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Yamana Gold Inc  (NYSE:AUY)
Q3 2019 Earnings Call
Oct. 25, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

All participants, please standby, your conference is ready to begin. Thank you all for joining us this morning.

Before I turn the call over, I need to advise that certain statements made during this call today may contain forward-looking information and actual results could differ from the conclusions or projections in that forward-looking information, which include, but are not limited to, statements with respect to the estimation of mineral reserves and resources, the timing and the amount of estimated future production, cost of production, capital expenditures, future metal prices, and the costs and timing of the development of new projects. For a complete discussion of the risks, uncertainties and factors, which may lead to actual financial results and performance being different from the estimates contained in the forward-looking statements, please refer to Yamana's press release issued yesterday, announcing third quarter 2019 results as well as the Management's Discussion and Analysis for the same period and other regulatory filings in Canada and the United States.

I would like to remind everyone that this conference call is being recorded and will be available for replay today at 12:00 PM Eastern Time. Replay information and the presentation slides, accompanying this conference call and webcast are available on Yamana's website at yamana.com.

I will now turn the call over to Mr.Racine, President and CEO.

Daniel Racine -- President and Chief Executive Officer

Thank you, operator. Thank you all for joining us and welcome to our third quarter conference call. With me on the call today is Jason Leblanc, our CFO. Other members of management are also in the room and will be available for the Q&A portion of the call.

I'll start as I do every quarter with health, safety and corporate responsibility. The total recordable injury frequency rate continued to trend lower at 0.58, down 0.66 a year earlier, a 12% improvement. We did not have any significant environmental or social incident at our sites during the quarter. As of the third quarter, we began environmental monitoring programs at all operation with neighboring local communities. These programs, I'll ask communities to partake in environmental monitoring, improving transparency and ultimately strengthening our license to operate.

GEO production during the quarter was in line with our plan at a cost of $678 per GEO and an all-in sustaining cost at $1,039 per GEO. The all-in sustaining cost reflects the Company decision to increase exploration spend and concentrate sustaining capital spend in the second half of the year. The additional exploration spend allows us to build on the strong drilling results, being obtained across all operation. We share some of those results in the third quarter, with exploration updates for Jacobina and Canadian Malartic, and will be providing updates in Q4 for Minera, Florida and El Penon. The additional sustaining capital spend provides greater certainty for Q4 and into 2020.

Historically Q4 is our strongest quarter and that trend is going to continue this year and bring costs in line with annual guidance. I'll talk more on that shortly.

Net earnings during the quarter of $201 million or $0.21 per share include a number of item that might not be reflective of current and ongoing operation. Most notably, the $273 million gain on the sale of Chapada. On adjusted basis, net earnings are $52 million[Phonetic] or $0.05 per share.

Cash flows from operating activities, before net change in working capital, were $152.4 million or $0.16 per share. Free cash flow, before dividend and debt repayment, was $29.4 million, compared to a loss of $19.7 million a year earlier. We declared a 100% increase to our dividend in the third quarter, raising our annual dividend to $0.04 per share. And as Jason will discuss, we are looking to increase that further in the future.

It was an eventful quarter with a number of positive developments. We decreased our total debt by $800 million, lowering our net debt by $810 million to $949 million and we now have far greater financial flexibility to reinvest in the business, deliver growth and increase shareholder returns. $1,500 gold does not change our business plan nor it will change the discipline with which we allocate capital, a point I cannot stress enough, but it does mean we will generate more free cash allowing us to further reduce debt and increase returns.

During the quarter, we provided a reserve resource and exploration update for Jacobina. Since year-end 2017, mineral reserve has increased by 20.5% and grade is up 5.3%. The increase supports annual gold production above 170,000 ounces, which was our previous guidance target for Jacobina following competition of Phase 1 expansion, was expected in mid-2020. Plant throughput in Q2 approached our Phase 1 target of 6,500 tonnes per day at a recovery of 96.2%. The remaining Phase 1 investment is expected to add consistency and stability to the process plant. The increase in mineral reserve and mineral reserve grade also supports the potential for the Phase 2 expansion.

During the quarter, we also provided a positive exploration update for Canadian Malartic, including the discovery of new mineralized zone, known as East Gouldie. Mineralization at East Gouldie has been intercepted by drilling along 1,200 metres of strike over a 700-metre vertical extent, across wide intercepts. In addition, the results suggest the potential for another zone between East Gouldie and Odyssey. Results also indicate that East Gouldie, East Malartic and Sladen zones are converging at depth, suggesting the prospect for a large underground bulk tonnage opportunity. The positive result drove our decision to disclose inferred mineral resources below 1,000 meters for East Malartic at year-end 2018. Our 50% share was 1.48 million ounces bringing our share of the total inferred mineral resources at East Malartic to 2.88 million ounces, a 106% increase.

Drilling at East Gouldie is ongoing and we expect a preliminary inferred mineral resources for the deposit by year-end 2019. We initiated the first phase of Canadian Malartic led by our Chairman, who engaged in the purchase because of the cash flow from the operation and also the underground potential. We conducted extensive diligence. While only the Odyssey potential was identified at the time, we concluded there was a strong potential for a large underground ore body.

Four of our five mines are underground operation, and eventually, all five will be with Canadian Malartic. Our team at Yamana has years of underground experience, and as many of know, personally I spent over 25 years in underground mines in the Abitibi. This is a high priority for us after Jacobina and we would consider the merit of getting some synergies from developing the underground, while we still have open pits.

Turning to operation, we produced 239,000 GEO in the third quarter, including 209,000 ounces of gold and 2.5 million ounces of silver. As mentioned, we choose to increased spending in the third quarter as it allow us to build on strong exploration results and set up for a strong Q4 and 2020. To give some added color, we expect the fourth quarter operating costs to benefit from strong performance at El Penon and Minera Florida, primarily due to grade improvement. We also expect to benefit from the start of production of four underground mines at Cerro Moro, including the high-grade Zoe underground mine.

Taking a look at our individual mine, El Penon had a strong quarter with production exceeding the same year earlier period as well as the second quarter of 2019. The improvement was driven by higher gold and silver feed grade, in line with plan and a trend that we can expect to continue in Q4. We also expect that El Penon production will exceed our guidance.

I think it's worth nothing that recent mine development at El Penon has greatly improve the operation, production flexibility and follows a similar straetgy undertaken at Jacobina, which once again exceeded its production plan and posted its third straight quarter this year of record production. Costs at Jacobina during the quarter were in line with expectation and lower than Q3 of 2018. The decline reflects the internalization of underground development activities that were previously under contract. Jacobina is well-positioned to meet or exceed our revised annual guidance of 152,000 GEO ounces. As mentioned, we provided a positive exploration update for Jacobina during the quarter and we continue to explore aggressively, targeting new addition to mineral reserve at three grams per tonne or better.

Production at Canadian Malartic was in line with plan and the mine is well-positioned to meet its full-year forecast of 330,000 ounces. The expansion project continues to advance as expected with modest contribution from Barnett anticipated in the fourth quarter of 2019. The ramp-up will continue throughout 2020 with meaningful contributions set to begin in 2021.

At Cerro Moro, production feed grade and mine ore grade were consistent with plan, but lower than prior-year period and the second quarter of 2019, due to mine sequencing. As mentioned, four underground mines are expected to be in development and production during Q4, including the high-grade Zoe underground mine. Cerro Moro continues to pursue an aggressive drill program to delineate near-mine targets, test major in near-mine and regional structures.

At Minera Florida, production was impacted by lower gold grade and decreased throughput, due to development challenges, stemming from mechanical availability and mine sequencing compared to the prior-year period. Mine management has taken action to improve mechanical availability, which is expected to increase in the fourth quarter. In relation to mining sequence, we shifted production to the core mine to focus on exploration and development in the Agua Fria concession and prepare the PVS, Pataguas and Don Leopoldo veins for long-term success.

Overall, our GEO production and costs are well on track to meet the 2019 guidance.

And now, I'll hand it over to Jason to discuss the financials.

Jason LeBlanc -- Senior Vice President, Finance and Chief Financial Officer

Thank you, Daniel, and good morning everyone. I'd like to start out with some thoughts about our cost performance during Q3 and recent quarters.

As you can see in the top left graph, in relation to the first half of 2019, third quarter cash costs were stable at $678 per GEO. Shifting to the upper right, all-in sustaining costs of $1,039 per GEO were impacted by the increase in our exploration budget as well as the timing of sustaining capital spend, shown in the bottom left and right graphs respectively. As Daniel mentioned, the decision to concentrate sustaining spend in the second half of the year supports the highest quarterly rates of mining and production during the fourth quarter, as well as improving access and flexibility in mining operations into 2020. This strategy has been notably effective at Jacobina, resulting in higher production rates in recent years and quarters, and at El Penon, where production levels have increased together with development rates there.

The higher spend later in the year is sequencing. It does not change our total annual guidance for sustaining capital of $167 million, nor did it impact cash margins due to the increase in the gold price during the quarter. Sustaining CapEx in Q4 is expected at about $47 million, which were true-up to our guidance for the year. ASIC is expected to decline in the fourth quarter, similar to the profile in 2018, and be in line with our overall annual guidance.

Following the improvement in the Company's financial flexibility, one of the first decisions was to allocate a portion of our better cash flow profile to a higher dividend. As such, doubling of the quarterly dividend was declared in Q3 and positions Yamana with one of the better yields among the peers seeing here. With an expectation of improving cash flow and cash balances, the Company will be evaluating future increases to its dividend rate. Part of this appropriateness is how our dividend measures in relation to our revenue, cash flow and on a per ounce basis. These are factors we will continue to consider in a evaluating the level of our dividend and the sustainability of that level.

With the growth in our cash flow and free cash flow profile, we intend to balance our reinvestment in the Company through organic growth opportunities and exploration with increasing cash balances and also improvements to our dividend. Our expectation is there are opportunities for improvement across all of these measures.

Revenue in the third quarter was $357.8 million, compared with $424.7 million in the same period last year. The decrease reflects that the Company's current portfolio includes five mines, compared to seven in the third quarter of last year.

G&A in the quarter was $21.8 million, up primarily due to mark-to-market on stock-based comp from share price depreciation during the quarter. This was partially offset by the reductions in G&A announced earlier this year. We continue to expect 2019 G&A costs on a cash basis of $68 million compared to previous guidance of $75 million.

Net earnings attributable to Yamana equity holders in the third quarter were $0.21 per share. This includes certain items that may not be reflective of current and ongoing operations, mainly the $273 million gain on the sale of Chapada. When adjusted for these items, earnings in the quarter were $0.05 per share, more than double the $0.02 generated in the third quarter of 2018.

Cash flow from operating activities more than doubled in the latest quarter to $157.4 million from $64.5 million a year earlier. Free cash flow before dividends and debt repayments during the quarter was $29.4 million and we reduced net debt during the quarter by about $810 million. The performance during Q3 was a continuation of the inflection point on free cash flow that we had in Q2, but we expect a further step-change in free cash flow for Q4 with our best production quarter of the year.

As Daniel mentioned, we monetized the gold price instrument during Q3 for $65.5 million in cash. The decision to monetize the gold price instrument followed a detailed analysis to determine the fair value of the instrument. Our analysis of value factored in the forward curve and consensus used for the gold price, gold price volatility, and appropriately discounting the value of the instrument for risk and the uncertainty of the future gold price. We concluded that the fair value can not be derived by simply calculating the present value of the instrument based on the maximum potential payout over its five-year tenure.

This view was corroborated during a price discovery process and led to the monetization of the instrument during Q3 for $65.5 million in cash. The consideration represents immediate recognition of nearly three years of the maximum payment under the instrument, a value that we may never have received due to gold price volatility. As a reference, we estimated the fair value of the instrument at around $35 million in April, when the agreement to sell Chapada was announced.

On July 5, the Chapada closing date and the recognition date of the instrument as well, we estimated the fair value at $54 million. Monetizing assets when it makes sense for the business as it did in this case is another way in which we generate value.

And with that, I will turn the call back over to Daniel.

Daniel Racine -- President and Chief Executive Officer

Thanks, Jason.

It was a positive quarter for Yamana. We delivered strong free cash flow growth and we will continue to do so. While our costs increased in the quarter, this was by choice, and we will bring costs in line with annual guidance during the fourth quarter. We will continue to evaluate our strategic assets and deliver value by advancing developing where appropriate, monetizing them.

Our Upcoming Catalyst includes exploration update for El Penon and Minera Florida in Q4, and the reserve and resource update for the entire Company in Q1 of 2020. Results from Jacobina's prefeasibility study are expected in Q1 of 2020 and we will be providing a preliminary inferred mineral resources for East Gouldie in the same quarter.

And with that, we'll be happy to take your question.

Questions and Answers:

Operator

Thank you, Mr. Racine. We will now take questions from the telephone lines.

[Operator Instructions]

The first question is from Stephen Walker with RBC Capital Markets. Please go ahead.

Stephen Walker -- RBC Capital Markets -- Analyst

Thank you very much. Good morning.

Just wanted to ask Daniel, we've heard Northern Star, Barrick and Newmont talking about streamlining the development costs underground, and given your underground exposure, Daniel, could you talk a little bit about what we're seeing in the industry with respect to the development, the traditional development of a crew doing scaling, bolting, screening, and then another crew coming into to do the jumbo drilling? What we're seeing from the Australian and some of the other underground miners is that it's now being streamlined to one crew that is using the jumbo for that. Do you see the potential for adopting this modification in the underground Latin American operations. Is this something that could be a future cost benefit on unit mining costs for Yamana?

Daniel Racine -- President and Chief Executive Officer

Thank you, Stephen. Look, each underground mine is different and I think our costs are -- already I look at costs at El Penon, I look at the costs at Jacobina. They are already quite low compared to the industry standard. And then look, I think there's certain mines, you can do bolting with jumbos. But other mines, you need bolters and it's different. In our case, it's not different crew. They're all part of the same crew. There is a crew working together, some are doing with the jumbo, some are coming back after to do the mucking, then the bolting for the phase to be ready. So, it depends, all as integrated the amount of phases you have also and the priority you have.

We don't have one single phase of priority, so we have many at our mines. And then to be efficient, that's the way you do it too[Phonetic] in many phases at the same time with the same crew. So, I think each mine is different. When you have bigger mine with bigger opening, then you can assume you can do it with the same equipment, but with the size of mine we have, type of ore body we have, it's going to be it's going to be challenging to be different. But like I said, right from the start, we're very happy. When you are in the $2,000 per meter, doing development at you mine, I think it's challenging to go lower than that.

Stephen Walker -- RBC Capital Markets -- Analyst

All right, great. Thank you.

And maybe just stepping back a little bit, you've made a number of improvements to the operating costs on an unit basis. Do you see further improvements that are possible or are you starting to see cost inflation whether it's contract cost inflation, maintenance cost inflation? Are you starting to see impacts of inflationary pressures on your unit costs or do you think there is just further benefits and improvements?

Daniel Racine -- President and Chief Executive Officer

No. There is further benefit of improvement. We've mentioned that 2020 and '21, we're going to continue to further improve. We have great operational excellence in all our mines; they all work and share the benefit there. They see at each of their mine how to improve different area, we have implemented that as Jacobina a few years ago. Now it's implemented at all our mine they share. They share benefits or ideas to improve costs.

And naturally as our production is going to go higher with grade, then we're going to benefit with lower costs just by the divider being higher. So, we will continue to see costs going down for Yamana.

Stephen Walker -- RBC Capital Markets -- Analyst

That's very helpful. Thank you.

Operator

Thank you. The next question is from Tanya Jakusconek with Scotia Bank. Please go ahead.

Tanya Jakusconek -- Scotia Bank -- Analyst

Great. Good morning, everybody.

Just a couple of technical questions and then one for Jason. Just on the technical side maybe, Daniel, can we talk a little bit about just some of the challenges, like something else have set[Phonetic] very well, but Minera Florida and Cerro Moro seem to just be a bit challenged in the quarter. I appreciate that you're expecting a stronger Q4 for both. But maybe just review what's happening there, why the stronger Q4?

And then does the guidance for Minera Florida of 85,000 ounces appear doable for this year, and similarly a 130,000 for Cerro Moro? That's my first question.

Daniel Racine -- President and Chief Executive Officer

Okay. So I'll start with Cerro Moro, I think Cerro Moro, we mentioned, we're going to be in four mines now underground starting this quarter. So, you'll see grade going back up for Cerro Moro. And then answering the second part of your question, we're very confident that Cerro Moro's production for the full-year will be pretty close to the guidance.

For Minera Florida..

Tanya Jakusconek -- Scotia Bank -- Analyst

The grade is going back up to what Florida's level?

Daniel Racine -- President and Chief Executive Officer

The 10 grams per tonne to 11 grams per tonne or the reserve grade is so above 11[Phonetic].

Tanya Jakusconek -- Scotia Bank -- Analyst

Okay.

Daniel Racine -- President and Chief Executive Officer

For Florida, it's been more challenging. I think we have decided to change the way we were doing mining. You're going to see cost decrease in Q4, production increase. We're very confident that Florida going to meet the guidance, probably it's going to be shy of guidance. Globally, it will be higher than guidance because like I mentioned, Penon and and Jacobina will be higher than guidance, Cerro Moro will be close to guidance, and Malartic will be on guidance. So globally, we will meet the guidance for both gold and silver, but Florida will be more challenging. but you'll see great improvement in Q4 for Florida.

Tanya Jakusconek -- Scotia Bank -- Analyst

Okay. And maybe just some comments on where do you see this asset going longer term, Minera Florida?

Daniel Racine -- President and Chief Executive Officer

I mentioned many times during this year that we see huge potential in exploration at Florida. If Florida will be 85,000 ounces to 90,000 ounces for a few more years, two or three years, then we should see production going up. What we're doing and Yohann is doing with the team at the mine is to adapt the cost to that reality of 85,000 ounces to 90,000 ounces per year. And again, I mentioned in Q2 and I'll say it again, you have good surprises when we will come with resources and the reserve update in February for Florida and many of our mines, but Florida especially.

But we don't want to go too fast at Florida and go right away on these new zone and start to develop them and mine them without doing the proper exploration before. So, we're still very hopeful that Florida will be a very good mine. Now, our target is clear for the mine and make sure that we go to the best areas, we adopt our costs to make sure that the mine is generating cash flow and free cash flows. Even if they're modest, at least it's going to be in the positive side of the business. And again, I'm saying again, we're very optimistic on the future of Florida.

Tanya Jakusconek -- Scotia Bank -- Analyst

Okay. And maybe you mentioned reserves and resources, which was my second question. With everything that you've done this year, do you think you'll be able to replace your reserves and resources without changing commodity prices?

Daniel Racine -- President and Chief Executive Officer

Yes. We said it also too. It's clear that all our mines won't change the parameters that we used last year. So, we used 1,250 to do our resources and reserve last year, and then we'll do the same this year. So, all the same parameters, all the same exchange, the same value for everywhere. So gold price increases won't increase the way, artificially our resources or reserve will using the same parameters as last year. And yes, we're very confident that we're going to replace globally our reserve and resources.

Tanya Jakusconek -- Scotia Bank -- Analyst

Okay.

Daniel Racine -- President and Chief Executive Officer

And Florida is one of the one, it will probably[Phonetic] overperform.

Tanya Jakusconek -- Scotia Bank -- Analyst

Okay, perfect. And then maybe, Jason, just coming back on sort of your hedging policy for both currencies and gold. And I know we've talked a little bit about you do hedge currencies going forward. Just maybe talk a little bit about your gold hedging strategy, given the color you put in Q4 and how do you see hedging in 2020?

Jason LeBlanc -- Senior Vice President, Finance and Chief Financial Officer

Yes, I'll start with the currencies first, that's the way you asked the questions, Tanya. And we've been a very steady state hedger of certain currencies, when it made sense that's from a cash flow certainty perspective. I don't think anything has changed there. So, you can continue more of the same, where we would hedge, in certain cases between 50% and say 70%, maybe up to 75% of local currencies.

On the the gold question, yes, you're referring to the color we put in place just for Q4. I guess I'd start by saying we're not gold hedgers. We won't continue to the hedge gold that was fit for purpose for a quarterly perspective. We saw the opportunity with the rise up in gold prices and some of the dislocations that happened there and the volatility that presented an opportunity like that.

And really, the purpose on Q4, I'll go back to the comments I made in my remarks about profile of free cash flow. We are very excited to have that inflection point in Q2, Q3 also delivered free cash, but the Q4 is the one where we see a multiple of that free cash flow generation. And really with the increases in gold prices, we are able to effectively lock that in, that we can show that current trend upwards. But I would consider that a one and done as it relates to gold hedging. I think it also allows us to continue on our path of increasing cash, of reducing debt levels. We don't have any real debt maturities due until 2022. We do have a more modest payment of fixed-term debt in the first quarter next year. So with that free cash that we've locked in, we can defease that upcoming debt payment. Beyond that, you should expect growing cash balances and decreasing net debt.

Tanya Jakusconek -- Scotia Bank -- Analyst

So Jason, I understand. So, if we were to see a move upward in the gold price, I shouldn't be looking at your next quarter, and thinking there's another caller coming with debt maturity payments[Phoneic].

Jason LeBlanc -- Senior Vice President, Finance and Chief Financial Officer

No, you shouldn't. I wouldn't conclude that now.

Tanya Jakusconek -- Scotia Bank -- Analyst

Okay. Okay, great. Thank you.

Jason LeBlanc -- Senior Vice President, Finance and Chief Financial Officer

Thank you.

Operator

Thank you. The next question is from Michael Fairbairn with Canaccord Genuity. Please go ahead.

Michael Fairbairn -- Canaccord Genuity -- Analyst

Hi, guys. Thanks for taking my question. Jason, just a question for you around capital guidance for the rest of the year. I know you guys said that in Q4, you expect to spend about $47 million for sustaining. And first off, I was wondering if you could give any more granularity around both the growth CapEx, stockpile CapEx at Malartic and even capitalized exploration going into Q4?

And I also wanted to ask around the percentage of exploration that would be capitalized. I think at one point, you guys had said you'd expect to capitalize about 77% of exploration costs this year. I just wanted to know if that was still the case going into the last quarter?

Jason LeBlanc -- Senior Vice President, Finance and Chief Financial Officer

Yes, that's still pretty good, Michael. I'll try to run through those, if I forget something please just remind me.

Yes, as mentioned, we're going to do our sustaining capital for the year. I said $47 million on the call. So, you should expect that. Exploration, you can see in the disclosure, we increased that by $10 million, that's all capitalized exploration will go through there. The expense portion is probably running a couple of million dollars per quarter, that's still a good run rate.

On the growth side, we announced a few projects this year. So, it will be a couple of million dollars, I'd say, above guidance. Big picture, call it online, with guidance on the stockpiling front, it's about a million tons at Malartic during Q4, I believe. So, that's a pretty good number to use and just apply your mining cost for that.

Michael Fairbairn -- Canaccord Genuity -- Analyst

Okay.

And on a total basis, are you able to give any kind of guidance around what you expect that total CapEx number to be?

Jason LeBlanc -- Senior Vice President, Finance and Chief Financial Officer

On which line item, Michael.

Michael Fairbairn -- Canaccord Genuity -- Analyst

Just across the Board, including sustaining exploration, stockpiling and growth?

Jason LeBlanc -- Senior Vice President, Finance and Chief Financial Officer

Yes, it's effectively all of our guided levels.

Michael Fairbairn -- Canaccord Genuity -- Analyst

Okay. All right.

Jason LeBlanc -- Senior Vice President, Finance and Chief Financial Officer

Thank you. Yes.

Operator

Thank you. The next question is from Mike Jalonen with Bank of America. Please go ahead.

Mike Jalonen -- Bank of America -- Analyst

Hello. Hi, Dan.

Just two questions. First Agua Rica, looks like positive progress there with your partners, tying that with Alumbrera. Just wondering there might be a change in government in Argentina very shortly, more left wing. Just wonder if that would impact the project pipeline?

And then I just wondering on Cerro Moro is -- is Yamana getting cash out of the country with the foreign exchange controls? Thanks.

Daniel Racine -- President and Chief Executive Officer

Yes. Jason can answer the second part. But yes we can -- I can say that there is no issue to bring cash out of the country for us. Jason can give more detail, but that's not an issue.

And regarding your first question, after the first round of election in Argentina, they runner up candidate, Mr. Fernandez, not even a week after that first round, contacted all the mining companies to go meet him, and then, we were part of it. And we don't see any big change on our part in the country after this weekend's election. So, it's the second round on Sunday. We're going to see the results. But so far we don't see major changes with the potential new President of the country. We'll see what are the results, but we don't see any changes. And yes, Agua Rica study is going really well. We've started the permitting process and then we're going through the phase of doing the feed study for mid-next year.

Mike Jalonen -- Bank of America -- Analyst

Okay, thank you.

Jason LeBlanc -- Senior Vice President, Finance and Chief Financial Officer

Yes. And Mike, I wouldn't really add anything more than the Daniel said that business is usual in Argentina. As it relates to moving our money, we see no impediments to getting cash out and we've been operating in Argentina for over 10 years, and have had experiences like this before. And we see this is a very similar similar episode. It's a little bit more elbow grease, but it gets done normal course.

Mike Jalonen -- Bank of America -- Analyst

Okay, thank you.

Operator

Thank you. And the next question is from Anita Soni with CIBC. Please go ahead.

Anita Soni -- CIBC -- Analyst

Okay. Good morning, guys. Most of the questions have been asked.

So, I'll ask about January and February. Coming into January, are you going to do a production update as you normally do for the fourth quarter? And then, when will you deliver guidance, at January or February this year?

Daniel Racine -- President and Chief Executive Officer

Yes. We have decided as a company, probably to do pre-production release twice a year or so. January will probably be one and then, July will be the other one. So, we don't think there is a purpose to do it each quarter. But I think twice a year will be -- that we want to go into future. So, you can expect that, yes in January, we're going to pre-release production.

Anita Soni -- CIBC -- Analyst

Okay.

Daniel Racine -- President and Chief Executive Officer

On the guidance and resources and reserve, it's always a second week of February.

Anita Soni -- CIBC -- Analyst

All right, that's all I have. Thanks.

Daniel Racine -- President and Chief Executive Officer

Thank you.

Operator

Thank you.

[Operator Instructions]

The next question is from Steve Butler with GMP Securities. Please go ahead.

Steve Butler -- GMP Securities -- Analyst

Well, thanks, operator. Jason, interest payments, how do you expect they will fall in -- through roughly what level in the fourth quarter? Thanks.

Jason LeBlanc -- Senior Vice President, Finance and Chief Financial Officer

Yes, Steve, I guess, you can just you can build that up off of our total debt level and gross debt is about call $1.05 billion. You can apply a 5% rate to that, that will account for the interest rates. Then, standby fees and some other ancillary costs. I think it's a pretty easy way to do it. Just divide that by four, and then prospectively you'll need to take into account our free cash flow generation obviously. And we'll see those debt levels going down. So, the interest will go down commensurately.

Steve Butler -- GMP Securities -- Analyst

Okay, sounds fine.

And then guys, just on El Penon, I noticed your ore mined approximately 2,700 tons per day, just a hair above that in the ore milled about 3,500 tons per day slightly less. Is the stockpiling strategy -- do you have a fair stockpile at El Penon that can help sustain the mill at that 3,500 tons per day rate, and maybe if you can give us a sense for the tonne and stockpile tonnes and grade, if you have it?

Daniel Racine -- President and Chief Executive Officer

Steve, I'm going to answer one here. At Penon, at this moment, we got about, I would say 18,000 tonnes of stockpile. And we also have low-grade stockpile. So, all you can see, I mean we see that the contribution from the run of mine is increasing. And concentration from the local stockpile is decreasing quarter-over-quarter. So, this is [Indecipherable] strategy, and this is based on our flexibilities to feed the mill from one of the mine with more working activities.

Steve Butler -- GMP Securities -- Analyst

All right. So into 2020 or '21, do you expect to be able to sustain or even improve upon the run of mine from underground above 2,700 tonne per day level?

Daniel Racine -- President and Chief Executive Officer

I think we're going to see improvement quarter-over-quarter at Penon, I mean, we are still working on our budget. But Penon is trending very well. The rightsizing that we did was -- I mean, it takes time, you need to rightsize first your tonne and after that your costs. And we have the stage where we really rightsize our costs. So, we see a really positive momentum in Penon. And there is, -- we believe that this is going to continue over in 2020 and going forward.

Steve Butler -- GMP Securities -- Analyst

Okay. Okay, thanks very much guys.

Daniel Racine -- President and Chief Executive Officer

Yes.

Operator

Thank you.

[Operator Instructions]

There are no further questions registered at this time. So, I would like to turn the meeting over to Mr. Daniel Racine.

Daniel Racine -- President and Chief Executive Officer

Thank you, operator. Thank you everyone for joining us. We look forward to updating you on our fourth quarter results in February. And for us, at all our mine, it's business as usual. So, we should have a great Q4 like we mentioned many times a day and then in the past. Thank you. Bye, bye.

Operator

[Operating Closing Remarks]

Duration: 40 minutes

Call participants:

Daniel Racine -- President and Chief Executive Officer

Jason LeBlanc -- Senior Vice President, Finance and Chief Financial Officer

Stephen Walker -- RBC Capital Markets -- Analyst

Tanya Jakusconek -- Scotia Bank -- Analyst

Michael Fairbairn -- Canaccord Genuity -- Analyst

Mike Jalonen -- Bank of America -- Analyst

Anita Soni -- CIBC -- Analyst

Steve Butler -- GMP Securities -- Analyst

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