of more than $100 million. With a long 14-year reserve life, several years of resources and behind the excellent exploration potential that we will outline momentarily, YD has a long runway ahead of it, generating more than $100 million of free cash flow per year. And with that, I will now pass it over to Scott K. Parsons to open it up for questions before we go over to Scott R.G. Parsons to touch on exploration.

Thank you, Luc. [Operator Instructions] We will also have more time for questions after the exploration section. Our first question comes through the chat function. So I'll read that out now. What is the sustainable CapEx level for the operation after project spending?

Yes. As we touched on in the capital outlook slide, with the TIA 1 coming to completion at the end of this year, longer term, moving forward, we'll be into the $40 million to $50 million range. And then once we have declining infrastructure requirements and further reduction in development, we'll be in that $20 million to $25 million per year.

Thanks, Luc. That's it for questions thus far. But as a reminder, we will have more time for questions after Scott R.G. Parson's exploration section. So if we've not addressed your questions as of yet, we will certainly do so then. I will now turn it over to Scott, our VP of Exploration, to go into more detail on our exploration results from last night as well as our 2021 exploration program.

Thanks, Scott. I'm pleased to provide you an update on our ongoing 2021 exploration programs at Young-Davidson and also to highlight the significant exploration potential that we see, both near mine and across the property. With $7 million budgeted for exploration in 2021, this represents the first significant exploration program at Young-Davidson since 2011. With the focus over the past several years on completing the lower mine expansion, we've now established underground drill platforms for improved access to drill at depth. This is the start of a really exciting phase of exploration at Young-Davidson. This figure is the longitudinal of the Young-Davidson mine looking to the north. The year-end 2020 mineralization wire frame is shown in red and the underground development in gray. The focus of the underground exploration drilling program is to expand mineral reserves and mineral resources in several target areas that we've identified that are in proximity to existing underground infrastructure. And also, we want to test new exploration targets, which I'll touch on later in the presentation. As shown on this slide, the underground exploration program includes 8,000 meters of drilling in the drill platforms established in the lower mine; 6,000 meters of exploration drilling from the mid-mine. Year-to-date, we've completed approximately 3,500 meters in each of the lower mine and mid-mine areas. We're also planning 7,500 meters of surface drilling in the second half of 2021, focused on near mine and regional targets. I'll touch on the regional targets later on. Near mine, the targets include the MCM reserve mining area, which is on the east side of the Young-Davidson deposit, and also the [indiscernible] extension of the syenite, which is open to the west of the YD historic pit. This mine scale longitudinal is from our press release yesterday, where the black points indicate the location of the midpoints of drilling that were completed to date, the 8960 levels and 8990 level drill base, which are established in the lower mine. The rectangle outlined in the lower left corner of the image and annotated by [indiscernible] will be the extent of the next detailed longitudinal that I'll show in the next slide, where I'll discuss specific results to date from the 8960 level exploration drilling. So, so far, the drilling has been successful in intersecting gold mineralization within the YD syenite, which is down-plunged from the existing reserves and resources to the lower mine. In late 2020, we extended gold mineralization 220 meters below the previous mineral resource with drill hole 008, which intersected 5.3 grams or 3.4 cut over 35 meters true width, including 22 grams or 10 over 6.2 meters. In 2021, we followed up on this with a hole below, which we extended mineralization another 150 meters in hole 21, intersecting 4.4 grams over 9 meters also in the syenite. So Young-Davidson syenite remains open to the northwest and to the southeast as well as down-depth. And this will be one of the targets for ongoing exploration drilling. What's really exciting is we've also intersected other styles of gold mineralization outside of the syenite. So this gold mineralization was hosted within high-grade structures within the hanging wall mafic-ultramafic stratigraphy of the Tisdale assemblage and also within structure developed in the Timiskaming sediments, which were in the footwall of the syenite. This level plan shows a generalized geology with the syenite shown in pink, the footwall sediments in beige and the mafic-ultramafic of the hanging wall in light purple. Highlights from the mafic-ultramafic lithologies include drill hole 14, which intersected the high-grade structure over 200 meters south of the hanging wall contact of the syenite, which is beyond the limits of any previous drilling. The structure returned 6 grams over almost 14 meters, including 24 grams over 1.9 meters. Within the Timiskaming sediments of the footwall, drill hole 11 intersected 8.3 grams per tonne over 6.3 meters, which included 22.5 grams over 1.2 meters, also within the shear-zone developed over 100 meters from the footwall contact of the syenite in the sediments. Although early days, it's very encouraging and further drilling will definitely be completed to evaluate the geometry and continuity of these mineralized structures that's ongoing as we speak. These initial exploration results highlight the significant geologic potential that we see on the property. Not only to grow the mineral reserve and resource base within the syenite, we're also starting to recognize opportunities to define other styles of potentially higher-grade mineralization in relatively under-explored prospective geological domains in proximity to underground infrastructure. Next slide. This image is a plan B map with satellite imagery and geology showing the extent of our 5,600-hectare Young-Davidson property. Regionally, the property is situated along the Cadillac-Larder Lake deformation zone. And specifically, it sits at a regional scale jog, which is a key control on gold mineralization along these [indiscernible] shears. What's also exciting about the property is we've identified and historically have identified several highly prospective second order structures across the property within and along the contact of the Tisdale and Timiskaming domains. These include the YD Mine Break, which is the host to the YD deposit; the Morrison Break to the north; and the Christie Break to the south; and a key lithologic contact unconformity between the Timiskaming and Tisdale sediments, which repeat itself not only at Young-Davidson but also to the north. Just to highlight an example of the untested exploration potential on the property, if we look at Macassa, which is 60 kilometers to the east along the Cadillac-Larder Lake deformation zone and similar to the same geologic domains, at Macassa, the South Mine Complex sits outside of the main Macassa syenite within the Timiskaming sediments that's associated with structures developed between and in parallel to the main and amalgamated breaks in Kirkland Lake. Compare this to Young-Davidson, we see the potential for similar geological and structural settings along the Young-Davidson Mine Break and the Morrison Break within the Timiskaming sediments. The Morrison Break seems limited to drilling. However, the Morrison Break has several historic gold occurrences that have identified its surface along it historically. And this indicates it could be an important structure for gold-bearing fluid movement that has seen limited testing, other than near-surface drilling back in the '40s and '70s. We're thrilled to continue to advance our exploration programs at Young-Davidson, and we're looking forward to providing ongoing updates as our activities progress. And with that, I'll turn it back over to Scott K. Parsons to open up the floor to any further questions.

Thank you, Scott. I would now like to invite all of our presenters today to join us for our final Q&A session. I know some of you joined the call late, so I'll just give a quick reminder on the different ways you can ask a question. [Operator Instructions] Our first question comes from Cosmos Chiu.

Scott, can you hear me?

We can hear you, Cosmos.

Maybe first off, on the press release that came out last night, Scott, the geologist, as you talked about, you're finding new styles of mineralization, you're hitting some mineralization in the Timiskaming sediments and at Tisdale, mafic-ultramafic assemblages. Two questions, I guess. First off, number one, as you talk about, current reserve resources, can you confirm most of it is actually in the syenite? And number two, at this point in time, maybe too early stage, what's the potential here in terms of in the sediments and also in the hanging wall mafic-ultramafic rock, what's the potential here in terms of mine life, in terms of higher ounces, resources? And I guess, the third question is I noticed last night in the drill results, the highest grade actually came from the sediments. Maybe can you comment on that as well? Or is it once again too early to tell in terms of what the grade could be?

Okay. Thanks for the question. And I'll start with the first question, which is the mineral reserve and resources. And yes, the majority of the mineral reserve and resources are within the syenite. There are some reserves and resources to the east side of the deposit in sediments which are inter-fingered with the syenite around the MCM mining area. But for the most part, the majority of the reserves and resources are in the syenite. And the second part of the question, intersecting this mineralization in the footwall sediments and hanging wall mafic-ultramafics, I mean, it's extremely encouraging and exciting. I mean, we knew elsewhere in the mine near surface, there have been some structures that have been defined previously [indiscernible] follow-up, which do form the thesis for some of our other targets in the -- within the mine from the mid-mine area. But to see these high-grade structures in the lower part of the mine beyond any previous drilling and looking at the rest of the property after doing a detailed compilation of all of the historic drilling, it really highlights how under-explored the very prospective lithologies are outside of the syenite. I mean, that's been the focus essentially for the last 100 years is exploring in the syenite into the MCM area in the east. So although early days, it's nice to see that mineralization. And we'll continue to drill it off and put a lot of thought into interpretation as we're drilling to confirm geometries and follow up a step-out drilling to firm up continuity. And then the third part of the question, the higher grades in the sediments. It's early to comment on that. It's -- we only have a few holes so far into that. I think it represents is a high-grade structure in the sediments. The ultramafics of the other areas, the opportunities to define some high-grade mineralization. But it's nice to see them both. I won't comment that the sediments can be higher grade than the ultramafic. It is a little early to speculate on that.

Great. Maybe a question for Luc. Luc, just talking about the underground throughput here. I know you're still targeting 8,000 tonnes per day. But in Q1, it was -- you're already hitting 7,800 tonnes per day. And in your mine tour, you talked about -- it seems like there's excess capacity in terms of the hoist, the skipping, capable of over 10,000 tonnes per day ore and waste. There is excess capacity at the rock breakers and some of the other parts of the infrastructure as well. Again, I can know you're targeting 8,000 tonnes per day at this point in time. But if I were to look beyond this year, could you comment on what the potential could be in terms of further upside? And to get to that upside, what are some of the key parts that you might need to sort of debottleneck?

Yes. Sure, Cosmos. Look, I mean -- can you hear me?

Yes.

So with regards to the mining rates that we've talked about, our guidance is 7,500 tonnes per day in the first half of the year. We [indiscernible] little bit in Q1, as you noted. Certainly, I mean, the driver there is that we've got a couple of -- as we established with the lower mine infrastructure, a couple of the stopes that have been a bit more productive for us, which generated a little bit more overall mining rate into the first quarter. But we're certainly very comfortable with what we've communicated as far as that mining rate in the first half of the year. And really, the step change for us into the second half of the year is really a function of having that fifth mining front that I talked about in the presentation. We've been running with 4 mining fronts currently. We've just brought the fifth mining front online. With regards to the ore body, strike lengths, the vertical extent, the width of the ore body, the mining rates that we're talking about in the second half of the year is certainly doable. The infrastructure is in place to do that, as you mentioned, with the crushing, hoisting, breaking facility. But you've got to keep in mind that originally the design of this operation was a 6,000 tonne per day operation. So we've already taken it at about a 34% increase to what it was originally designed to, so -- and I also talked on the basis of paste backfill. And that's the key to achieving that consistent 8,000 tonne per day mining rate. You have to have a method of backfilling your stopes as you extract them very efficiently and very, very quick. And paste backfill distribution allows us to do that. To go beyond 8,000 tonnes per day, I think currently with what we've communicated, we're at the expectation that we can deliver on 8,000 tonnes per day comfortably. And that's our long-term vision.

Great. And maybe one last question here, integrating everything. As Scott, the geologist, finds more ounces for you in terms of reserve and resources, it sounds like it is at depth or at least most of it. On that, Luc, maybe can you comment on the rock competency as you go deeper into the deposit? And then the second part of that question is the lower mine infrastructure, how is that able to handle some of those ounces further at depth?

Yes. Look, I mean, we're currently mining at the 9270 level. We've taken our first stope from that horizon within the -- in the underground. Geotechnically, with what we've been seeing so far with regards to ground control, it has been very, very positive. We've got a very -- I touched on the fact that we're adhering to a mining extraction sequence. It's a very responsible mining extraction sequence in order to manage the overall geotechnical environment with the underground. And that's what leads to that grade variability that I touched on as well, where you're going to see some quarters above our reserve grade and some quarters below our reserve grade. It's important that we follow that geotechnical sequencing in order to make sure that we're extracting the ore body responsibly. With regards to some of what Scott touched on in his slide deck with regards to some of the exploration upside at depth into the west. We're also looking further to the west within the upper mine, within the infrastructure of the -- that we have in place as well already. We need Scott to complete his process, understand what we've got there with regards to the west and at depth. And then the mining guys will have some fun figuring out how we're going to invest the capital to go and get it.

Our next question comes from Kerry Smith of Haywood Securities.

Scott R.G., just on these footwall, hanging wall zones that you're hitting at depth here, it sounds like a small portion of the current reserve is actually in those structures outside of the syenite. But when you mine them or if you have mined them higher up in the structure, have you seen the kinds of grades that you're seeing in the drilling you've given us yesterday? Or is the grade of those structures more in the 3 to 4 grams or 2 to 4 grams, let's call it?

Yes. I don't think there's been any historic mining in the hanging wall mafic-ultramafic sequence. Where there was historic mining was the MCM area, which was -- 80% of it was in syenite and 20% of that historic mining was coming from sediments. It was kind of an inter-fingering of the 2 units. So just a comment on historic mineralization, it has been mined from either of those domains. It's hard to do them. The MCM area, like I said, was predominantly syenite. And I think the average grade there was somewhere around 4 grams. But they weren't targeting structure specifically in the sediments. So that's the opportunity. I mean, getting a handle on key structures controlling mineralization, we're sitting within proximity to a syenite that has -- that will be pushing 5 million ounces of gold. And there's more there to be discovered. And it's just getting tuned into those structures that are controlling mineralization and then following up on the ones that do have the continuity with the higher-grade mineralization. So early days, but that's what our focus is when looking outside of the syenite.

Okay. And is there -- or what is the tool to try and target these structures in the hanging wall and the footwall then, Scott? Like is it really drilling? Or can you use some geophysics? Can you map these structures? Do they have any strike length to them? Or are they small discrete structures?

Well, I mean, the tools that we use, obviously, this is beyond any existing drilling. So the first step is getting a drill hole in there. We're looking at opportunities, depending on pyrite content as an example, some of these structures seem to be associated with elevated 5% to 10% pyrite and quartz carbonated veins. So would downhole IP work? Maybe. We'll have to get a few more holes into it first. The other tool that we're using is -- or will be using, sorry, is looking at drilling with oriented core to firm up the geometry of the zones from hole-to-hole. And when you get into hanging wall, as an example, the stratigraphy is extremely folded and we're looking at potentially plunges along full noses or axial planar structures that we need to follow up on. So all of that information from a structural perspective will be used to continue to evolve our targeting in the areas.

Okay. And just on the syenite, what is the deepest intersection that you have in the syenite today in drilling?

The -- I have to look at it exactly, but I believe it's the hole that I just quoted, which was the deepest around 1,800 meters vertical depth. I need to confirm that.

1,800. Okay. And then just roughly, what is the depth of the current reserve in the syenite and actually the bottom of the reserve, just for context?

Approximately 1,500 meters.

1,500. Okay.

Moving on, we do have some questions via the chat function. Scott, another question for you and it's a two-part question. What is the goal of the 2021 regional exploration drilling program? And a second part to that, considering the drilling results you're seeing in the ultramafics in the footwall, can you drill this unit closer to surface?

So the focus of the regional program, we've gone through or we've almost wrapped up a very detailed compilation of all historic work, identified targets that have over the years been followed up by various companies that have gone in kind of looking at specific occurrences. But what we're doing is testing some of those structures on a more property scale kind of systematic exploration approach, where we're looking at some of these key controls that we know that understand gold -- control gold mineralization, such as intersection of a cross-structure with the Tisdale, Timiskaming contacts. So testing some of those key ideas that we understand are controls of mineralization on the property scale. And the objective would be to intersect mineralization, which would then form the basis for all of work in 2022. And then the second part of that question regarding the Tisdale, it's an interesting area. You have the [indiscernible] cover sitting over top of -- as you get south of the Young-Davidson syenite into that hanging wall, you have a much younger [indiscernible] cover dipping off to the south. So historically, it's the unlimited testing as the unit thickens. So this is an opportunity from underground is being able to access that prospective stratigraphy with underground drilling that was challenging historically from surface, although it was possible, much more systematic with testing the stratigraphy, not just in the lower mine, there's opportunities in the mid- and upper mine as well that haven't been fully evaluated.

Thanks, Scott. So another question via the chat function. Does the high-grade -- or how does the high-grade exploration potential or South Mine Complex potential change -- potentially change the scope of the operation? Would it still be a bulk tonnage 8,000 tonne per day operation with a separate component processing the higher grades? Or would it be two mines both feeding the same mill sort of configuration?

Sorry, Scott, I'm not sure if I'm following that question. With regards to the South Complex?

Yes. It's just in terms of the exploration potential Scott has discussed, including the higher grades in the ultramafics and the hanging wall and the footwall. With higher-grade potential, does that change scope of the current milling operation? Or could the high grades be put through the existing mill with the current ore?

Yes. No issues with the higher grades, certainly. Look, it'd be just a mine planning perspective to amalgamate what we have currently with our existing reserve with maybe some potential higher-grade sources. But I mean, we could all -- it can certainly all feed through our existing infrastructure as far as mining operations and milling operations. There wouldn't be any issue in there. I mean, look, like I mentioned earlier, Scott's exploration work is in the early stages at this point. We've got the infrastructure in place early or from that area that was maybe higher grade. We can certainly truck it to our rock breaking system, which would then feed into our lower mine infrastructure. But as I said, as Scott, I'm sure, is going to continue to make this thing grow, which would be our hope certainly, then we can look at it from certainly a different view on how we would access the reserves at depth.

Okay. Thank you, Luc. Scott, this is going to be another question for yourself. But can you talk about how the YD West resource fits into exploration and development priorities versus the deeper mineralization in the update from last night?

Absolutely. So YD West is obviously a key target area for us, given that it is slightly higher grade west of the diabase dike. We are advancing underground development for establishing drill platforms kind of in the -- between the upper and lower mines at the 9220 level to the west. So once we get that platform out there later this year, we'll be doing some drilling to target both above and to the west of YD West. The other opportunity that we see is down-plunge. I mean, there's clear ore shoots within the syenite. And if you look at the upper mine tying into YD West and then the opportunities that exist further down-plunge below YD West, I mean, that's something that we'll also be testing once we get the underground drill platform out in that area.

Thanks, Scott. [Operator Instructions] Your next question comes from Kerry. What is the drill spacing needed for the -- or within the syenite to get into inferred resources?

Chris, do you want to take that one?

Sure, it's about 80 meters for inferred.

Great. Well, thank you, everybody, for your questions. We have no further questions at this time. So this concludes the final segment of our presentation. I'd now like to turn the presentation back over to John for his closing remarks.

Thank you, Scott. And it's been a pleasure to listen to this presentation. I think our team has just done a great job. In closing, it's good to look back, and I would just like to say Alamos and AuRico came together in 2015 for the purpose of completing the development of the Young-Davidson mine. We've achieved that goal. And I think the credit can be given to a very capable team of employees and contractors. Through mine expansion and tailings expansion, we've more than doubled the mine life of Young-Davidson. Exploration in the years to come will continue to sustain YD for many more years. The construction work is done. With higher rates of production, lower costs, lower capital, YD is going to be a great profit generator for decades to come. I want to thank our team for establishing this flagship asset as a profitable, long-term Canadian gold producer. This is a mine our employees, our communities and our shareholders can take pride in and give us all a great deal of confidence in a sustainable and profitable future for our company. I can confidently say our best years lie ahead. Thanks again, everyone, for attending.