Q2 2026 Doman Building Materials Group Ltd Earnings Call
Speaker #1: Good morning, everyone, and thank you for participating in Magnolia Oil and Gas Corporation's second quarter 2026 earnings conference call. My name is Megan, and I will be your moderator for today's call.
Speaker #1: At this time, all participants will be placed in listen-only mode as our call is being recorded. I will now turn the call over to Magnolia's management for their prepared remarks, which will be followed by a brief question-and-answer session.
Speaker #2: Thank you, Megan, and good morning, everyone. Welcome to Magnolia Oil and Gas's second quarter earnings conference call. Participating on the call today are Chris Stavros, Magnolia's chairman, president, and chief executive officer; and Brian Corrales, senior vice president and chief financial officer.
Speaker #2: As a reminder, today's conference call contains certain projections and other forward-looking statements. Within the meaning of the federal securities laws, these statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements.
Speaker #2: Additional information on risk factors that could cause results to differ is available in the company's annual report on Form 10-K filed with the SEC.
Speaker #2: A full safe harbor can be found on slide 2 of the conference call slide presentation, with the supplemental data on our website. You can download Magnolia's second quarter 2026 earnings press release as well as the conference call slides from the Investor section of the company's website at www.magnoliaoilgas.com.
Speaker #2: I will now turn the call over to Mr. Chris Stavros.
Speaker #3: Thanks, Tom. Good morning, everyone. Thank you all for joining us today for discussion of our second quarter 2026 financial and operating results. I know that today is a very busy day of earnings.
Speaker #3: I will briefly cover our second quarter results, which continue to validate the consistent high-quality nature of our gettings asset and provide strong overall financial results.
Speaker #3: Returns together with our current area of business. I'll then highlight a few items related to the financing underlying our recent agreement to acquire wildfire energy.
Speaker #3: Brian will then review our financial results for the second quarter in greater detail and provide some additional guidance before we take your questions. Beginning on slide 3 in our quarterly investor presentation, Magnolia markets 8-year anniversary by delivering another quarter of strong and consistent execution as seen through our financial and operating metrics, which continue to underscore the strength of our differentiated business model and the quality of our asset base.
Speaker #3: Our strong second quarter financial metrics were supported by both solid production growth and higher year-over-year oil and NGL prices. Our second quarter adjusted net income was approximately $184 million, or 99 cents per diluted share, with adjusted EBITDAX of $370 million, during the period.
Speaker #3: Drilling and completion capital for the second quarter was $125 million, with a reinvestment rate of just 34% of adjusted EBITDAX, and our lowest quarterly rate of capital reinvestment since 2022.
Speaker #3: Our pre-tax adjusted operating income margins averaged a very robust 51% for the quarter. Magnolia generated $235 million of free cash flow in the second quarter and returned $80 million of this free cash to our shareholders through a combination of our base dividend and our share of purchase program, where we bought back just over $1.7 million shares during the quarter.
Speaker #3: Our ongoing discipline around capital allocation, strong operational performance, and continued focus on our financial returns allowed us to generate meaningful free cash flow and to continue to execute on our proven business model.
Speaker #3: For the second quarter of 2026, total company production volumes grew by 8% year-over-year to $106.1 thousand barrels of oil equivalent per day, above our expectations in earlier guidance, with oil production growing by 5% and averaging 41.9 thousand barrels per day.
Speaker #3: But total production and oil production volumes established new quarterly records for the company. Based on the strong second quarter production we are raising Magnolia standalone full year 2026 production growth guidance to 6% from 5%.
Speaker #3: Production at gettings continued to be the primary growth driver for Magnolia and setting a new quarterly record with total gettings production increasing 10% year-over-year to 85.5 thousand barrels of oil equivalent per day and oil production of 29 thousand barrels per day, with growth of 7% over the same period.
Speaker #3: Gettings production accounts for approximately 81% of Magnolia's total company volumes. Production in our current area was relatively flat year-over-year at just over 20 thousand quarter, and which we expect to sustain for many years.
Speaker #3: The current area assets continue to generate a significant amount of free cash flow for Magnolia. Turning to slide 4, as we announced last month, we entered into a definitive agreement to acquire wildfire energy for total consideration of approximately 4.06 billion dollars.
Speaker #3: The acquisition will add approximately $810,000 net acres to Magnolia's gettings area position and total oil and gas production of roughly $53,000 barrels of oil equivalent per day.
Speaker #3: Just to give you a sense, after averaging 2,300 tons per day in the second quarter, underground production rates jumped over 40% to approximately 3,300 tons per day in July and we now expect to achieve our target of 5,000 tons per day by year end versus the third quarter as assumed in the original new goal 2026 budget that they approved late last year.
Speaker #3: Revised partial year 2026 production guidance at Rainey River is shown on slide 13 which reflects this slightly slower assumed ramp-up of underground mining rates.
Speaker #3: With that, I'll turn the call over to Tom.
Speaker #4: Thanks, Mick. Turning to slide 9, I'll briefly run through our consolidated financial results. Despite being our second lightest expected production quarter this year, our balance 7 asset portfolio produced quarterly record financial results off the back of the inclusion of our first quarter of our Canadian assets.
Speaker #4: Some of the many quarterly records included record quarterly revenue of 1.1 billion dollars at 27% increase quarter over quarter. Record EBITDA of 478 million dollars despite the 141 million dollar non-cash expense related to Rainey River's fair value uplift of the short-term stockpile which must flow through EBITDA, the P&L, and our reported CAS number.
Speaker #4: And record free cash flow of 388 million dollars or more than 4 million dollars per day and increase of 45% versus last quarter. Our Canadian assets delivered 45% of overall quarterly free cash flow or approximately 175 million dollars despite both assets being in ramp-up mode.
Speaker #4: Our Q2 results did see lower realized gold and silver prices than Q1, particularly in June. We are also seeing some signs of cost inflation specifically diesel costs as shown on slide 11.
Speaker #4: Slide 8 illustrates the tremendous impact of these accelerating cash flows on our balance sheet. Cash of 1.1 billion dollars at June 30 represents a doubling of the balance versus year end 2025.
Speaker #4: We paid out approximately 45% of our Q2 quarterly free cash flow with 110 million dollars of buybacks through June 30th. The payment of an inaugural 2-cent dividend and the elimination of 39 million dollars of our higher cost capital lease debt.
Speaker #4: We exited Q2 with liquidity of over 2 billion dollars leaving no doubt about our balance sheet strengths. With expectations for significantly higher production during the second half of 2026, Kerr is poised to deliver even higher quarterly free cash flow for the remainder of the year.
Speaker #4: Based on revised guidance and our updated forecast pricing, a 4,000 dollars per ounce of gold, 60 dollars per ounce of silver, and 6 dollars per pound of copper we expect to generate 2026 EBITDA of approximately 2.3 billion dollars and free cash flow of approximately 1.5 billion dollars despite significantly lower assumed metals prices in the second half of 2026 and only 9 months of lower than originally planned contribution from new Afton and Rainey River.
Speaker #4: What an amazing story. I wanted to highlight the key changes in our updated guidance on slide 21. We have tweaked our overall 2026 capex guidance at Rainey River to reflect 45 million dollars of phase 5 capitalized stripping costs previously guided as an operating cost and 25 million dollars of expenditures related to underground development, equipment, and infrastructure to assist with the gaps Mick and his team identified.
Speaker #4: Revised CapEx guidance also includes an additional $15 million at Silvertip for 2026 pre-feasibility study and related costs. Cash taxes were guided downwards to reflect lower assumed metals prices and lower Canadian taxes.
Speaker #4: Amortization guidance was also reduced as we completed our initial purchase price allocation for the newly acquired Canadian assets. Adjusted CAS guidance for gold and copper at New Afton increased as a result of the lower expected production.
Speaker #4: However, it is important to note that we did not see an overall increase in total operating costs at New Afton. Adjusted gold CAS guidance at Rainey River also increased as a result of the lower expected production.
Speaker #4: We are also expecting a 10% increase in total operating costs or approximately 30 million dollars during 2026 for additional labor, rental equipment, and maintenance to address the gaps Mick and his team identified.
Speaker #4: I did want to spend a minute on the acquisition accounting related to the short-term inventory including the significant short-term stockpile at Rainey River. That we acquired at the transaction closing.
Speaker #4: The fair value uplift of the acquired inventory as required under US GAAP is an important pointy-headed accounting matter to clearly understand given the magnitude and the pervasive impact it has on our financial results.
Speaker #4: While the impact is non-cash the full year total will be 244 million dollars at Rainey River and 20 million dollars at New Afton. We want to emphasize this non-cash amount must be included in our EBITDA net income and CAS.
Speaker #4: During the first quarter approximately 85 million dollars of the fair value uplift hit our EBITDA net income and CAS. The Q2 impact was a further 140 million dollars or approximately 10 cents per share and the remaining 38 million dollars is anticipated to flow through during Q3 as we expect to have depleted the remaining acquired short-term stockpile at Rainey River by the end of the quarter as Mick mentioned.
Speaker #4: To give a better sense of the order of magnitude of this non-cash impact on our CAS the Q2 impact at Rainey River was 2,036 dollars per ounce of the total 3,788 dollars CAS per ounce.
Speaker #4: And on a consolidated basis it represented 834 dollars per ounce of the total 2,442 dollars in CAS per ounce. I hope that made sense.
Speaker #4: And I'll get off the accounting soapbox. We remain extremely excited and proud of this platform we have created as a unique North America only precious metals producer with a heart of silver.
Speaker #4: We are set up for a strong second half of free cash flow continued capital returns and cash accumulation on the balance sheet as we continue to deliver on our strategic plan.
Speaker #4: I'll now turn the call back to Mitch.
Speaker #1: Thanks Tom. Before opening it up for Q&A our key strategic priorities for the remainder of the year are shown on slide 20. We're looking forward to delivering sharp increases in production and cash flow during the second half that are expected to lead to record full year 2026 results leaving us well positioned to deliver another record year in 2027.
Speaker #1: With that let's go ahead and open it up for questions.
Speaker #2: We will now begin the question and answer session. To ask a question you may press star then 1 on your telephone keypad. If you're using a speakerphone please pick up your headset before pressing the keys.
Speaker #2: And to withdraw a question you may press star then 2. At this time we will pause this momentarily to assemble our roster. And our first question here will come from Wayne Lamb with TD Securities.
Speaker #2: Please go ahead.
Speaker #5: Yeah thanks. Morning guys. I just want to. Hey how's it going. Just want to understand the reset in the expectations for the new gold assets after just the first quarter of operation post the combined guidance.
Speaker #5: Maybe starting with New Afton what was the previously budgeted timeline to get to the 16,000 tons per day or was the revision here also largely grade driven?
Speaker #5: Because I think most had baked in a ramp up to reach the run rate capacity but also seems like a second haircut taken at New Afton now from what new gold management had previously guided to what was outlined in the combined guidance a few months ago to now.
Speaker #1: Yeah well we'll start there with New Afton. Thanks for the question. The original plan for New Afton coming into this year was for them to be at 16,000 tons a day by the end of the second quarter.
Speaker #1: And I think what we're seeing now is hitting that level early in the fourth quarter. So you know roughly three months. Slower than what they came into the year assuming.
Speaker #1: And so the reset in the guidance ranges there was driven more by that timing there's a little bit of a grade differential just as we draw from different parts of the cave in response to kind of how the cave is propagating since the construction was completed in April but maybe Mick you can go a layer deeper than that.
Speaker #2: Yeah, yeah, thanks for the question. It’s really about that healthy cave propagation and, with respect to the grades, we’re really trying to chop the cave up into six main areas. That’s north and south, and then split up into the east and west zones.
Speaker #2: And that's different grades across the cave but the key to the start of the cave is really about drawing it and getting it balanced and flat so that it comes down as a block.
Speaker #2: And where were high grades are really in the south and the east and we have to draw more on the west and the north at the moment to get the cave to propagate in a flat manner so as we see that coming to bear over this next quarter then we'll see the draw rates increase and we should see the grades improve.
Speaker #2: Over that period between now and the end of the year.
Speaker #1: Does that help Wayne?
Speaker #5: Yeah that's great. And then maybe just at Rainey River can you give us a bit more detail on the challenges with the underground contractor this quarter and again on the prior timeline on the ramp up to 5,000 tons per day and maybe some color on the underground grades as well.
Speaker #5: And then just wondering maybe for Tom if you're chewing through more of the stockpiles at a faster rate resulting in a greater non-cash impact near term on the purchase price adjustment does that mean that that non-cash impact the CAS goes away at some point soon or just not sure if I'm thinking about that correctly?
Speaker #1: Well maybe I could Tom I'll try and answer that second question first is yes it should go away with the third quarter. I think Tom in your comments you mentioned 30.
Speaker #1: 38 million or so is expected to roll through the P&L in Q3 and then we should be done. Thankfully. So on that that's on that Wayne.
Speaker #1: Is that good on the accounting question?
Speaker #5: Yeah yeah that's good color. Yeah.
Speaker #1: Yeah okay. Good. And then just on the Rainey River front I'll say a couple things and then Mick you can cover more detail. I'd say that those short-term execution challenges were more in the kind of in the tactical realm you know as those throughput rates started to climb you could see some gaps start to surface in things like trucks, personnel, availability and some infrastructure related constraints that will be covered by the CapEx increase that Tom flagged.
Speaker #1: But you know we got in there in April and May Mick and the team and the team at Rainey River did I think a really good job of identifying some of these gaps as they started you know ramping up to that next level.
Speaker #1: And put a good plan in place pretty quickly and it's really nice to be able to see in July the effects of that work as the rates started to climb up pretty quickly and that's continued here into the early days of August.
Speaker #1: So that has us feeling really good about the second half ramp up to that 5,000 tons a day by year end. And just quickly on the underground grade open pit grade mix I think in the second quarter the underground contributed like something like 9% of total tons.
Speaker #1: And that should be almost twice that in the second half. And those underground grades are almost three times higher than the surface grades. The open pit grades.
Speaker #1: So as we see that tonnage come up to 5,000 tons a day with that higher grade impact from those tons you know that's going to be the nice tailwind in terms of the second half production levels there at Rainey River.
Speaker #1: Mick did I leave anything there for you to cover?
Speaker #2: Yeah a couple of bits and pieces. Really just to say well actually really happy with the response of what underground mining contractor working really well with them hand in a glove.
Speaker #2: The early part of the development of the underground was really focused on those development rates and the contract structure focused on that. Once we addressed that and we ramped up hard on the development that outpaced the mining rates which then effectively exposed the other bottlenecks that we had to address.
Speaker #2: So we've got after those with what contractor with a great response and we're seeing already that the uptake in that performance with the contractor focused now on mining rates to balance that against the development rates and yeah really happy about how that's improving.
Speaker #5: Okay great. Yeah looking forward to the operational improvements in the back half of the year. Maybe just last one at Rochester. Can you just walk us through the expectations into the second half on the grades and recoveries?
Speaker #5: I know the quarterly guidance had accounted for some of the lower grade this quarter. And a pretty big step change on silver into Q4.
Speaker #5: But just given the longer cycle for silver recoveries that we've seen in the past is that still realistic to expect those ounces to come out that quickly as per the guided expectations?
Speaker #1: Yeah I'd say the three biggies there Wayne consistent crusher performance that we're now demonstrating assume that continues higher and then you've got the nice mix of higher grades and then close to fresh liner and those are the ingredients for what should be a pretty dramatic second half compared to the first half.
Speaker #1: But Mick you want to cover that?
Speaker #2: Yeah and you know during this first part of the year Wayne we had a lot of material that we had to produce as overlay now for the construction of those new parts and that's at a higher size fraction and it slows what crusher performance down.
Speaker #2: And so we got through that a lot. We're still producing a little bit of that for the next phase of the expansion but overall we're in good shape for that uptake in the second half.
Speaker #2: There's a lot of tons sitting on that new liner that have not even been started to irrigate yet. So looking forward to that.
Speaker #5: Okay perfect. Nice to see a lot of free cash flow coming through despite the slow ramp up and look forward to the catch up operationally.
Speaker #5: Best of luck in the months ahead.
Speaker #1: Yeah yeah. Thanks Wayne.
Speaker #2: And our next question will come from Cosmos Q with CIBC. Please go ahead.
Speaker #6: Thanks. Mick and Tom for the presentation. Maybe my first question is going back to New Afton here. I noticed that recovery was slightly lower quarter over quarter 85.1 for gold and 90.6% for copper I guess two parts to my question.
Speaker #6: Number one you know as you talked about grades potentially coming back up later on during the year is that going to help in terms of recovery?
Speaker #6: And then number two you know as you had recalibrated your guidance for the year what kind of recovery rate are you assuming for the rest of 2026?
Speaker #1: Yeah thanks Cosmos for the question. I'll as we go into the second half of the year and as Mick alluded to you know we'll not only see a throughput put uptick but we'll see a grade uptick as well as they start drawing on some of those other areas of the season and that should flow through to higher recoveries on both gold and copper relative to what we saw in the first half of the year.
Speaker #1: But Mick do you want to cover that as well?
Speaker #2: Yeah you nailed it actually. So those lower grades and it's all really about the key of draw management as those grades come up we should see some appreciation in the recovery rates.
Speaker #6: Great. And then so is like what we saw in Q1 is that a better sort of run rate? I forget in terms of you know based on the technical report what kind of recovery rates you know is expected sort of life of mine for copper and gold?
Speaker #1: Yeah that first quarter was for us in our world was 11 days so I can't even remember what those recoveries looked like for that little snapshot of time but Mick do you want to answer Cosmos's question?
Speaker #2: Yeah based on the material that we pulled from the cave the recoveries actually just did better than what that model in fact. So it's tracking well based on recoveries compared to the tech report.
Speaker #6: Great. I guess going to Rainey River here you know as you mentioned as underground development caught up mining rates are now you know now catching up to those development rates.
Speaker #6: I guess my question is, you did 2,300 tons per day in Q2. Is there any kind of internal targets you can share with us?
Speaker #6: Like what were you expecting in Q2 for mining rates to have hit? And then second part is you know you're getting to 5000 tons per day or targeting 5000 tons per day by year end that's almost double that's yeah.
Speaker #6: More than double what you did in Q2. What's kind of like that cadence or that increase? You know you did 3300 kind of now.
Speaker #6: Is that a good number to use for Q3 or how should we think of how that increase is going to be? Is it a straight line or is it going more parabolic?
Speaker #6: How should we look at it?
Speaker #1: Wayne you're asking for some pretty good precision there Cosmos but I'd say the rates of underground production between now and the end of the year is fairly linear and gradual and you know that 5000 ton a day is not an average for the fourth quarter.
Speaker #1: It's sort of the end you know at the end of the year is where we plan to be. So you know as you think about building that into your model you know it's a pretty steady ramp assumed from where we saw July to where we see December.
Speaker #6: Great. Yeah it doesn't hurt to ask right Mick you can always.
Speaker #1: Hey, you know you've got a model to update. I get it.
Speaker #6: And then maybe in terms of the pre-stripping of phase five how's that going?
Speaker #1: Yeah that's a good news story. I mean you know at Rainey we talk a lot about these underground mining rates but let's not forget the open pit is doing great.
Speaker #1: The mill is doing great. They're really hitting their stride on the underground development and now you know chasing that next bottleneck down into the underground mining rates now that we're on top of.
Speaker #1: But in terms of phase five pre-strip, that's a good story, right, Mick?
Speaker #2: Yeah the strip is ahead of the game and we expect to get a fair amount of material in the second half from five now which is great as we finish off four and then we manage coming out of the four pushback we'll get into five before the end of the year and pull some material.
Speaker #2: Yeah really happy about the progress there and the mill I mean the mill is full. We have stockpiles that allowed us to keep the mill full continuously.
Speaker #2: So yeah we're in good shape.
Speaker #6: Great.
Speaker #2: Heading up the case.
Speaker #6: Cool. And maybe one last question I see that in your CapEx you know discussion in your MD&A. You have allocated additional $15 million in CapEx to silver tip.
Speaker #6: Any updates there you can provide to us and you know what should we be looking for?
Speaker #1: Yeah yeah no good catch. Good question. Since we talked after the first quarter in early May we wrapped up the initial assessment and we've now progressed into a pre-feasibility study and that was a decision that we made together with our board in mid-May and so that extra capital that you've flagged there Cosmos is really a reflection of us you know funding that additional work to wrap up a PFS hopefully you know early 2027.
Speaker #1: Mean time exploration you know is fully funded for the year to continue to try and expand the resource. That's really hitting its peak right now here in this third quarter.
Speaker #1: So that extra capital for silver tip is really to fund the studies that we're proceeding with.
Speaker #6: Great. Thanks Mick and Tom for answering all my questions and enjoy the rest of your summer.
Speaker #1: Yeah thanks you too Cosmos.
Speaker #4: Our next question will come from Josh Wipsen with RBC Capital Markets. Please go ahead.
Speaker #5: Yeah thank you very much. I appreciate all the disclosures on this call and some of the details for the new gold assets. It's been helpful.
Speaker #5: Just sort of going into some of the details there further and looking at maybe some of the impacts on 2027. You know the company was talking about changing I guess the draw of the cave for New Afton.
Speaker #5: Maybe balancing things out a bit more. Would it be reasonable to think you know if you're balancing things out more the grades that were previously expected in '27 and '28 that were quite high you know might be a little bit more smoothed out versus the rest of the mine plan or is that is the cave sort of changes more limited to 2026?
Speaker #1: Yeah Mick do you want to cover that?
Speaker #2: Yeah yeah. So at the moment we're busy rerunning those plans. We'll really know that through Q3 and into Q4 as we set the budget for '27 and beyond.
Speaker #2: But for the moment, there hasn't been any more sterilized. We're really just making sure that we balance the cave, and we draw from the right points to get that balance.
Speaker #2: So my expectation is that we'll see that grade at some point over the next period.
Speaker #5: All right thank you. And then similarly at Rainey I believe the underground throughput or mining rate was closer to about 6000 over the next two years.
Speaker #5: Is that still a reasonable ultimate target and maybe is there some slight ramp up here that we should be forecasting in '27?
Speaker #1: Yeah no good question. I'd say you know that technical report some good piece of work obviously it was new gold technical report not ours.
Speaker #1: And there's still some work that we'll want to do here as we get closer to 2027 on how we see that mix of underground versus open pit going forward.
Speaker #1: You know for now getting up to that 5000 ton per day from the underground by year end and carrying that into 2027 is the near term plan.
Speaker #1: But there's still a lot of good work to do there in terms of figuring out what that future looks like at Rainey River because there's a lot of optionality there with the open pit that we want to make sure we're factoring into our thinking as we go forward.
Speaker #5: All right. And then last question just on the capital allocation side. I mean good work with the initial buybacks you know noted the high cash balance projected for year end.
Speaker #5: In that context, I'm wondering, you know, how the company is thinking about the cadence of the buyback through the approved period. Should we forecast similar levels or rates, or will it change based on share prices?
Speaker #5: And then when you think about the cash position and the growth expected you know where would the company look to invest in growth that could start to be spent in 2027?
Speaker #5: Thanks.
Speaker #1: Yeah great capital allocation question. I'll start and then Tom you can certainly chime in. You know the I think we set up a well-designed buyback program with you know a portion of it just automatically chewing away you know during blackouts you know no matter what and then we can step in during non-blackout periods and be opportunistic when we see the stock you know at a point where we think it's undervalued.
Speaker #1: And so you know it's going to be driven by that. You know we don't feel like we have a gun to our head to get through 750 million by a certain date.
Speaker #1: But certainly when the stock's weak or is underperforming or on a relative basis seems undervalued you know we're going to step in and be aggressive.
Speaker #1: And so as we go through the rest of the year you know that's really going to be the driver for the pace of that buyback program.
Speaker #1: But we feel good about you know coming out of the gate strong since mid-May and the progress that we've made so far and it remains a key focus for us as we go forward.
Speaker #1: And as far as that building cash yeah it gives us a lot of great financial flexibility to pursue high return growth you know starting with exploration on the brownfields exploration side.
Speaker #1: We'll keep investing as much as we efficiently can deploy at some of those high priority sites. So that's right up there high on our capital allocation framework.
Speaker #1: The big chunky growth really is driven by K zone. Out there at New Afton advancing the studies and seeing if silver tip is a potential new source of you know not that long term or not that far off primary silver production you know Canadian production silver growth.
Speaker #1: You look out at East Rochester a little bit longer term and you think about what could we do over there to take advantage of the exploration success outside of the Franco Nevada area of interest.
Speaker #1: There at Palmorayo, and then back to Rainey River. You know, what does the future look like there in terms of potential mine life extensions that could require some additional infrastructure to support a longer mine life?
Speaker #1: So though some of those are some of the big chunks that come to mind. Tom what did I forget?
Speaker #5: I nailed it. We're really happy with the design program. We'll be coming out of blackout here on Friday and if we see opportunities where the share price is at versus our expectations of value we'll be aggressive.
Speaker #5: All right thank you very much.
Speaker #1: Yeah thanks Josh.
Speaker #4: And our next question will come from Kevin O'Halloran with BMO Capital Markets. Please go ahead.
Speaker #6: Hey Mitch and team, thanks for taking my questions.
Speaker #1: Yeah hi Kevin.
Speaker #6: Hey, at Palmorayo, can you just remind us what your goal is in terms of building out that resource inventory outside the area of influence, and then how much production do you expect to shift outside that stream area over the next, say, few years?
Speaker #1: Yeah great question. Been a topic of discussion here a lot. Especially on the heels of that exploration release that we put out a couple weeks ago.
Speaker #1: That shows continued you know success over there both further to the east at that San Miguel La Union we call it the Guazapares area which is the furthest kind of to the north and east from where you know our current operations are.
Speaker #1: You know that's a longer term game. You know that needs to have additional drilling additional resource growth and then making the team you know we're going to start doing their studies around trade-offs of you know how much mineralization do we need to consider a potential standalone opportunity there longer term or in the interim is there an opportunity to haul material from that Guazapares area back to the Palmorayo processing facility.
Speaker #1: So that's you know that's a work stream that we'll go on for a while and with additional drilling in the meantime. The nearer term stuff that's the Independencia Sur the southeastern extension of Independencia that extends off the Franco Nevada area of interest that's the nearer term opportunity and I think in the second quarter we saw something like 50% of our gold production subject to the Franco Nevada terms you know the goal is to look at that Independencia Sur in the next two or three years as the nearer term opportunity to start bringing in some gold where we can actually sell it for the market price rather than to Franco Nevada for $800 an ounce.
Speaker #1: So there's a near-term play there. To the south and east at Independencia, there's the kind of medium-term play, further off to the east in that Guazapares area. And then, in between those two areas, there's a lot of exploration potential and excitement that we'll continue to fund. That, in my mind, is then the longer-term play, even further beyond the Guazapares.
Speaker #1: So it's like a whole new chapter to the Palmorayo story over there to the east with some near term medium term and longer term opportunities.
Speaker #6: Great, yeah, lots of potential there. Appreciate that. My other question was just at Los Chispa. So, you had higher throughput in Q2 and slightly lower grades, although grades were still quite strong.
Speaker #6: How should we be thinking about the production there going forward? Is there a bit of a trend towards higher throughput and a little bit lower grades or was this just kind of typical quarter to quarter fluctuations?
Speaker #1: Yeah thanks for the question they are doing a tremendous job there of being very predictable and consistent and steady and you look at first half performance versus second half expectations it's a nice equal balance between the two and that's kind of the way we see it continuing you know into the future.
Speaker #1: Anything, Mick, you want to add to that?
Speaker #4: We have a very healthy inventory stockpile, and that helps us balance what we get from the mine and balance the grades and the production rates out, so that the mill sees what we need it to see. We just continue to tick along there.
Speaker #6: Okay makes sense and then on the mining unit cost there at Lost Chispa I noticed they were up a little bit in Q2. Was that driven by royalties and the peso or are there other factors going on there?
Speaker #1: Yeah that's a good one. I don't have a good answer to off the top of my head. I know there was some stockpile management that was taking place building onto the stockpile Mick is there anything that comes to mind?
Speaker #4: Yeah, it was just with those slightly lower grades. We've pushed a little bit more material to keep hitting the plan, but we expect to be on budget by the end of the year.
Speaker #4: So it's just really quarterly fluctuations.
Speaker #6: Okay great. That's it for me. Thanks for taking my questions.
Speaker #1: Okay thanks Kevin.
Speaker #4: And our next question will come from Eric Windmill with Scotiabank. Please go ahead.
Speaker #7: Oh, hi. Good morning, Mitch and team. Thanks for taking my question. I think a lot of my questions have been answered, but maybe just one on New Afton and the K zone—any updates there in terms of what's happening?
Speaker #7: I know you said studies are ongoing, but are we likely to see an update, do you think, later this year or next year?
Speaker #6: And are you talking K zone Eric?
Speaker #7: Yeah. That's correct. Yeah New Afton.
Speaker #6: Yeah yeah yeah.
Speaker #1: Yeah, there's an exploration piece there, and then, you know, a study piece. Mick, do you want to take the study piece—where we are on that work—and then Ifa, maybe you could chime in with a couple of comments on the drilling that we're doing there?
Speaker #4: Yeah we're doing the preparations for an FS which we're getting ready we're having an exact date when we'll kick that off yet but it'll be soon because the engineer and the development and Ifa will talk about the drilling in a second that's ongoing so we're resourced and moving forward with that.
Speaker #4: We have time to do that well and we're already looked at how we'll do that development to get in the right spot to do the drilling and characterize that ready for the engineering requirements of an FS.
Speaker #1: Ifa?
Speaker #2: Yeah, and on the exploration side there, we're having great results from the K zone. We've expanded the footprint by just over 300 meters this year, on a base of somewhere around 600 meters initially from the maiden resource shape that was outlined in Q1.
Speaker #2: So and the grades are holding up very well we're seeing some nice wide juicy intercepts in K zone so we're very excited to see what comes out here in the next resource update.
Speaker #7: Okay.
Speaker #1: Does that help, Eric? Oh, yeah, okay. Yeah.
Speaker #7: Yeah appreciate the update. And then just point of clarity did I hear correctly you said you're expecting a PFS at Silvertip probably early next year you'd release something?
Speaker #1: Well we'll complete it as to whether we'll release it or not that's probably something we'll just keep internal and whether there's a thumbs up or a thumbs down at that sort of off ramp in a we'll see what it looks like is it worth continuing on to an FS you know probably if and if it is and we make that transition into a feasibility study maybe on the back of that work that's something we would look to release.
Speaker #1: That gives us a little more time as well for the drilling to keep going and catching up, and adding to that resource so that we could, you know, put together a really economically attractive project in that kind of a final study.
Speaker #7: Okay great. Thank you very much. And last one from me I know you're still busy integrating the new gold acquisition but in terms of overall portfolio composition are you happy with the assets any thoughts on divestitures or things you might want to add down the road?
Speaker #1: No appreciate the question. We're happy with the portfolio everybody's doing great every asset's contributing the second half is going to be a lot of fun and on the integration front you know the people are great the infrastructure these assets are you know are terrific we couldn't be more pleased with everything obviously we've got a little bit of a timing on the ramp ups that we've made an adjustment for but you know as far as the overall portfolio no we like everything we have we like the North America only we've got good balance across the seven assets and so we're pleased with what we have.
Speaker #7: All right fantastic. Thank you very much we appreciate it and I'll hop back in the queue. Cheers.
Speaker #1: Okay yeah thanks Eric.
Speaker #4: Mick again. If you have a question, you may press star one to join the queue. Our next question will come from Brian MacArthur with Raymond James.
Speaker #4: Please go ahead.
Speaker #7: Good morning, and thank you for taking my question, and thank you for all the guidance. Can I just ask a bigger, philosophical question? Obviously, this is all about free cash flow.
Speaker #7: You've given good guidance for the rest of the year but I kind of want to break it up into Q3, Q4 if I can.
Speaker #7: If I think about this going forward for EBITDA you're sort of saying you need to under your forecast you need a billions tree over the back half of the year.
Speaker #7: With you know the non-cash stuff coming off in the Q4 you've got ramp ups going on I assume costs are coming down. Should I think of this as 40/60 between Q3, Q4?
Speaker #7: Is that reasonable? And then maybe the more important part of the question is: when I go to free cash flow for your CapEx in the back half of the year, is it evenly weighted, or is it heavily weighted to Q3 or something, so that when we get the Q3 free cash flow number, it ends up being, you know, 25 or 30% of your expected back half cash flow?
Speaker #7: I know it's a detailed question, but I think it is about leads into, you know, how much free cash flow the market's expecting, and you know, how much you have available to buy back shares and do everything else.
Speaker #7: Thanks.
Speaker #1: Yeah, no, great. Great philosophical question. I was going to just hand over the call to Tom, thinking it was going to be a tax question that you were going to ask Brian.
Speaker #1: But on the weighting your weighting is probably pretty good between Q3, Q4 on the free cash flow and typically capex is a little higher in Q3 during the better summer season than or weather.
Speaker #1: Versus Q4. Tom?
Speaker #3: Yeah, no, yeah, Q3 is definitely higher capex than Q4, and don't forget IFA has a gazillion drills going in the third quarter, so it will be the heaviest quarter for exploration. But, you know, just look at the production profile that we guided, right.
Speaker #3: You do see the production steps up pretty nicely in Q3, and then steps up even nicer in Q4, so that should help figure out the geography of the free cash flow growth by quarter as well.
Speaker #1: And back to Wayne's question on timing of silver at Rochester—you know that gold comes out a lot faster in Q3, but Q4 on the silver at Rochester is where you'll really start to see the hockey stick in the second half of the year out there.
Speaker #7: Yeah, that's what I was trying to work out, because you've got all these moving parts and you set up and down there and a couple, and then I guess the other thing, just for EBITDA, we get rid of the $38 million, as you said, from Q3 to Q4 as well, right?
Speaker #7: So that'll be you know income statement Q3 but non-cash in Q3.
Speaker #1: That's right. Yeah, it'll be nice to get past that purchase price allocation noise in the third quarter, and have a cleaner, simpler fourth quarter.
Speaker #3: Yeah offset by like let's I know it's accounting noise but this is great operational flexibility for us to have. I mean last Chief Specs has proven to be it's been great to have that stockpile and at Rainey it's been great to have that stockpile just apologies for the accounting we're just this is what has been forced upon us to and so the pain's almost done and thanks for everyone's understanding it.
Speaker #3: All of the analysts did a really good job of understanding this, and thank you.
Speaker #7: Great. Thanks very much. I was just more concerned about the free cash flow. I think that's what's really important. So thank you.
Speaker #1: Yeah no thanks Brian.
Speaker #4: And this concludes our question and answer session. I'd like to turn the conference back over to Mitch Krebs for any closing remarks.
Speaker #1: Okay well we appreciate all the great questions and everybody's time today and we look forward to talking with you all again later in the fall after our third quarter results.
Speaker #1: Have a great rest of the day and rest of the summer.
