Centamin plc (CELTF) CEO Andrew Pardey on Interim Results - Earnings Call Transcript

About: Centamin plc (CELTF)
by: SA Transcripts
Subscribers Only
Earning Call Audio

Centamin plc (OTCPK:CELTF) Interim Results July 31, 2019 3:30 AM ET

Company Participants

Andrew Pardey - Chief Executive Officer

Ross Jerrard - Chief Financial Officer

Alexandra Carse - Investor Relations Officer

Conference Call Participants

James Bell - RBC Capital Markets

Dan Shaw - Morgan Stanley

Justin Chan - Numis Securities

Alan Spence - Jefferies

Andrew Pardey

Okay. Thank you. Okay. Good morning, ladies and gentlemen. Joining me on this call this morning is Ross Jerrard our Chief Financial Officer; and Alexandra Carse our Investor Relations Officer. Thank you all for taking the time to dial into our Interim Results Webcast and Conference Call.

For those participating through the conference call, the presentation can be found on the website. And for those who wish to follow via the webcast, the link can be found in the interim results announcement published this morning on the LSE and TSX at 7:00 AM U.K. time this morning. Slide number two, here you'll find our disclaimers and forward-looking statements. Please do take your time to digest these in your own time they can be found within the announcements and here on the presentation.

Moving on to the next slide. I'd like to commence today by stressing how we believe Centamin offers a unique investment proposition. Centamin maintains a strong balance sheet of $327 million cash with no debt. And importantly, we have a no hedging policy. As a gold miner, our focus is on extracting processing and producing gold responsibly and cost effectively -- as cost efficiently as possible, maximizing margins and subsequently offering investors pure equity exposure to gold price, combined with leading market shareholder returns and attractive valuation upside.

As you will have seen today, we've announced an interim dividend of $0.04 per share, equal to U.S.$46.2 million. This brings our total cash dividends and return to shareholders to $500 million over the last six years. Importantly, it's all about quality ounces and delivering free cash flow and importantly shareholder returns. This is the sixth consecutive interim dividend declared. Again, I'll reiterate we have now paid a total of $500 million out to our shareholders over the past six years.

Moving on to the next slide. 2019 gold production and cost guidance. The first half of the year was a solid half. Operationally, this delivered 45% of the total ounces, as we guided and that's in line with our market guidance. Costs are in line with guidance and expect to trend towards the lower end in the second half of the year.

We've also had good success in our brownfield and greenfield exploration programs and H2 is scheduled to be a stronger half with the open pit delivering approximately two-thirds of the ounces as the high-grades are delivered through stage four and as I said previously, on the operational update earlier in the month through the Hapi zone.

Okay. Moving on to our baseline three-year outlook. We've provided a baseline guidance of 510,000 to 540,000 ounces for 2020 and 2021. Our cash cost of production of $630 to $680 per ounce and an all-in sustaining cost of $870 to $930 an ounce. The baseline estimates underpin the solid foundation of the business model and do not include the impact of near-term upside drivers.

Baseline estimate is all about profitable ounces. Our focus and objective is on driving the upside and maximizing the output of cost-efficient ounces, driving margins, profitable ounces and ultimately free cash flow leading on to shareholder returns. It's all about quality over quantity.

Again, the three-year outlook. H1 of this year is in line with the budget. And we're on track to deliver our full year guidance on both production and costs. H2, costs are expected to trend lower towards the bottom end of the annual guidance range, should we've increased production. And as a forecast, declining unit all-in sustaining and cash costs through to 2021 in line with the increasing production profile. Again, the operation at Sukari is the Tier one asset, it's in a very solid position to keep continuing and improving on shareholder returns.

Moving on to the next slide, the ESG review. H1, 2019, we're delivering on our ESG initiatives. Environmental no major incidents recorded, very, very good use of recycling water and ensuring this continues to minimize any external water usage wherever possible, continued reduction in water levels in our tailings dam. We're in the process now of finalizing the solar feasibility study to reduce reliance on fossil fuels and reduce our CO2 emissions.

On the social side, H1 the group lost time injury rate was 0.42, which for us is disappointing and our target is zero-harm. We've also got a partnership with GIZ in Cote d’Ivoire providing bottom-up agricultural skills and resources across the local communities where we are operating in Cote d’Ivoire.

Governance side Board succession program, we've appointed Dr. Sally Eyre as an Independent Non-Executive Director. And there's a very active process underway to identify three further NED's by the 2020 AGM. Again, Board committee review refresh and rotation is in line with the U.K. Corporate Governance Code.

Further on, delivering our sustainable development goals good health and well-being and providing access to water and sanitation across the areas that we're working in both West Africa and Egypt, education and workplace development, building classrooms, providing training and development also offering university scholarships both through the Camborne School of Mines and through the University of Alexandria in Egypt.

Importantly, also clean energy feasibility study to build a 40-megawatt solar farm to carry in Egypt as part of the partial power solution, significantly reducing our reliance on fossil fuels and CO2 emissions. And again, economic growth and local development with the local communities.

With that, I'd like to hand over to Ross for the financial review of the presentation.

Ross Jerrard

Thank you, Andrew. Turning to page 11. We ended the half with a strong and flexible balance sheet that underwrites our robust financial strategy. Cash and liquid assets continue to build and were $327 million at the end of the half. In a year, where we flagged higher costs driven by throughputs and inflationary cost pressures, we continue our focus on cost management, improving efficiencies in the supply chain and maintaining our unit rates in light of the increased volume and material movements when compared to the previous period.

Our capital allocation both sustaining and non-sustaining are on track and within budget at the half. And importantly, I'm pleased to report free cash flow for the half of $36 million which is significantly up quarter-on-quarter and in line half-on-half. This has ultimately meant that we've been able to continue to achieve our core objectives of returning surplus capital to stakeholders both in terms of profit share royalties in our host country Egypt of $48 million and also our Centamin shareholders in the form of an interim dividend of $0.04 per share or $46 million.

Talking to some of the financial highlights. Although our gold -- Apologies for that. If we're back online I'll refer you back to page 12. And I'll go back onto the financial highlights. Although our gold sold ounces are down when compared to the previous half, we did have a larger-than-normal balance of gold and safe at period-end due to the timing of gold shipments. There were 19,000 ounces held in the safe at the end of June.

With a 2% lower ounces sold and an average realized gold price decrease and the increased cost base that we had flagged predominantly driven by the volumes move as well as local cost pressures, we finished the half at a 5% reduction in operating cash flow, but pleasingly had an adjusted free cash flow number almost exactly the same on the prior period.

Focusing a bit more on our cost, our mine production costs were up 11% primarily driven by [indiscernible] in increase in total material mine and a 6% increase in ore process. Our absolute cash costs were up 17% year-over-year, which I'll explain in a minute with our stockpiles. Although up year-on-year, these are within budgets and we are on track. Importantly, the capital expenditures matched with cash flows where at all possible, which does drive some of the movements of variability you see quarter-on-quarter.

I would highlight that whilst we have made inroads in our cost-saving initiatives there are still further savings to be made both in 2019 and beyond. We are targeting a 12% reduction in operating costs in the near-term with a no-savings-too-small approach and we have confidence in achieving these savings and our team is driving new initiatives and we'll add further momentum in this area.

Page 14 lays out our cost reconciliations half and half which shows the increased consumption, volume and throughput rates, which were partially offset by some of the pricing gains. I do highlight the change in inventory in the second last column of the chart. This year we had a much -- this period we had a much smaller credit attributable to mining inventory movements compared to comparative periods.

I'd refer you to the financial statements and non-GAAP measures which reconcile our mine production costs to cash costs where you'll see the movement against prior periods. Basically we had a $20 million credits in H1 of 2018 compared to $13.6 million credit this half and therefore the $6.4 million movements half-on-half that you see in the diagram.

Slide 15 provides a volume analysis and shows how the increased volumes mined and processed affect the business. This is a rolling comparison there is a breakdown of our mine production costs across the business with processing and open pit driving the quantum of spend at 50% and 35% respectively.

Our core key unit cost metrics pleasing trend across these three primary areas, open pit, underground, and processing. The standard breakdown of our cost base shows limited durability. I won't talk in detail as the positions are very consistent.

I would highlight that the Egyptian pound has strengthened against the U.S. dollars in recent months and we will be monitoring this closely as we close out 2019. Only 6% of our EGP cost base is non-U.S. dollar-linked as a large part of the EGP is fuel which although paid in EGP is priced in U.S. dollars.

With our disciplined capital, we ensure that our spend is aligned with cash flows and the self-funded organic growth pipeline. In H1, we spent $48 million in sustaining and non-sustaining with a further $10.5 million spend in West Africa.

The majority of the spend was on underground and fleet rebuild programs and our exploration spend in West Africa and non-sustaining categories. Our outlook for the second half is consistent with this profile and we will be on track with our guided numbers.

The $327 million in cash and liquid assets on our balance sheet. The balance sheet remains strong and very keen. We have no debt hedging gold loans or streams. And importantly we have a balanced cash flow distribution return contributions to operating countries our shareholder returns and allocation of funds to investing in the future.

Our corporate strategy remains clear and consistent creating tangible return through maximizing value on current operations, whilst at the same time, also progressing future growth prospects.

Slide 19 shows our cumulative dividends against the backdrop of our cash and cash equivalents and our competition for capital with cumulative direct investment of $4.2 million -- billion we have paid $450 million to EMRA profit share and royalties and equally paid our shareholders $500 million this year through our 4% interim dividend today.

Our strategy going forward is producing valuable ounces that maximize cash flows. We can all see the impact of volume variances that both material mine and process and the flow on impact on consumption rate and cost base has had on us this year.

We remain focused on getting the optimal balance of producing gold ounces at the best possible margins that creates the best cash flow results and ultimately, support this sustainable dividend policy.

And with that, I'll hand it back to Andrew.

Andrew Pardey

Okay. Thank you very much Ross. Moving on to the operational review on Slide number 21. You'll see this -- I know most of you are familiar with Centamin and Sukari. This is a long section the new graphic and it's really encompassing all facets of the Sukari operation.

I'd like to draw your attention to the current mined out pit which is the light brown colored area. And then below that there's the final Stage 4 pit which comes down through into the yellow geological zone which is the Hapi zone. Hence where the underground first started in the upper Amun areas and that Hapi zone continues to the Stage 5 pit that comes down and that's why the open pit is the primary ore source for the remainder of this year and going through into 2020 and part of 2021. Just to demonstrate to you mining for the Hapi zone et cetera consistency and good growth to be coming out of the pit.

Importantly, the diagram also shows the Stage 6 open pit and then the Stage 7 longer term open pit and also in green is the existing underground infrastructure. And you can see on the right-hand side of the screen, the Amun development and that's continuing to drive down towards the Osiris area. And then in the Central area you've got the Ptah development and then the structures with further drilling to be done from Ptah and importantly up on the top left-hand side is the Cleopatra level development that has been put in for drilling access and then that decline the Cleopatra decline progressing further down but heading towards the Julia structure where further drilling will be undertaken.

Okay. Moving on to the next slide in the operational highlights as Ross has discussed in 2019 volumes have increased across all sections of the operation. This has been balanced with strong cost control. And as we guided at the beginning of the year, we would be mining more material, but we've got a very stringent controls in place so that we're maintaining our unit costs at very good levels.

Okay. Moving on to the next slide. This is really talking about the open pit. Again, I talked about it on the previous call. The open pit is the foundation of the operation at a greater than 15-year mine life. For 2019, we forecast quarter-on-quarter growth which is driven from the open pit, as the grades improve with depth down into the Hapi zone.

And the slide above shows the areas where we will be mining for the remainder of this year and the predominant ore source is coming from the area that's circled on the bottom right-hand section of that slide. And that's really the western wall of the pit progressing down into the Hapi zone.

And then you've got the two Northern mines Stage 4 and Stage 5 they are progressing down they will drop down over the course of this year and next year to maintain further access to the Hapi zone ore whilst stuff on the top part of that area Stage 5 that's -- for 4 CapEx development that also progresses as part of the longer-term development strategy for the open pit.

Moving onto the next slide. This summary view pretty well talked about this already previously increased mining rates compared to previous years, the stripping that's going on and the ore delivery that's coming from Stage 4 pit and maintaining that high-growth that will come through in the second half of the year for the open pit.

Moving on to the underground and the total production from the underground in H1 was 580,000 tons at a grade of 5.53 as I said previously on the previous call the important thing was the stoping grade so stoping grades have improved. We have a stoping grade of 7.74 for the quarter. Ore development tona were increased the grade was lower because there was a lot of decline and level development that had forecast to be in waste and it was actually in mineralization above 2 grams a ton so it reports to the ROM pad as ore.

Importantly, there was over 4 kilometers of decline ore driving cross-cut development ensuring that the underground continues to progress forward. So as well as stoping now the plan development is in place for stoping for the future of the underground. I did say during the call, the previous call as well we've had a delay in some of the areas the 635 and the 650 Amun -- upper Amun areas that's only one part of the stoping where we had some geotechnical issues which impacted secondary access at the end of Q2.

That remedial work is underway and the work is on schedule and will be completed during Q3. Expectation is that work will be completed at the end of August. This has no impact on the guidance for the year it delays the sequencing of four of the stopes in the upper Amun area, but meantime we continue to stope in the lower Amun area and across in the Ptah area as well.

Moving on to the next slide again this is a long section view. It's showing the three core areas for development, mining and also drilling in the Sukari underground. Obviously, the right-hand side of that slide is showing the lower Amun areas going through into the top of Horus development and drilling. The central areas Ptah production and development as well. And again you can see below the Ptah with the heat map that's very high-grade areas sitting in the Porphyry-Keel.

And then across on the left-hand side the Cleopatra development and importantly drilling. We completed over another 4,000 meters of drilling in Cleopatra. Those results are starting to come back through. We're now being able to -- over the next half of the year develop a really strong picture of that future and the way we take Cleopatra forward.

Next slide, processing plant. We had a plant throughput of 6.6 million tonnes, plant availability was very good and the head grade through to the plant at 1.22 grams per tonne.

It's maintaining throughput for 2019, maintaining throughput at/or above 12.5 million tonnes per annum, improved head grades it's being driven year-on-year and in particular being driven by the open pit mining that will come through in the second half of the year and carrying through into 2020 as the Stage four and Stage five CapEx continue.

On the exploration pipeline very, very quickly. We've got our organic growth profile which everyone is aware of. We've got Sukari exploration development, Sukari underground drilling and development, the Cleopatra decline access development for further drill platforms and drilling final pit shells and also testing further the Cleopatra and the Julius structures and some of the deeper drilling into the Ptah Deeps.

We also have the Sukari regional work with 2D seismic survey. That work commences on-site on the 25th of August. And that's certainly going to create a new pitch for us not only targeting Sukari and the Sukari resource at depth, but also the surrounding areas as well.

Outside of Sukari, we've got the Doropo project. Drilling during H2 is really focused on further resource development on the resource and resource extension. And then we have the ABC Greenfield exploration project that's targeting resource growth and it's testing in a regional scale structural extensions and further early stage exploration.

Moving on to the next slide, again this is a -- highlighting various -- the high-grade intercepts that have come through from Sukari. The blue numbers are H1 results. And the -- sorry Q1 results and the red numbers are Q2 results.

And again you can see there's good consistent grades coming from various areas from both the Cleopatra area Ptah, where you've got grades ranging from into gram 7 intercept 7 meters at 7.99, 0.35, 135 grams per tonne etcetera all -- both within and outside of existing resource areas.

And then importantly as well the Horus intercept down at depth. There is two meters at 43 grams per tonne, it's 5 meters of 5.2, 0.5 of meter at 14 grams, 0.4 of meter at 69 grams per tonne, 1.7 meters at 7.31.

And the exciting part about those lower Horus results they're all in excess of 400 meters below the current base of the M1 decline development pointing out to the long-term sustainability of the underground resources Sukari, underpinning also that the plus 15-year mine life we had from the open pit.

Sukari regional -- Sukari Deeps and regional I have spoken briefly about the seismic survey getting underway at the end of this month end of August. And that will highlight a lot more both Sukari exploration on the hill itself of depth, but also the surrounding structures and we are also progressing out and doing more exploration in the surrounding areas of Sukari, V Shea, Quartz Ridge, Semi South, Kurdeman and that's all part of the profile for further looking at further high-quality new surface ounces that can be also delivered to the processing plant in the coming years.

Until now the exploration of Sukari has really – but then still is the main focus is on Sukari underground, but we've also brought in an additional two surface draw rigs that have now commenced drilling at Sukari on the surface to really get further surface grades.

Moving on to the next slide advanced exploration, we did over 21,000 meters of RC drilling, a similar number of aircore drilling. That drilling has been focusing on strike extensions of Souwa, Nokpa and Tehini and also the slide below shows the han structure of the current model and then we've had further extension from that drilling extending that model further by another 250 meters. That's all within that 7-kilometer radius.

That resource work update is underway along with resource updates for Sukari that have also commenced. And we'll be in a position to provide progress further that PEA on the Doropo project.

I've spoken briefly already about the greenfield project much earlier stage projects. But again, that is progressing well, and gives us strength to our exploration internal pipeline that we have.

So, in summary, our investment case is robust underpinned by strong fundamentals. We have a reliable dividend stream. We've returned $500 million to shareholders. We have a quality asset portfolio. Sukari is a Tier 1 asset, has a 10-year operational track record, has a life of mine in excess of 15 years, and in a low cost environment.

We have a robust financial strategy, no debt, no hedging, self-funded organic growth, reinvestment to sustain the core asset for the longer term, stringent cost management. We have growth through the value chain, resource upside across the entire asset base, maximizing operational efficiencies. And we are a responsible corporate citizen, targeting zero-harm, a strong emphasis on workplace training and development, core ESG values, strong government relations and committed to achieving the best practices for HSES and ESG.

So, in summary, delivering performance, continuing to optimize performance of Sukari, including stringent cost management, unlocking value through the organic growth pipeline and strong -- maintaining our social license to operate, continued focus on workplace safety delivering Sukari solar project, board succession plan and the appointment of further NEDs before the next AGM. And importantly, also continuing to grow and ensure that we deliver strong returns for our shareholders.

And with that, I'd just like to close and hand back to the operator for any questions that you may have. Thank you.

Question-and-Answer Session


Sure. [Operator Instructions] So our first question today comes from James Bell of RBC Capital Markets. James, your line is open.

James Bell

Yes. Good morning and thanks for the call. Just a question on dividends. Obviously you're paying out more than your H1 free cash flow, so how should we think about the final dividend? And looking ahead, if there are no alternatives for investment, how do you think about the cash above that $100 million sort of cash minimum? Should we think of that as being returned as the sort of top-up on asset free cash flow over time?

Ross Jerrard

Andrew, would you like me to take that?

Andrew Pardey

Yeah, go for it Ross.

Ross Jerrard

Hi, James. So firstly in terms of the interim dividend, it was above our free cash flow level. It was really the assessment of our capital allocations. And basically anything that is excess to what we believe is required will be distributed there. It's an important consideration on this is that it's a sustainable stream. So, when you look forward in your question on the full year, I guess the answer is we wouldn't expect the full year to be less than what we were paying as an interim, and it's very much results driven.

And then as we look forward in terms of our capital allocation, any excess above that $100 million. So we've always spoken about $100 million plus $150 million growth opportunity. We need to put that $150 million war chest to work, and to the extent that there isn't opportunity out there in terms of investment it will be allocated back, but this might be short-term or near term initiatives both in the current assets as well as M&A.

James Bell

Okay. I mean is there a decision point around that? Because obviously, it's a pretty large war chest as you say. Would there be a decision point where there we got to full year next year, you would say, well, actually we can give an extra x back? Or is it something which you're going to basically monitor over the next couple of years? Is it sort of a longer-term return on that?

Ross Jerrard

Yes, it's trailing opportunities. John Singleton has joined us as Head of Business Development. We're going through screening opportunities with him. But we're continually assessing and monitoring in terms of as that cash builds or gets distributed in forthcoming years that will be a rolling position, but there will be times where we'll draw down into it in the absence of anything else and at the times that we will build.

James Bell

Okay. Make sense.

Andrew Pardey

Our intention is not to hang on to excess cash. If we haven't got a home for the excess cash, it will be returned to our shareholders.

James Bell

Okay. Very clear. And then just secondly on the baseline outlook for 2020 and 2021 does that include the 12% targeted cost saving or not? And then if you could maybe just give a little bit of a feel of where you think the underground grade may come out for those forecast production numbers given the recent kind of volatility we've seen in the last couple of years now?

Ross Jerrard

Addressing the cost the 12% needs to be built into that forecast. So we put out those numbers but there is upside opportunity across our whole base – cost base in Jeremy, can talk to this in due course. As we exit the year, but we believe there's a lot of cost initiatives and value extraction in terms of the current base as well as additional projects that will come online and the big one will be further into 2021.

Alexandra Carse

Okay. And just on the underground grades in those forecasts we are forecasting underground grades through 2020 and 2021 in the vicinity of six to around 6.5 grams per tonne. They're not ultra-high grade they're consistent grade going through model stoping sequences et cetera.

James Bell

Okay. Makes sense. And then I guess just one more, if I can on that. I mean if you look at where your reserve grade is versus that? I mean, you're comfortable that that is achievable? Or are you feeling like those grades –

Alexandra Carse

Very much so James. If you remember the underground well you've got the reserve grade from our stoping et cetera. You've also got development continuing on all the time as well. And there is no intention to stop development as you see – if you look at the presentation and you see the drill results both within and nearby resource areas and at depth it's important that the underground development continues for the longer-term future of the underground mine.

James Bell

Okay. Make sense. Thanks.


Our next question today comes from Dan Shaw of Morgan Stanley. Dan, your line is open.

Dan Shaw

Hi. Thanks for taking my question. Just one I suppose follow-on from James' first question. You talked a lot about organic growth opportunities in the presentation, but you didn't touch on or say much on potential M&A opportunities, which seems to be a bit more relevant given the small stake purchase that you did during the first half. Can you just remind us how you're thinking about M&A as part of your overall capital allocation framework? Would you prefer to buy something that was already operating? Or would you prefer to buy more exploration properties that you can develop yourself? How are you thinking about that?

Alexandra Carse

We have a very strong internal exploration pipeline through ABC early stage in Cote d’Ivoire Doropo further exploration and near-term opportunities for the Doropo project, plus we've got further organic growth and exploration in Sukari both Sukari Hills, Sukari Underground and also conducting going back into some more regional exploration on the Sukari concession area. But internally we have a great exploration portfolio pipeline that we can certainly – with the right results can deliver us organic growth.

Other opportunities we continue to look for other opportunities that would be a fit for the organization. And look ultimately, it comes down to what is going to be profitable. What is going to deliver the best returns for our shareholder's. Operationally, it will be nice to have another operational something that's not far off from coming into production. But it all comes down to it's got to be value accretive and it's got to be quality, quality ounces over quantity and ensuring we are delivering our free cash flow and shareholder returns.

Dan Shaw

Okay. Thank you.


Our next question today is from Justin Chan from Numis Securities. Justin, your line is open.

Justin Chan

Hi. Thanks very much for hosting the call. Just as a follow-up to James' question on underground grades, are you expecting similar grades from stoping through that period and the development grade comes up a little bit? Or can you just give us more detail on the profile there? And my second question is on CapEx within the guidance window period. I guess, how much of stoping -- or sorry how much of stripping for Stage 4 and 5 comes into all-in sustaining cost versus how much do you expect to capitalize?

Alexandra Carse

Okay. Just -- I'll talk about the grade part of the underground as I said 2021, we forecast overall grade from the underground of between 6 and 6.5 grams per tonne. That is predominantly made up of 55% stoping and 45% development. Development is a mixture of ore drives stoping access, which is high-grade development, because it's along the structures. And then there's also cross cuts and access, which are lower grades coming through the porphyry. So when it's split out when I'm talking about six to 6.5, you'll see higher grades will come from stoping and the development grades will vary depending on where you are in the sequence, but development grades will be variable between 2.5 and four grams per tonne.

Justin Chan

Okay. And I presume the -- I guess over the two years, you just average it out essentially between 2.5 and 4?

Alexandra Carse


Justin Chan


Ross Jerrard

Justin, on your question regards to the stripping we thought under our strip ratio, so we're not intending at this stage to carry in any of those costs on the balance sheet.

Justin Chan

Okay. And so -- I think so -- I guess what are the stripping expectations within that? I know you gave the overall movement tonnes, so I presume just the two years look relatively similar?

Ross Jerrard

Yes basically. It's just over a 5:1 ratio. Sorry, I don't have the exact number in front of me, but life of mine at 5.75 and I think we'll be running at above 5:1.

Justin Chan

Okay. And that just all goes into expenses?

Ross Jerrard

Yes. So the waste component will go through yes without capitalizing.

Justin Chan

Okay. All right, great. Thanks very much. That's it for me.


Our next question today comes from Daniel Tigemera [ph] of Macquarie. Danielle, your line is open.

Unidentified Analyst

Hi there. Thanks for the call. Just on Cleopatra, can you give some color around the amount of drilling or studying or time that you need in order to get enough information to make a decision on how best to exploit that part of the deposit? And in the meantime, what volumes of development ore per year for example should we expect from that area?

Andrew Pardey

Okay. Cleopatra I expect that earlier in the year there was just over 11,000 meters of drilling that we plan to get completed at Cleopatra. We have completed just over -- just under 8,000 meters of that drilling. We did over 4,000 meters in Q2, obviously waiting for those results to come in. We've got approximately another 4,000 meters of drilling to complete as all the Q2 results start to come through we're going to be able to start building up a picture of what is the best plan of attack for Cleopatra in both the short and medium terms.

So Q3 we'll be able to provide more updates as more results come in and by the end of Q3 we should be fairly close to having that 11,000 meters of drilling completed. And then Q4 is working on those results and resources, so we can provide more color on the Cleopatra development and the way we take Cleopatra forward as well.

As far as development grades that are coming out of Cleopatra, we don't expect much in the way of the Cleopatra development to be mined as ore at this point in time. Obviously as we use a two-gram cut-off if it's below two grams a tonne, it's treated as waste material from the underground. If it's above two grams a tonne, it will get delivered to the ROM pad. So the contribution from Cleopatra in our forecast for 2020 and 2021 is very, very minimal.

Unidentified Analyst

Okay. That's helpful. And so by Q4 we should be able to quantify the upside to the baseline production from Cleopatra?

Andrew Pardey

That's correct. It's about -- the outside results coming back materialize Q3 on the outside results then we can really start talking about them in more detail.

Unidentified Analyst

Okay, very clear. Thank you.


Our next question today comes from Alan Spence with Jefferies. Alan, your line is open.

Alan Spence

Yeah, good morning. Most of my questions have been asked. So, just a couple follow-ups and clarifications please. On the baseline, could you remind or tell us what the recovery rates you are assuming? On the underground for 2019, there was a note in the slide of the forecasted quarter-on-quarter improvement in graded tones, but I thought at the production call you talked about sequentially lower grade in Q3 and then a Q4 grade similar to Q1, if you could please just clarify that?

And then lastly, are you able to perhaps quantify some of the cost savings potentially from solar power in 2021 and onwards?

Andrew Pardey

Okay. I'm just talking on the underground. We talked about the geotechnical and the access issues to part of the upper Amun areas. And just reiterating that access to secondary egress. So, basically so you've got two points of entry and exit from a safety point of view. That remedial work is underway. And we expect to have that completed by the end of August, which is a couple of weeks longer than what I said in the call a couple of weeks ago. It doesn't impact on -- all it does it push out the stoping sequence from the upper Amun area.

So the stoping sequence in the grade -- the underground production will be -- total ounces will be lower than what we had originally, but we still maintain the forecast because those stopes will come in late Q3 and then flow over into Q4. Hence that's why we maintained our guidance at 490,000 to 520,000 ounces. Plus while that area has restricted access at this point in time, we're still mining in the lower Amun and across in the Ptah areas.

Alan Spence

Okay. And then in terms of the recovery rate please?

Andrew Pardey

Sorry. Yeah. Recovery, the recovery in the long -- in the guidance is 89%.

Alan Spence

Thank you.

Ross Jerrard

Yeah. And then your question on the cost savings as for solar, I guess, it's still a very high level at the moment and they are hypothetical calculations going through. The key driver is building in the cost saving and it's really going to drive our processing costs, which are sitting at $13 or $13.7 reducing that by up to 30%.

So the processing costs come down considerably. But we are finalizing all our costings on this and getting the various process in there, so I can't give you anything more granular than that. But it does have a considerable savings particularly on our processing cost profile; and the payback period is basically worked on a 2.5-year payback.

Alan Spence

That's very helpful. Thank you very much.


[Operator Instructions] We currently have no further questions, so I'll hand back to you.

Alexandra Carse

All right. Thank you very much for joining us on this call today. Should you have any further questions, please feel free to contract myself, Ross or Alex and we'll be happy to answer those questions for you. With that, I'd like to say thank you very much and have a nice day. Thank you.