Pretium Resources (PVG) Q4 2018 Earnings Conference Call Transcript

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Pretium Resources (NYSE: PVG) Q4 2018 Earnings Conference CallFeb. 15, 2019 10:00 a.m. ET

Contents:

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  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you all for joining us this morning. Welcome to the Pretium Resources 2018 results and 2019 outlook conference call. [Operator instructions] And the conference is being recorded. [Operator instructions] The conference call today is being webcast live and available along with the presentation slides on Pretium's website at pretivm.com.

I will now turn the call over to Mr. Joseph Ovsenek, Pretium's president and CEO.

Joseph Ovsenek -- President and Chief Executive Officer

Good morning, everyone. Welcome to our 2018 results and 2019 outlook call. Participating on the call with me today is our CFO Tom Yip. On today's call, I will comment on operational highlights and guidance for the coming year, and we'll then turn the call over to Tom, who will comment on our fourth-quarter and full-year 2018 financial performance.

I will close off with a look ahead to our key near-term catalysts, before opening up the call to your questions. Before we begin, I refer you to the cautionary language included in our news release issued yesterday, as well as the management's discussion and analysis for the same periods. These are available on our website and have been filed on SEDAR. Please note, all dollar amounts mentioned on this call are in US dollars, unless otherwise noted.

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In the fourth quarter of 2018, we again recorded a profit, our sixth consecutive quarter with positive adjusted earnings. We have been profitable every quarter since the start of commercial production of Brucejack back on July 1, 2017. Our profitability is principally due to the sound economics of Brucejack and the hard work of everyone at the mine, Smithers and here in Vancouver. Our thanks to the team.

For the year 2018, our first full-year production, we produced 376,012 ounces of gold and generated $454.6 million in revenue on 367,428 ounces sold for the year. The all-in sustaining cost per ounce of gold sold was $764 for the year, resulting in adjusted earnings of $99.3 million or $0.54 per share. Our cash margin per ounce of gold sold averaged $608 over 2018. The Brucejack Mine produced 96,342 ounces of gold in the fourth quarter of 2018.

With an 89,011 ounces sold, we generated a $108.6 million in revenue for the quarter, resulting in $20.2 million in adjusted earnings, equivalent to $0.11 per share. In December, we received the amended permits to increase production rates at Brucejack by 40% to 3,800 tonnes per day. Also in December, we used our significant cash build to repurchase the precious metal stream and facilitate the refinancing of our construction credit facility, goals we set for ourselves this time last year. With these milestones achieved, we ended the year 2018 with a cash balance of $45.4 million in a simplified balance sheet.

Turning to Slide 7, a look at gold production at Brucejack over 2018. In 2018, we produced 376,012 ounces of gold at a grade of 11.9 grams per tonne. Our production profile improved at the beginning of the second quarter, following the successful implementation and integration of the grade control program into our short-term mine planning, which was reflected in the average grade increasing to 12.9 grams per tonne for the last nine months of the year. During the first half of 2018, the mine produced over 187,000 ounces of gold, achieving gold production guidance of 150,000 to 200,000 ounces.

We achieved 95% of our gold production guidance for the second half or 188,983 ounces of gold versus the guided range of 200,000 to 220,000 ounces due to a grade control program over call in December. We have since reviewed and revised our long-hole sampling protocols and audited our long-hole sampling procedures to improve the accuracy of grade estimation from our long-hole sampling. We see improvements resulting from this review and audit and expect to continue to see improvement over the next few months. We've also revised our long-hole drilling procedures to provide for forward slashing of stope top cuts in parallel long-hole drilling.

We are using parallel long-hole drilling in place of fan drilling wherever possible, which will remove any sample bias present in our long-hole ring drilling. Finally, reconciliation to the Valley of the Kings global resource model for 2018 was approximately 90% based on mine wireframes and shapes. The reconciliation to the resource model for the period April 1, 2018, to December 31, 2018, improved to approximately 92% when the grade control program became fully operational. Overall, reconciliation improved in 2018 compared to the period August 1, 2017, to December 31, 2017, when reconciliation to the resource model was approximately 75% to 80%.

We intend to provide an overview of the reconciliation process and results at a technical session we plan to host in the second quarter of this year. Despite the challenges of mining at deposit of variable grades, the hallmark of the Valley of the Kings deposit, the Brucejack Mine remains sustainably profitable. With the experience we have gained operating over these initial six quarters of production, we are well-positioned to consistently achieve our production and cost guidance. Turning to Slide 11, I look at all-in sustaining costs over 2018.

Our all-in sustaining cost per ounce of gold sold improved, starting the second quarter with increased sales. For the second half of 2018, our all-in sustaining cost was $745 per ounce sold, which was well within our financial guidance range of $710 to $770 per ounce of gold sold. Turning to guidance, for 2019, gold production at Brucejack is expected in the range of 390,000 to 420,000 ounces. With our production guidance accounting for the production ramp-up from 2,700 tonnes per day to 3,800 tonnes per day over the course of the year.

Production is expected to average 3,500 tonnes per day in 2019, with production starting the year at roughly 3,000 tonnes per day and ramping up to 3,800 tonnes per day by year-end. In order to operate sustainably at a rate of 3,800 tonnes per day, the production ramp-up requires in addition to mill upgrades, the expansion of the underground development to the west and east and at the depth. Gold grade is expected to average 10.4 grams per tonne over the course of 2019. The lower grade in 2019 reflects a sequencing of stopes in the mine plan to achieve the development ramp-up to 3,800 tonnes per day, working within geotechnical and ventilation constraints.

The average gold rate is representative of the areas to be mind in 2019 and is not representative of the estimated life of mine grade, which will be provided in the second quarter. We note that production is weighted more heavily to the second half in fourth quarter this year. All-in sustaining cost for 2019 are expected in the range of $775 to $875 per ounce of gold sold. Our all-in sustaining costs includes sustaining capital of approximately $15 million associated with one-off capital items out of the total sustaining capital budget of $30 million.

It also includes expense costs of approximately $23 million associated with the growth of Brucejack. One-off sustaining capital items include; $6 million for access road and camp upgrades; $2 million for an underground maintenance shop; and $2 million for a backup underground pace booster pump. Expense cost includes $17 million for the increase in underground development to 1,000 meters per month from 700 meters per month as part of the production ramp-up to 3,800 tonnes per day, and $6 million for underground exploration focused on reserve expansion and discovery of the source pore-free for the Valley of the Kings. Our all-in sustaining costs less one-off capital items and expense growth costs, are approximately $675 to $775 per ounce of gold sold.

Looking ahead to 2020, we expect our all-in sustaining cost to decline. Turning to Slide 14, this slide shows an aerial view of a portion of the Brucejack Mine property, the Brucejack Lake in the top-right corner and Brucejack Mine infrastructure on its southwest shore. The Valley of the Kings are high-grade zone, is located at the bottom left. The dark blue area represents a projection to surface of proven and profitable reserves, and the light blue area represents a projection to surface of indicated and inferred resources.

You can see that there's significant room for reserve expansion into indicated and inferred resources, and the Valley of the King remains open to the east, west and at depth. As important, in the lower right-hand corner, you can see the Flow Dome Zone, which we discovered in 2015 as part of the grassroots exploration program. We drilled a number of holes into the Flow Dome Zone in 2015, and all of them intersected Valley of the Kings dome mineralization. We believe that the Flow Dome Zone is an extension of the Valley of the Kings.

Turning to Slide 15, this slide is a section view of the Brucejack Mine property, looking to the north, with the Valley of the Kings in the top-left corner and the Flow Dome Zone in the center. In 2018, we drilled two deep holes toward the Flow Dome Zone, from the underground at the Valley of the Kings with two objectives. The first objective was to confirm the continuity of mineralization from the Valley of the Kings to the Flow Dome Zone, which we were successful in accomplishing. The Valley of the Kings dome mineralization intersected throughout the gap between the Valley of the Kings and Flow Dome Zone.

The second objective was to locate the source porphyry for the gold mineralization at the Valley of the Kings and Flow Dome Zone. Both deep holes indicated mineralization indicative of a porphyry nearby, which we then followed up with the surface geophysical program and mineral chemistry evaluation. Our underground exploration budget for 2019 is primarily focused on expanding reserves at the Valley of the Kings and includes the start of reserve expansion drilling toward the Flow Dome Zone to the east. The exploration budget also includes funds to follow up on the deep holes from 2018 with two additional deep holes, targeting the source porphyry for the Valley of the Kings and Flow Dome Zone.

Now I'll turn the call over to Tom to review our financial performance for the fourth-quarter and full-year 2018.

Tom Yip -- Chief Financial Officer

Thank you, Joe, and good morning, everybody. Turning to Slide 18. As we continue to optimize our operations, during the quarter, we sold 89,011 ounces of gold at an average price of $1,204 per ounce for total revenues of $108.6 million. For the year, we sold 367,428 ounces approximately 8,500 ounces less than 376,012 ounces produced.

Total revenues were $454.6 million for an average of $1,231 per ounce for the year. Included in our revenues were TC/RCs related to our concentrate sales, which totaled $4.5 million for the quarter and $17.1 million for the year, impacting our revenues by approximately $49 and $46 per ounce respectively for the quarter and year. Otherwise, we would have realized $1,253 per ounce for the quarter and $1,277 per ounce for the year, which is similar to spot prices. Our cost of sales which includes production cost, depreciation and depletion, royalties and selling costs, averaged $814 per ounce for the quarter and $827 per ounce sold for the year.

The total cash cost per ounce sold averaged $610 for the quarter and $623 for the year. The higher average cost for the year reflects the lower grade process and result in lower ounce production and sales, which occurred in the first quarter of 2018. This yields an earning from mine operations of $36.1 million for the fourth quarter and $150.6 million for the year. We're continuing to show robust earnings from mine operations this year, and deducting our corporate G&A cost of $15.8 million, we generated operating earnings of $134.8 million.

There are two significant nonoperating items on our P&L. The first is net interest expense of $64.2 million for the year, which is primarily related to our project financing. With the new syndicated bank facility, as well as our ability to generate significant cash flow to service our debt, the interest cost going forward is expected to be significantly less. The second item is a loss on financial instruments at fair value.

The fair value of these items is based on future gold, silver prices, interest rates and production profiles. That adjustment was a loss of $17.1 million for the year. This fair value adjustment has been significant since September of 2015. And with the refinancing and buyout of the stream in December, the fair value adjustment will now be limited to movements in the offtake obligation.

Lastly, we incurred $16.9 million of tax expense during the year. This consists of $4.2 million for the current BC Mineral Tax and $12.7 million related to the deferred taxes. The effective tax rate is 31.5%. This is lower than our statutory effective rate of 36.5% as we recognized loss carryforwards previously accumulated.

Currently, we only pay BC Mineral Tax at a rate of 2%, which will increase to 13% once our significant tax pools are drawn down, expected over the next several years. The earnings for the year were $36.6 million or $0.20 per share. The adjusted earnings for items that we believe are not reflective of the underlying operations of the company, these includes noncash items, such as loss on financial instruments at fair value, amortization of the discount on the credit facility, deferred income taxes and convertible notes accretion. The adjusted earnings were $99.3 million or $0.54 per share for the year.

Turning to Slide 22, in terms of liquidity and cash flow. For the year, we generated a $197.2 million of operating cash flow, averaging $49 million per quarter in 2018. Together with net proceeds of $472.4 million from the new syndicated bank facility, this enable us to repurchase the 8% stream obligation for $237 million and repay the construction credit facility of $422.7 million, which included a principal and accrued interest from September of 2015. We spent a total of $32.9 million on CAPEX, which includes $8.6 million of construction payments in Q1 of 2018.

We ended the year with $45.4 million in cash. With the refinancing activities completed in December, we reduced our total debt by approximately $180 million, and our balance sheet has been simplified. The syndicated bank facility totals $480 million. This facility consists of a term loan of $250 million, which we will repay in 15 equal, quarterly payments, commencing in June of 2019.

And a $230 million revolver, which requires a reduction of $30 million to $200 million in June of 2019. And thereafter, the revolver will be due as of December 2022 maturity. Under the bank facility, we have up to $40 million available per year commencing in 2020 to repurchase shares or pay dividends, subject to compliance with certain financial covenants. And finally, to give a little more detail on all-in sustaining costs.

On Slide 25, in 2018, ASIC totaled $764 per ounce sold for the year. For 2019, as Joe had mentioned, we will be ramping up to the 3,800 tonne a day level by years end. Our total ASIC spending will be approximately $325 million to $341 million for the year. With the increase in tonnes, there is a corresponding increase of approximately $15 million $50 in spending over 2018.

The main factors of the increase includes additional mining development of $17 million, reflecting the additional 300 meters per month, as well as additional resource drilling of approximately $6 million over the 2018 levels. Within the $30 million estimate for sustaining, capital, we had a number of one-time projects totaling $15 million. In addition to sustaining capital, we estimate spending $15 million on the 3,800 tonne a day mill expansion. With the increase in concentrate production, our TC/RCs will also increased by approximately $7 million.

Therefore, the all-in sustaining cost will range from $775 to $875 per ounce sold for the year. As we ramp up production through the year, we expect ASIC in the first quarter to be higher and ASIC in the fourth quarter to be lower than this range. For 2019, current gold prices were able to self-finance the ramp up to 3,800 tonnes per day, generate significant free cash flows and are targeting debt reduction of approximately $140 million to continue improving our balance sheet. Now back to you, Joe.

Joseph Ovsenek -- President and Chief Executive Officer

Thanks, Tom. With our first full-year production behind us, we're finalizing the data compilation and technical work to update the key benchmarks for the Brucejack Mine. Early next quarter, we expected to disclose updated mineral resource and reserve estimates and an updated life of mine plan for the Valley of the Kings deposit followed by an updated technical report for the Brucejack Mine. These updates will incorporate what we have learned mining and processing over 1.5 million tonnes of gold mineralization, these initial six quarters of production.

We will host a technical session to coincide with these updates and in due course, will advise of the date and time with a link to the live webcast. Before concluding, I would like to highlight the value proposition of the Brucejack Mine as it stands relative to peers in terms of cost and profitability. Here on Slide 28, we have plotted our 2018 gold production versus our all-in sustaining cost per ounce of gold sold, as well as the same metrics for some well-established intermediate gold producing peers. As you can see, Pretium stacks up well, with cost in the first quartile, even though we've only been in production a short while compared to our more-established peers.

In 2019, we will continue to focus on driving down costs and moving forward on gold production. On Slide 29, we have plotted free cash flow to enterprise value against some of our peers, which highlights the near-term upside for Pretium. We have operated Brucejack profitably since the first quarter of production in the third quarter of 2017, including the period of ramp-up during a challenging gold price environment in 2018. We are now in a favorable gold price environment and as we deliver on production and cost guidance, we expect our shares to reflect that.

Brucejack is now securely established as a profitable, low-cost, mid-tier gold producer located in Canada. We remain fully focused on consistent execution of Brucejack in order to deliver profitable gold production and meet or beat our full-year 2019 guidance. Thank you. That concludes the formal presentation.

I will now turn the call over to the operator, who will open the lines for your questions. Operator?

Questions and Answers:

Operator

[Operator instructions] Our first question comes from Justin Chan of Numis Securities.

Justin Chan -- Numis Securities -- Analyst

My first question is just on your thoughts on grade through the year. By the sound, what you expect cost to lower later in the year? Does that imply a trend in grade? Or do you have any trends that you expect to see at this point?

Joseph Ovsenek -- President and Chief Executive Officer

We would expect to see higher grade and tonnes at the end of the year than the beginning of the year.

Justin Chan -- Numis Securities -- Analyst

OK. OK. That's very helpful. In terms of the -- in terms of your stope inventory and where you are now and where you intend to be for 3,800 tonnes a day, can you just give us a sense of, I guess, just that where you stand now? And do you hope to get to about 12 to 13, and when you think you'll get there?

Joseph Ovsenek -- President and Chief Executive Officer

Well, look, we're going to be ramping up, that's why we've increased our production rate underground, development rate underground, 1,000 meters per month. So we'll be -- we are ramping that up as we speak, and we'll be giving more color on that in early April when we have our technical session.

Justin Chan -- Numis Securities -- Analyst

OK. Can I just press you for where you stand now in terms of your stopes?

Joseph Ovsenek -- President and Chief Executive Officer

Yes. Off the top of my head, I think, we're 10 to 12 right now, but we're ramping that up. We want to get ahead of that, and that's why we've increased our the underground development.

Operator

Our next question comes from Ovais Habib of Scotiabank.

Ovais Habib -- Scotiabank -- Analyst

Couple of questions on my end. And just a follow-up question from Justin I believe. In regards to 2019 guidance, you basically said, OK, throughput is going higher toward the second half of the year. And you said grades are also going higher in the second half of the year, is that correct?

Joseph Ovsenek -- President and Chief Executive Officer

Yes. We would see grade and tonnes trending up as we go through the year.

Ovais Habib -- Scotiabank -- Analyst

So basically, I mean, in terms of -- production-wise as well obviously first half is going to be weaker than the second half. But in terms of grade and if your grade is about 10.4, then what kind of grade expectations do you have for the first half? Can you comment on that, Joe, right now?

Joseph Ovsenek -- President and Chief Executive Officer

We will be in that -- it's an average, right, for the year that we're giving, OK? So we expect to be stronger in the latter half and then a bit lighter in the first half.

Ovais Habib -- Scotiabank -- Analyst

OK. And just in terms of the 10.4 grams per tonne, are you looking in 2019 to mine outside the proven reserve area, or is it still within the reserves?

Joseph Ovsenek -- President and Chief Executive Officer

At this point in time, we're pushing our development to get outside. That's one of the reasons for the increased production development rate. We need to get outside to -- we have geotechnical and ventilation constraints, various constraints on our mining, when we ramp up to 3,800 tonnes per day. And so we need to open up the breadth of the mine, east, west and depth to actually sustainably pull 3,800 tonnes per day.

So we will be moving outside of that -- well, on the slides we've had over the past, that box that we've been mining in.

Ovais Habib -- Scotiabank -- Analyst

Right, right. OK, OK. And then just in terms of reconciliation. In the press release, I mean you guys are talking about the block model was predicting around 13.23 grams per tonne.

Now, was this provided -- I mean, is this -- is it still -- this block model within the updated feasibility study that we were -- we had received, I guess, in 2016? Or this was a new kind of mine plan that you guys were, kind of, predicting going into 2018? That's all.

Joseph Ovsenek -- President and Chief Executive Officer

Well, this is the mine plan that we -- Yes, well this is the mine plan we're using, right? feasibility study mine plans are concepts put forward before you actually get underground and start mining. So that was the mine plan we were executing on, which is our actual mine plan. And if you look at the actual mine plan, stope shapes, What we mine against what the model called for. That's where you get that grade from.

Operator

Our next question comes from Joseph Reagor of Roth Capital Partners.

Joseph Reagor -- ROTH Capital Partners -- Analyst

Just a follow-up on the grade reconciliation items. So how should we look at that 90% or 92% compared to what the reported reserves are for the company? Like is that kind of a good guide of what you would expect as far as the revised reserves grades, or is there a wider range to that expectation?

Joseph Ovsenek -- President and Chief Executive Officer

Well, all we can really say about the reconciliation is that that's what you have for the areas we mined it, it doesn't speak for the areas beyond that. So we will be coming forward with some more information in April at our technical session. But reconciliation really relates to the areas we have mined in and only those areas, as you know, it's a very variable deposit.

Joseph Reagor -- ROTH Capital Partners -- Analyst

OK. Fair enough. And then thinking about the 2019 guide and, I think, it -- when we compare this to what you did last year, obviously, we're looking at 10% declining grade. Is that reflect of, in any way, that you guys, like , based on the experience you had in the second half, that you guys have taken a more conservative approach this year, and realizing that the variability can cause a wider range of outcomes? Or is that based off the similar math of how you guys came up with expectations for the second half of last year?

Joseph Ovsenek -- President and Chief Executive Officer

Good question, Joe. We believe we're being prudent with our guidance for 2019.

Operator

Our next question comes from Heiko Ihle of H.C. Wainwright.

Heiko Ihle -- H.C. Wainwright -- Analyst

Hello, guys, can you hear me?

Joseph Ovsenek -- President and Chief Executive Officer

Yes, we can hear you.

Heiko Ihle -- H.C. Wainwright -- Analyst

OK .Sorry about that. I am at an airport and there is crazy amount of noise. With even the permit for production, you said, you started the year off at about 3,000 tonnes per day, ramping up to 3,800 tonnes per day. It's mid-February right now.

Where were we on January 31? Where do you think we'll be at the end of February and where do you think we'll be at the end of March, please?

Joseph Ovsenek -- President and Chief Executive Officer

We're running north of 3000 tonnes per day right now, but we've got scheduled shutdowns and doing some work in the mills and cut over to the offloading of the flotation concentrate. So we're running at north of 3,000 tonnes per day at the moment, but we do have some scheduled shutdowns in that over the quarter. So we will see where we come out at the end of the quarter.

Heiko Ihle -- H.C. Wainwright -- Analyst

Can you quantify that number just a little bit more exactly?

Joseph Ovsenek -- President and Chief Executive Officer

We're right -- I think at the end of January, remember, we're running about 3,300.

Heiko Ihle -- H.C. Wainwright -- Analyst

OK, perfect. And you mentioned the target of debt reduction, but you're using $1,250 gold and a 0.78 exchange rate. I mean, let's say we stay at $1,320 gold, where does the excess money go? we're going to drill that into the ground or we're going to pay back more debt? What's your thoughts?

Joseph Ovsenek -- President and Chief Executive Officer

I'll say, it's a good question. Our focus is in paying off debt. But I do throw in the caveat there, if work is successful in drilling deep holes and hitting that porphyry and we get some nice results. We'll want to follow up on that.

So we have some flexibility there, but our primary focus, over the next couple of years is going to be paying down debt and deciding whether we put in a dividend policy or shareholder buyback -- share buyback. But that's -- those are the primary uses of the cash in hand.

Operator

Our next question comes from Dan Rollins of RBC Capital Markets.

Dan Rollins -- RBC Capital Markets -- Analyst

I know the focus is on grade, but I think the free cash flow potential is being missed by the market today as it was last year. But maybe just quickly on that to try and tighten up the cost that we're modeling here. Could you, sort of, give us an idea of what you're modeling on, on unit basis in Canadian dollars for mining, milling and G&A for this year? And then, maybe what type of direction you see once you've got the underground sort of that steady-state 3,800 tonne a day?

Joseph Ovsenek -- President and Chief Executive Officer

Dan, we'll have -- Tom's going to take it on that way.

Tom Yip -- Chief Financial Officer

What, Dan. What I can tell you is that, in 2018, we were running approximately, well, $210 per ounce -- or per tonne in US dollars. And we'll be trending down because we have higher throughput. So we'll probably see slightly less, within or above $200 per tonne.

If you want a split of where we're spending, it's primarily, mine is about 50%, processing and maintenance is about 20% and general services, which includes surface operations, drills what have you, that's sort of your 30% total. That's sort of roughly where we're at these days.

Dan Rollins -- RBC Capital Markets -- Analyst

OK, perfect. And can you just update us based on what you're seeing right now, when do you expect one, to start paying the BC Mineral Tax; and two, when you expect to be fully taxable on a corporate income tax level?

Tom Yip -- Chief Financial Officer

Well, the BC Mineral Tax, we're paying the lower rate of 2%, and we've got significant pool. So it will be several years. It'd be three to four years at least before we see the higher number kick in, in addition to the federal and provisional rates will be altered in our cash basis also.

Dan Rollins -- RBC Capital Markets -- Analyst

OK, perfect. And then just on the targeted debt payment, I'm assuming that's going to be back-end loaded with respect to both production and when the grades come up?

Tom Yip -- Chief Financial Officer

Yes. So there are also a lot of mandatory quarterly payments that we have to make also so...

Joseph Ovsenek -- President and Chief Executive Officer

We're generating cash throughout quarters, which we'll be looking at debt repayment.

Operator

Our next question comes from Anita Soni of CIBC.

Anita Soni -- CIBC -- Analsyt

My question is with regards to the grade profile. I would've thought coming off of 11.5 grams per tonne material that there would have potentially been a blend down if you go into the further zones that are, as you mentioned, were sort of constrained by rock mechanics and ventilation issues. So can you talk about what the rock mechanic or geotechnical constraints are and the ventilation constraints that I can understand what's going on?

Joseph Ovsenek -- President and Chief Executive Officer

On the ventilation side, we can only operate so much equipment on any given level at any given time, and we also have drilling going on. So we're producing a lot of exhaust at depth. We're not yet. And so we're working on that.

We have our mine sequencing to worry about with geotechnically. We can't be mining a couple of stopes close to each other so just pasting between, that's not going to work. So we're working within constraints like that as we're trying to open up the ore body to the east and west and at depth.

Anita Soni -- CIBC -- Analsyt

So to understand, you actually have basically a 3,500 or 3,300 tonne opened up, right? But it's just up matter of being able to mine these and fill the mill in sequence?

Joseph Ovsenek -- President and Chief Executive Officer

Yes. We're running at roughly that, but we want to get to the point where we were sustainable at that. Because at this point in time, we're pushing a lot of stopes through, and we'll see how that goes. Because we want to really get ahead.

Because the last thing you want to do is, once you get behind underground, you're in trouble. So we're trying to push what we can but not push too hard while we open things up.

Anita Soni -- CIBC -- Analsyt

And then I just wanted to follow up. I think, someone already asked the question in a different manner. But the 10.4 gram per tonne material, does that incorporate any kind of conservatism given your grade reconciliation update? Or is that based on the prior reserve estimate? And what that -- those areas would give you from a geological model perspective?

Joseph Ovsenek -- President and Chief Executive Officer

Well, we looked through our model, and now we've got our mine plan for the year, and we believe that guidance is prudent.

Operator

Our next question comes from Bhakti Pavani of Alliance Gold Partners.

Bhakti Pavani -- Alliance Gold Partners -- Analyst

Well, most of my questions have been asked. So just kind of a housekeeping question on sustaining capital. You did mention there's going to be a one-time sustaining capital of $15 million. Just kind of wondering from the modeling perspective, how is that expenditure going to trend over the quarters? And going forward, what would be the ideal model?

Tom Yip -- Chief Financial Officer

The spending profile of the sustaining capital is pretty much sort of midyear focused because we like to do our construction projects during the summer months. The reason why we identified these as one-time is that we don't think that these will be manageable. So if you assume that going forward, we wouldn't have these items anymore, our sustaining capital will be reduced accordingly going forward.

Bhakti Pavani -- Alliance Gold Partners -- Analyst

I believe once you are ramping up your underground development from 700 meters to 1,000 meters. And with the increased production up to 3,800 tonnes per day, I'm assuming that development rate would be required going forward?

Joseph Ovsenek -- President and Chief Executive Officer

We will see how the development rate comes out. We're working through the mine plan right now. I would expect that as we get ahead and get built -- things built in that you should see the development rate fall off somewhat. And we will have more information on that at the technical session in April.

Operator

Our next question comes from Mark Magarian of UBS Financial Services.

Mark Magarian -- UBS Financial

A lot of questions have been answered, but I guess, as the market is showing, there is obviously still a lot of uncertainty and it sounds like in April, you are going to clean some of that up. But my key question here is in -- you say in your presentation and you said in -- earlier in the call that 2019 gold grade is not representative of the life of mine grade. Can you give an indication, even at this stage before the detailed one in April that that statement implies that one should expect the life of mine grade to be higher than 10.4 or potentially lower?

Joseph Ovsenek -- President and Chief Executive Officer

I can't really get into that, Mark. We're working on the reserve update now, and we will have it for -- the target is early second quarter, and we're pushing hard on that. And we will provide -- we are going to open things up, provide a lot of information on reserve, resource, geology, mining initiatives and all kinds of things come early April. So can't comment on it now, but we will provide a lot of commentary in one and a half, two months.

Mark Magarian -- UBS Financial

OK. Has there been any requests of site visits in the last couple of by any of the majors?

Joseph Ovsenek -- President and Chief Executive Officer

Sorry, we don't comment on possible M&A-type activity.

Operator

Our next question comes from Onno Rutten Mackenzie Investments.

Onno Rutten -- Mackenzie Investments -- Analyst

The press release talks about a 2018 planned grade of 13.2 grams and 999,000 tonnes. Could you tell me what the reserve in that envelope. What's predicting the December 2016 reserve block model? When you put those stopes into that block model, what was the predicted tonnage and grade based on the 2016 reserve?

Joseph Ovsenek -- President and Chief Executive Officer

What we have is, what those stope shapes came out with, right, against the model, and we cut the model in to those stope shapes. I don't have -- I can't give you -- I'll have it for you come April or sooner, what the reserves called for, for the stopes design, right? So we're giving reconciliation against what was actually extracted, based on CMS scans. And so I don't have the stope shape defined into that.

Onno Rutten -- Mackenzie Investments -- Analyst

But just to be clear, the 999,000 tonnes at 13.2 grams were based on a certain mine model. As you stated earlier in response to the same question, you said that's an operational mine model. But that is not the reserve model, just to be clear?

Joseph Ovsenek -- President and Chief Executive Officer

It was a 2016 model, right, that we updated following feasibility study. I think in this way if you look out -- something.

Onno Rutten -- Mackenzie Investments -- Analyst

Joe, Joe, I think you have a significant reserve, you have a proven and probable reserve that's what you need to reconcile to. The reconciliation data in your press release is not of any use to us.

Joseph Ovsenek -- President and Chief Executive Officer

Our reserve reconciliation was pretty much bang on with our resource reconciliation.

Onno Rutten -- Mackenzie Investments -- Analyst

Sorry, can you elaborate?

Joseph Ovsenek -- President and Chief Executive Officer

If we look at numbers that, I don't have the exact number of the reserve reconciliation, we ran it both ways. The global resource model is what we work against coming out of 2016. But we ran it against the reserve, as well as the resource and the numbers were pretty much bang on.

Onno Rutten -- Mackenzie Investments -- Analyst

So you suggest to me that the reserve model was for this area of mining was suggesting one million tonnes at 13.2 grams?

Joseph Ovsenek -- President and Chief Executive Officer

Pretty much, exactly. If we had better reconciliation, we would achieve guidance.

Onno Rutten -- Mackenzie Investments -- Analyst

Yes, but guidance was based on your operational mine model not the original 2016 reserve model?

Joseph Ovsenek -- President and Chief Executive Officer

Coming into the year, it was based on the 2016 global resource model, because we didn't get the grade control model up and running till later in the year.

Onno Rutten -- Mackenzie Investments -- Analyst

Joe, the resource model is none of use to me. It's sort of -- we mine to reserves, we don't mine to resources.

Joseph Ovsenek -- President and Chief Executive Officer

Correct, but what I'm saying is, it was based on our 2016 global works. So we had our 2016 resource model. A reserve model is based on that, which we then provided guidance on. And then as we developed through the year, we refined a grade control model that we operate on today on a short-term basis.

Onno Rutten -- Mackenzie Investments -- Analyst

But the 13.2, one million tonnes is based on the short-range mine model? This...

Joseph Ovsenek -- President and Chief Executive Officer

No. No, because it was based on the overall reserve model coming into the year.

Onno Rutten -- Mackenzie Investments -- Analyst

And the facts that the actual published proven because of was 14.5 grams and the probable 16.5.

Joseph Ovsenek -- President and Chief Executive Officer

16.6, I believe, correct.

Onno Rutten -- Mackenzie Investments -- Analyst

Yes. But I'm trying to understand the 13.2.

Joseph Ovsenek -- President and Chief Executive Officer

Those were the stope shapes we mined during this year. Remember, it's not a consistent grade throughout that area we're mining, so it's a very variable grade. And so taking the stopes that were available for us to mine on the various levels, subject to all the constraints we operate in at any given time, those were the stopes that were available. And that was the grade given to those stopes by the reserve model, as well as resource model.

Operator

Our next question comes from Steve Emerson of Emerson Investment Group.

Steve Emerson -- Emerson Investment Group -- Analyst

Not to beat a dead horse, but on the grade, can you put a range. I know you're trying to be beat and -- meet and beat guidance, but would you care to put a range around that 10.4? And does that incorporate possible improvement? And what improvement might be reasonable for the longitudinal mining trial?

Joseph Ovsenek -- President and Chief Executive Officer

Good questions, Steve. That's an average grade for the year, so we're going to beat up and down on that. Lower early on, higher later on. I can't really give you a range.

But that longitudinal mining, that is a very important thing we're looking at, long-hole stoping. We're going to present on that in when we have a technical session in April and look at the initiatives as we kick off. We're going to be running a few test stopes longitudinally this quarter. We're opening up part of the deposit for longitudinal long-hole stoping.

And so we will provide more information on that how the geology looks, as well as how the reserves are looking and how that all fits together with longitudinal mining come April. So we have a lot of information we want to talk about then, and that will be a good part of it. I think that's a big part of the future of the mine.

Steve Emerson -- Emerson Investment Group -- Analyst

OK. And I would assume that the -- your grade forecast does not include application of longitudinal mining?

Joseph Ovsenek -- President and Chief Executive Officer

You're correct. That is simply based on the existing mine plan with transverse long-hole stoping. So none of the benefits from longitudinal mining are worked into it.

Steve Emerson -- Emerson Investment Group -- Analyst

And what grade first half is reasonable versus second half? You said it would be lower in the first half.

Joseph Ovsenek -- President and Chief Executive Officer

I can't really comment on that, Steve, but it would be lower and higher in the second.

Operator

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Ovsenek for any closing remarks.

Joseph Ovsenek -- President and Chief Executive Officer

Thank you, everyone for dialing into our earnings call this morning. We appreciate all the comments and questions. Have a good weekend, everyone. Bye bye.

Operator

[Operator signoff]

Duration: 51 minutes

Call Participants:

Joseph Ovsenek -- President and Chief Executive Officer

Tom Yip -- Chief Financial Officer

Justin Chan -- Numis Securities -- Analyst

Ovais Habib -- Scotiabank -- Analyst

Joseph Reagor -- ROTH Capital Partners -- Analyst

Heiko Ihle -- H.C. Wainwright -- Analyst

Dan Rollins -- RBC Capital Markets -- Analyst

Anita Soni -- CIBC -- Analsyt

Bhakti Pavani -- Alliance Gold Partners -- Analyst

Mark Magarian -- UBS Financial -- Analyst

Onno Rutten -- Mackenzie Investments -- Analyst

Steve Emerson -- Emerson Investment Group -- Analyst

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