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Turquoise Hill Resources Ltd (NYSE:TRQ)
Q1 2020 Earnings Call
May 14, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, my name is Joanna and I will be your conference operator today. At this time, I would like to welcome everyone to the Turquoise Hill Resources First Quarter 2020 Results Conference call. [Operator Instructions].

Thank you Roy McDowall, you may begin your conference.

Roy McDowall -- Head of Investor Relations and Corporate Communications

Thank you, Joanna. Good morning I'm Roy McDowall, Head of Investor Relations and Communications. Welcome to our first quarter 2020 financial results conference call. On Wednesday, we released our first quarter 2020 results, press release, MD&A and financial statements. These items are available in our website and SEDAR. With me on the call are Ulf Quellmann, our CEO; Luke Colton, our CFO; and Jo-Anne Dudley, our COO.

This call and presentation includes certain forward-looking statements and information, we refer you to the forward-looking statements section of the Annual Information Form dated March 18, 2020 as supplemented by our MD&A for the three months ended March 31st,2020.

And now I'd like to turn the call over to our Chief Executive Officer, Ulf Quellmann.

Ulf Quellmann -- Chief Executive Officer

Thank you Roy and good morning to everyone. Thank you for joining us this morning for our first quarter 2020 financial earnings call. It was only a relatively short while ago that we hosted our 2019 year-end conference call and yet the impact of the coronavirus pandemic has become far greater than probably most of us might have expected at the time. On a personal note, we hope that you and your families are healthy and safe and you're able to adapt to the new realities that all of us are being presented with.

Turning to yesterday's first quarter update and the announcement of the updated Panel Zero mine design, I'd like to begin by providing with an overview of the quarter and then turn the call over to our Chief Operating Officer, Jo-Anne Dudley, to take you through the updated Panel Xero mine design, and finally to Luke Colton, our Chief Financial Officer to summarize our first quarter 2020 financials.

In Mongolia, the COVID-19 situation escalated in early March, when Mongolia recorded its first case of COVID-19. The Oyu Tolgoi team responded quickly and worked with local and federal authorities to ensure the health and safety of our workforce. The families, the local communities, while the Government of Mongolia acted decisively by halting international rail, flights and intercity travels. The immediate impact of travel and border restrictions slowed supply since Oyu Tolgoi and concentrate deliveries to our customers in China. However, the open pit operations continued uninterrupted. As of today, Oyu Tolgoi has not recorded any cases of COVID-19 and does not have any employees or contractors in isolation. In addition, Mongolia itself has not reported any recorded locally transmitted cases. The situation at the border has stabilized with shipments of copper concentrates into China and supplies into Oyu Tolgoi returning to normalized levels. The Oyu Tolgoi Business Resilience team meets on a daily basis and continues to work with the Mongolian authorities to monitor improvement possibility of any COVID-19 cases.

From an operations and underground development perspective, the team has done an exceptional job of managing the impact of the COVID-19 pandemic. The open pit operations continued uninterrupted through the first quarter, with copper and gold production remaining on track to achieve our 2020 guidance. In addition, the team is implementing initiatives to bring forward with the higher gold bearing ore into 2020, which is expected to lead to gold production to the upper end of the guidance range. Important to note, that this excellent level of productivity has occurred with a backdrop of continued best-in-class safety record that remains the Oyu Tolgoi team's top priority.

Although we have experienced slowdown in certain areas, progress on the underground development has continued as per expectations, as we've been able to cross train our highly skilled local workforce to alleviate the impact of the travel restrictions, focus on critical path infrastructure. Our activity in [Indecipherable] have resulted in a lateral development grade, averaging 1,822 equivalent meters in the first quarter versus 1,607 equivalent meters in the fourth quarter of last year, with March setting a new record of 1,939 equivalent meters.

As I touched on earlier, the first quarter was another excellent quarter from an open pit productivity perspective. Although we are transitioning through the lower grade areas of the pit, considering the impact of COVID-19, the team has done an excellent job of keeping production in line with our guidance. Mill throughput is another metric to note, as we processed over 119,000 tonnes per day, which is well above the nameplate capacity of 100,000 tonnes per day.

Now before I turn the call over to Jo-Anne to discuss the update in Panel Zero mine design, I'd like to take a moment to thank our shareholders for their continued support. As you will recall in July last year, we announced that stability risks have been identified with the original Panel Zero mine design, with an associated estimated increase in the schedule to sustainable first production of 16 to 30 months and an increase in capital development costs of $1.2 billion to $1.9 billion. We set a timeline to complete an updated mine design by the first half of 2020, and now of the extensive geotech modeling and a thorough technical assurance program that included independent third parties, the updated design changes for Panel Zero have been approved by the TRQ board.

And with that, I'd now like to turn the call over to Jo-Anne to take you through the underground development and the Panel Zero mine design. Jo-Anne, over to you. Thank you, Ulf. Hello everybody, please go to slide 7. Before turning to the update on the Panel Zero mine design, let me provide you with a snapshot of progress elsewhere. A key milestone toward the progression of the underground development was the completion of Shaft 2 in October last year. Shaft 2 has been performing well, but payloads and hoisting speed on the production hoists are currently reduced due to routine stretching of the newly commissioned roads. We are working through this ordinary course issue, with remote support with no impact on underground lateral development to date. Shafts 3 and 4 saw very good construction progress during the quarter, and nearly ready for sinking works to commence. Due to travel restrictions arising from COVID-19, these shafts have now been put into care and maintenance until specialist personnel can reach the mine site. But, I'd like to note that the initiation and ramp-up of Panel Zero can proceed without these shafts commissioned. Primary crusher one civil works are ongoing, and the team has successfully poured the 10th level of crushable. The spot chartering for being on care and maintenance, and the slowing of construction work on the primary crusher system, our team achieved a new record of 1,939 equivalent meters of lateral development in March, and a record average of 1,822 per month for the quarter. Progress continues on the conveyor decline, with over a kilometer of equivalent meters developed during the quarter. Please turn to slide 8; you will now recall from our fourth quarter update, that we had guided the market to expect the new panel zero mine design in the first half of 2020, and we've made some important steps to guide that design over the past few quarters. The Panel Zero mine design decision has now been made by the TRQ Board, with this caving method of mining remaining valid, and the design and location of all the other major infrastructure, such as shafts and primary crushers unchanged from the feasibility study. The design changes are focused around the Panel Zero mining area, which is the highest grade at the Oyu Tolgoi underground and remains our priority target. The updated design provides increased resilience in execution and operations to the geotechnical conditions in Panel Zero is now understood. The decision was supported by extensive geotechnical modeling and a rigorous technical assurance program involving third party experts, and considered consequential impacts on and risks relating to, recovery geotechnical, constructability, operability, schedule, costs and value. The next phase of mine design studies, will include design, optimization for Panel Zero and the review of mine design options for Panel 1 and Panel 2 to utilize the learnings from the Panel Zero work. The Panel 1 and Panel 2 studies will be informed by additional data, collected from an underground drilling program, which is in progress. Please turn to slide 9; the approved Panel Zero design remains within the ranges previously disclosed and anticipate a delay to the 2016 technical report key project milestone of sustainable production of 25 months, with a range of 21 to 29 months, inclusive of an allowance for scheduled contingency and an increase in development capital cost of $1.5 billion, with a range of $1.3 to $1.8 billion. This is subject to any additional scheduling delays or increases in capital costs arising from the impacts of the COVID-19 pandemic. As I said earlier, many of the fundamentals of the mine design remain unchanged from the 2016 feasibility study, with the changes to Panel Zero focused on addressing the stability risk highlighted by updated geotechnical modeling. The updated design varies from the 2016 design, primarily through the incorporation of structural pillars, located immediately north and south of the current Panel Zero boundaries and relocation of ore handling infrastructure to these pillars. This addresses the risk of damage to the ore handling system in the original position of updated geotechnical modeling. A change to initiate via a single undercut phase instead of two, reduces the complexity of managing two separate, but related work areas, and improves the separation of mine construction and production activities. Incorporation of pillars provides the opportunity to initiate panels 1 and 2 with independent panels or blocks, allowing design, optimization and for these areas to be developed discreetly, enabled by the required ventilation and ore handling infrastructure, as well as lateral development progress. Overall, the changes provide a robust platform to develop and operate the Hugo North Lift 1 case and will now undergo a period of further detailed design engineering and optimization, to support the definitive estimate during the second half of 2020, again subject to any delays due to the impact of the COVID-19 pandemic. I'll be available for questions, but in the meantime, Ulf would you like to continue? Thank you, Jo-Anne. Before I turn the call over to our CFO, Luke Colton, let me just provide you with a quick update of our multiple discussions with the Government of Mongolia. First, turning to power; as you know, Oyu Tolgoi is obliged under the 2009 Investment Agreement to secure a long-term domestic source of power for the Oyu Tolgoi mine. In February of this year, Oyu Tolgoi submitted a feasibility study for a Tavan Tolgoi Power Plant TTPP, with an estimated cost of $924 million. At the same time, a notice of contingency under the Power Source Framework Agreement was submitted by Oyu Tolgoi to the Government of Mongolia. This notice initiated the first phase, phase one, of the contingency process, which attempted successfully to agree on a basis for the TTPP, the Tavan Tolgoi Power Plant to proceed. Now, the second phase of the contingency process has commenced, where Oyu Tolgoi and government consider the alternatives to the TTPP prescribed in the Power Source Framework Agreement. On the 14th of April, the Minister of Energy notified Oyu Tolgoi off the government's decision to develop and fund a state-owned power plant. Oyu Tolgoi is currently in discussions with the government, to allow continued consideration all of TTPP, as well as the state-owned power plant. Reaching such an agreement remains our objective. However if such an agreement cannot be reached between Oyu Tolgoi and the government, by the 14th of June, then thereafter, Oyu Tolgoi is entitled to select and implement one of the alternative options that are outlined in the Power Source Framework Agreement. In reference to the outstanding tax dispute between Oyu Tolgoi and the Government on 20th of February, Oyu Tolgoi proceeded with the initiation of a formal international arbitration proceeding in accordance with a dispute resolution provisions of the Investment Agreement. We remain of the opinion that Oyu Tolgoi has now paid all taxes and charges required under the Investment Agreement in [Indecipherable] the Underground Development Plan and Mongolian law. As we announced in December last year, the Parliamentary Working Group finalized its report from which a resolution was put forward for the Government of Mongolia to enter into discussions to improve the implementation of the Investment Agreement and improve the underground development plan. It has also included a variety of other measures, including but not limited to exploring options of a product-sharing agreement or swap Mongolia's 34% equity holding for a special royalty. At this stage, representatives from Turquoise Hill and Rio Tinto are engaged with the government, as a result of these issues and we will update the market as and when appropriate. So with that, let me now turn the call over to Luke Colton, our Chief Financial Officer, to take you through our financial highlights. Luke, over to you please?

Luke Colton -- Chief Financial Officer

Thanks Ulf and hello to everyone on the call. If I could get you to please turn to slide 12 and I'll give you a summary of our key financial metrics for Q1 of 2020. There are some significant variances when comparing the metrics in the first quarter of 2020 to the first quarter of 2019. The primary reason for this is due to the planned transition into mining lower grade Phase 4B and Phase 6B ore together with stockpiles. The reductions in head grade and recovery led to a 78% decrease in gold production, and a 23% decrease in copper production, when compared to Q1 2019. Now, this ultimately led to a 63% decrease in revenue from Q1 2019 to Q1 2020, which in turn contributed to lower cash generated from operating activities. The 75% decrease in gold sales revenue was the main reason for the increase in the Q1 cash costs from $0.77 in Q1 2019 to $2.07 per pound of copper produced in Q1 of 2020.

The period-on-period increase in all-in sustaining costs was not as significant as the increase in Q1 cash costs this was primarily due to the offsetting impact of lower sustaining capital expenditure and lower royalty costs due to the lower sales revenue.

If I can ask you to please now turn to slide 13, Turquoise Hills liquidity balance at the end of March 2020 was $1.8 billion, with $1.6 billion in cash and cash equivalents and $200 million of remaining project finance proceeds. In addition, we expect to generate free cash flow at our existing open pit operations, subject to any impact of COVID-19 and this will also be available to help fund the underground development. We currently expect to have enough liquidity to fund operations and underground development, including progression of a power solution into Q3 of 2021. This timing has been extended since the March 2020 earnings call, as a result of an estimated slowdown in underground development spend arising from the potential impact of COVID-19, which has restricted access of the mine for teams from OT, Rio Tinto and our construction partners. This has also led to a downward revision of both our underground development guidance range for 2020 to $1 billion to $1.1 billion, as well as the downward revision of the upper end of our open-pit operations guidance range from $120 million to $100 million.

As work to complete the definitive estimates, the panels 1 and 2 mine design study and to secure a long-term domestic power solution progresses, Turquoise Hill will continue to evaluate cash flows, liquidity and financing projections, while it's funding requirements will be clarified by the ongoing work, we are well progressed in discussions with Rio regarding a proposal for sourcing incremental interim funding, to ensure Turquoise Hill can progress the underground developments over and above it's $1.8 billion of available liquidity.

Current estimates indicate an incremental funding requirement over and above liquidity currently available of at least $4 billion. This current estimate has improved from the at least $4.5 billion previously disclosed, due in part to the selection of the Panel Zero mine design, coupled with lower forecast LIBOR rates. As the slide shows, the at least $4 billion estimate is dependent upon many variables, all of which could impact the quantum of incremental funding required, and of course, the company will continue to assess the possible impacts of COVID-19 on its operations, development activities, as well as the incremental funding requirements.

And with that, I'll hand back over to Ulf.

Ulf Quellmann -- Chief Executive Officer

Thank you very much Luke. So to wrap it up, the first quarter of this year has in all, but overshadowed by COVID-19 and the impact it has had on the health and safety of really everyone around the world. And everyone is still trying to assess the full impact on the global economy, as well as the financial markets. In light of an unprecedented event such as this, it is our belief that Mongolia, as well as Oyu Tolgoi, have demonstrated an extraordinary capability to manage and mitigate the impacts on its workforce, the broader community and its business performance in an outstanding fashion.

Mongolia has done a tremendous job in containing and minimizing the impact on its people and Oyu Tolgoi as a business has been able to safeguard the well-being of its people and to operate and deliver under the most difficult of circumstances. This achievement and of course, we know that the challenge is far from over, speaks to the resilience and the ingenuity of the Mongolian people, who of course to make up more than 94% of Oyu Tolgoi workforce. Our safety record remains strong. Our open-pit open pit operations have continued thus far uninterrupted. The underground mine development and construction have progressed, albeit they are experiencing challenges, primarily as a result of not being able to get specialists and supervisory for a national site. But we are exploring creative ways to mitigate these impacts as best we can.

Importantly, we have approved the mine design for Panel Zero, but we are now taking forward to execution level planning, culminating ultimately in the definitive estimate later this year. So since July of last year, we have done what we said we would do, we've laid out a process map that we shared with the markets and we have delivered on those key milestones and that's what we intend to continue to do. The caveat in all of this of course is, the precise impact of COVID-19 on our key activities, which to-date remains unquantified.

We have more work to do, both on power, as well as financing. Luke just updated you on the latest minimum funding requirements, as well as the work and the discussions we continue to have with finance providers. The discussions are progressing, and we are absolutely focused on those. Also recall though, that we have available liquidity that sees us into the third quarter of next year. While funding is absolutely important and a priority for us to lay out a funding plan, there is no immediate cash shortfall.

And on power, we are working with the Government of Mongolia to progress sourcing power from within Mongolia. There are a variety of options available, and each one of them has its own advantages and challenges. The PSFA, the Power Source Framework Agreement, the contractual framework within which these discussions are taking place. Government has most recently put forward its preferred concept and we are now in discussions to find a way to embed this concept into the PSFA framework, which we hope to be able to do soon.

While the priorities remain clear, we are seeing Oyu Tolgoi progressing on many fronts and delivering against the milestones we set out, the quality of the ore body and the quality of Oyu Tolgoi as a business remains world-class and it is well on its way to being one of the world's Tier 1 copper mines. We've been able to demonstrate important progress in the key area of mine design and you're able to see what Oyu Tolgoi's largely Mongolian workforce is able to do in the face of adversity, as evidenced by COVID-19. So there's a lot to be done, but we're certainly well on our way.

So that concludes our prepared remarks and with that operator, could I please turn the call back to you for any questions please?

Questions and Answers:

Ulf Quellmann -- Chief Executive Officer

[Operator Instructions]. The first question comes from Orest Wowkodaw from Scotiabank. Please go ahead.

Orest Wowkodaw -- Scotiabank -- Analyst

So. Hi, good morning. Curious now that you've completed the mine design for Panel Zero, can you give us some color on what the ramp up schedule will look like, once you achieve that initial for sustainable production, which I take it, based on the 25 month delay is more like first quarter of 2023. I'm curious, specifically whether the ramp up profile for the copper and the gold has changed materially at all, from what we saw in 2016 tech report?

Ulf Quellmann -- Chief Executive Officer

Orest, thanks for the question. If I may. I might have to add a little bit of a facilitator on the call this morning, because we all working from different places. Jo-Anne is -- I hope you could hear the question. Do you want to address Orest's questions?

Jo-Anne Dudley -- Chief Operating Officer

Yes, absolutely. Thank you Orest for your question. So at this stage the decision that's been approved really is focused on the Panel Zero area and there is some ongoing optimization work that's being completed, to understand the full impact of the changes. We also are continuing to work on design refinements at tower 1 and 2, which also required to be part of the ramp up, as you would know from that 2016 technical report. So as part of that design review work, we will be further reviewing any impact on ramp up. The work is still in progress, and and has yet to be completed. Now is it worth noting that with the incorporation of pillars to the North and South of Panel Zero, there is some flexibility to start Panel 1 and 2 independently, and that will be dictated by infrastructure availability, like ventilation and ore handling and development progress. And so that work will be going on through 2020.

Orest Wowkodaw -- Scotiabank -- Analyst

Sure. But I'm not sure I understand. Are you saying that, it's too early to know if there is a material change or maybe I can ask, do you anticipate there will be a material change to the ramp up profile?

Jo-Anne Dudley -- Chief Operating Officer

Yes, so it's too early to say. The design gives us flexibility on the starting of on the initiation of Panel 1 and 2, the design decision for Panel Zero and so there is some opportunity provided with that, but that work is is ongoing, and it just had a slide year. It is a good question, but we just not there yet.

Orest Wowkodaw -- Scotiabank -- Analyst

And then if I could, can you just give us an idea of how much contingency is embedded in the new development plan and capital override number, with respect to say number of months or dollars for the budget?

Jo-Anne Dudley -- Chief Operating Officer

So another good question Orest. So at very conclusion, included in the range provided in the estimates and these things are calculated off each schedule and the degree of progress that has been made. So in this case, we haven't specified the contingency, but the there is contingency included, as you would expect and as you have seen in the past with the works that we communicated.

Orest Wowkodaw -- Scotiabank -- Analyst

OK. But you can't quantify it?

Jo-Anne Dudley -- Chief Operating Officer

Not right at this moment.

Orest Wowkodaw -- Scotiabank -- Analyst

Thank you.

Ulf Quellmann -- Chief Executive Officer

Can I just add to the two, to supplement Jo-Anne's comments. Yes, we're not in a position to publicly provide what the contingency is. I think what I just want to highlight, Orest, we are keen and we were keen to update the markets on the progress we made on mine design, which is what we've done. We were also keen to provide the market with an update on ranges for schedule and for capital costs, and that's what we've done. They are ranges, because of course that's where we are at the moment from a level of precision, if you like. So that's why they are ranges as opposed to precise numbers. But we wanted to do that at this point in time, because we felt it was appropriate for that. That's why also we have a contingency in the numbers at this stage. The final number if you like, or the definitive number, both on cost and schedule, you will then receive when we get to the definitive estimate, which is later this year.

Orest Wowkodaw -- Scotiabank -- Analyst

OK. Thanks Ulf.

Operator

Thank you. The next question comes from Hayden Bairstow from Macquarie. Please go ahead.

Hayden Bairstow -- Macquarie -- Analyst

Hi all. Evening from my side of the world. Just a couple of quick questions, firstly on the sort of mine plan, but we need to sort of almost throw out the old numbers in terms of 65,000s of development, where you are getting the sort of fee under way given you have now got two sort of all handling areas as opposed to one and all these numbers will come out with definitive estimates. So we'll get -- to my points, looking at your quarterly development rights, just getting closer to the finishing of the pre-development work, that's the first one. And then the second one just on -- a note in the commentary about yeah, the completion of the panel 1 and 2 work won't be done until '21. So the definitive estimate won't be definitive, won't have life of mine capex and all that sort of stuff, because you have not yet finished all of the Panel 1 and Panel 2 design work. Is that a fair way to think about it?

Ulf Quellmann -- Chief Executive Officer

Yeah, two very good questions Hayden. Again I think Jo-Anne on this call this morning, I'm afraid you may probably get the bulk of the questions. But are you -- could you hear the question from Hayden, Jo-Anne, do you want to start answering, I can supplement at the end, if needed?

Jo-Anne Dudley -- Chief Operating Officer

Sure. Thank you, Ulf and thank you, Hayden. So in terms of the way we should think about things. I mean we have provided an update of the sustainable production date and that is a key value driver for the mine and and that's why we're focused on that date. It's not necessarily meaningful to think about the development native, for example, because there are multiple critics passed on the project and some of them are development native, and some of the other aspects of the schedule like infrastructure, ventilation and and material handling, for example, and all of these pieces build to give us the date at which we can start ramping up, which is first sustainable production. So you would focus on the dates in front of us for the start of ramp-up, if that makes sense.

In terms of the definitive estimate, a key aim of the definitive estimate is to provide an update -- a very accurate update on the development capital estimate, which is really about the infrastructure components that is being constructed. And so, that particular portion of the estimate will be quite a good quality, subject of course to the current changes that we're finding, as a result of COVID-19. We have some aspects of the construction that is being impacted. Does that answer your question, Hayden?

Hayden Bairstow -- Macquarie -- Analyst

Yeah, I guess I'm just trying to get an understanding of the definitive estimate, I assume it would be a -- provide updates for everything that clearly you won't have lots of onus, it's more a focus on the front end capex, but just on the underground development, and I understand what you were talking about, but the previous numbers that were in your studies about, we needed 65,000s of lateral development to get going. There's probably more than that now, so there is no point even thinking about those numbers as relevant, we'll see all those in the definitive estimate? Is that how it could be...

Jo-Anne Dudley -- Chief Operating Officer

But there will be -- yes, so, there will be an update about it at some other time and there has been no change of the about -- that period. So it is a good way to think of that. I mean, just, sorry, back to the Definitive Estimate question, there is work going on and drilling proceeding on the book and trying to understand any residual uncertainties and we'll get a significant grade improved picture as it remind you of 2020, perhaps things are going to work out in terms of that loss of mine picture.

Hayden Bairstow -- Macquarie -- Analyst

OK. And Ulf, if I can, still one final one.

Ulf Quellmann -- Chief Executive Officer

I'll give Jo-Anne, rest.

Hayden Bairstow -- Macquarie -- Analyst

Just on the funding shortfall of $4 billion, I mean, like half of that, from memory just you had the date or time and schedule, I mean, the force as you would be -- of debt, is that changed that repayment schedule or it changed for long stop date? And if we strip that out, obviously the funding still pulls by lower list, past development is pretty interesting. I mean, does that potentially remove the power station cost or a large proportion from part of this potential shortfall?

Ulf Quellmann -- Chief Executive Officer

Thanks, Hayden. I'll let Luke comment in a second maybe on the fourth measure the loss update. Just on power, the second half of your question, what you are rightly point out Hayden is, as we are still looking at various options and if you were to take the government's preferred option which is what they call the State Owned and Funded option. If we ended up with that option and that was absolutely executable and met OT's requirements, then of course, that would have a material impact on the funding requirement, because it would all of sudden remove a big chunk of the funding from OT if the government decided that it was willing to fund the power plant, right and so, you absolutely rightly pointed out that, if that is where we ended up and of course, that's not certain at the moment, but it's that's way we did end up with have a material impact on the minimum funding requirement.

Maybe, Luke, with that, do you want to comment briefly on the first part of Hayden's questions around -- and indications on long stop date? And the size of the debt service really as part of that funding gap?

Luke Colton -- Chief Financial Officer

Yes, no problem. The question is a good one and the answer is simple. The impact is really on the long stop date, Hayden, this date we are not really expecting that the sort of near-term interest and principal repayments are going to change at all as a result of this. So, that's the quick answer. Happy to go into more detail if you want, but that's the quick answer.

Hayden Bairstow -- Macquarie -- Analyst

OK. Great. I'll take it [Indecipherable]. Thanks for the terrific answers.

Operator

Thank you. The next question comes from Oscar Cabrera from CIBC. Please go ahead. Oscar, your line is open. Go ahead please. Oscar, if you are on mute, please unmute your phone.

Oscar Cabrera -- CIBC -- Analyst

Apologies. Let me start over. I was just saying, hope you and your families are well in this uncertain times. So, couple of things for me. The first is, could you discuss the critical path items in the underground in order to meet your 25 month delay. It sounds like Shaft 3 and 4 are not part of this critical path and if they are not, then, how long can you wait to seeing this before it starts affecting future underground development and production?

Ulf Quellmann -- Chief Executive Officer

Thanks, Oscar. I'll pass the question in a second to Jo-Anne, but first of all, I acknowledge, thank you for your good wishes and hope you and your family are safe, as well. And Jo-Anne, just before you answer the specific question, you are absolutely right, Oscar, to point out that when we look at the impact to-date of COVID-19 and what might happen going forward, there are differences, right, because, what we try to point out is, to-date, certainly the open pit operations have been really uninterrupted.

That continues to be the case and in areas of underground development, it's also been unaffected, because we continue to deliver strong results. But where there has an impact is, correctly as you pointed out on some infrastructure, whether it's shafts 3 and 4 and one or two others. And Jo-Anne, maybe you want to take it from there and say, what are the implications of that and are they on the critical path now or if not now, will they become critical path at some stage going forward?

Jo-Anne Dudley -- Chief Operating Officer

Thank you, Ulf and thank you, Oscar for the question. On this project there are multiple critical paths and a component of that, a critical path is the actual development progress, as well as material handling and supply components to the critical path and at some point all of these aspects may become critical path on the project.

We should recall that, Panel Zero is able to be initiated and commenced ramping up using the existing ventilation capacity. And so initially, any delays in shaft 3 and 4 should have a minimal impact. As Ulf mentioned before, there is ongoing work on Panel Zero and also Panel 1 and 2, where design refinement work being carried out and at this point, a complete and full understanding of the critical path is under review and so, more is mentioned about that we will emerge as the work progresses and there is obviously some uncertainty about what will happen in terms of timing and accessibility to restart that work. So, the work is ongoing. It's very much -- there is a focus for the time. Ulf, do you want to add anything further?

Ulf Quellmann -- Chief Executive Officer

I would just say in general, Oscar, I think it's important for us to strike the right balance. I think on the one hand be very, I think proud to look at what the OT team and with the support of the Mongolian government has been able to do so far in terms of really minimizing the impact. At the same time, all of us know about-looking forward, it is quite or the degree of uncertainty remains high, right and many of these things at the moment are outside of our control. And while we are -- I mentioned that in my prepared remarks, while we are looking at some creative solutions to try and mitigate some of these impacts.

For example, where we do need specialized expertise from abroad to the in country, are there ways using technology to do it remotely, all of these things are being looked at. But at this stage, we just haven't got certainty to give you really a good answer and say, right, the impact is x many months and that's when it was mitigated. So that means all at the moment we can do, Oscar, is kind of point out what we've done so far. The work as Jo-Anne is saying, that's going to look at these things and mitigate them. But it's really not possible for us to put a lid on or put a cap on what is the impact obviously going to be, because the situation is live and emerges on a daily basis. I know, that's not a good answer, Oscar, but that's I am afraid the reality where we are.

Oscar Cabrera -- CIBC -- Analyst

Yes. No, that's helpful, Ulf. And I think my -- the main take away from you is that, that's pretty forward do not have an impact on the sustainable production or the 24, 25 month delay. Thanks. Then, turning to power, clearly the Mongolia government is intent to develop and halt the Tavan Tolgoi Coal Fields. Based on previous history, this is not particularly a reliable solution. So, how are you thinking about this process? I noticed that deadline of June 14, based on your agreement with the government and this is ten days ahead of your parliamentary elections. So, could you just provide context around that?

Ulf Quellmann -- Chief Executive Officer

Absolutely, Oscar. So, you are right. So, the dates and if you like, deadlines, for lack of a better term, that we mentioned, they are the processes that are laid out in the power source framework agreement, that is agreement that was signed in December 2018 that really Tavan's, the implementation of Oyu Tolgoi's obligation to deliver power domestically. That was an agreement that was signed with the government in December the year before last. And in that agreement, there are options laid out in terms of power options that are being considered and there are certain steps when they can be considered. So that the contingency mechanisms that we've referred to, and there are two of them.

The first one has expired and now we are in the second one. And the power options that were included and are considered in the power source framework agreement do not include the option that the government has now put forward as its preferred option, all right? And so the discussions we are having at the moment is, f you want to consider that, which of course, we do, the government has decided that this is its preferred option and so therefore, that's something we need and want to respect and investigate that if this indeed can be executed and you have some reservations about the -- how we are listing it is, but it's certainly something that we take seriously and we would like to work with the government to run the ground. In order to be able to do that, and to have that grounded in a proper legal framework, we would really need to amend that agreement, because at the moment, it technically does not allow for this option, if you like.

So what we are really saying is, we would like to work the government on this and on other options. But to be able to do so, we would really need to amend that agreement. And the date by which the current agreement says, it would need to be done, happens to be June 14th. That's how that works and comes together. Does that answer the question, Oscar?

Oscar Cabrera -- CIBC -- Analyst

Yes, no, it does. Hopefully, the government of Mongolia has thought this through and we can deliver the power for the project. Then the last thing if I may, on your estimate for current liquidity, lasting until -- still the third quarter 2021, what operating cash flow assumptions or working capital assumptions do you have embedded there? And at what now the price is?

Ulf Quellmann -- Chief Executive Officer

Thanks, Oscar. I might ask Luke to take that question. Luke, are you OK to address this one?

Luke Colton -- Chief Financial Officer

Sure, I will do my best. And Oscar, can I just say, I hope you and your family and loved ones are safe and well. Thank you for wishing the same for us. My attempt to answer your question is, I guess, first of all to, I guess, refer you to our production and capex guidance for 2020 and that will give you an idea of some of the key assumptions that we are assuming in the -- in both the capex and the production phase that obviously will contribute to our operating cash flow as well as our free cash flow. You'll know that the ranges haven't changed. But we are somewhat hopeful that we'll be able to get some additional gold and that will end up at the top-end of the range for gold production for 2020. I'd also refer you to the 2021 outlook for copper and gold as well, which we haven't changed. And it still remains valid. In terms of working capital assumptions, I mean, we are not assuming anything sort of Herculean in an effort really we are assuming kind of normal course stuff.

So, we are not assuming any sort of significant buildup or draw down in inventory levels, AP levels sort of appropriate for the level of capex expenditure that we are planning to see over that period of time. And then obviously, our assumptions around AR would be consistent with the sort of revenue profile over that period of time, which again, you can kind of -- you can kind of see from the guidance that we've issued. It's probably worth noting that on the capex guidance for the underground. We have reduced that to a range of $1 billion to $1.1 billion and we've also reduced the top-end of the sustaining capex guidance down to $100 million, it was previously at a $120 million. So, all of those things are obviously having an impact on liquidity over that period of time.

In terms of pricing, over that sort of key period in the remainder of 2020 and 2021, I mean, we are not really in the habit of sharing our pricing assumptions too broadly, but what I can say is that for 2020, we certainly have recognized the potential impact of COVID-19, not just on our levels of spending, but also sort of from a global macro perspective, the impact it's having on the copper price. So, we do have a very conservative assumption for 2020 that, without giving you the number, it's in the range of current spots, if not makes any sense at all. And obviously, a more conservative assumption for gold. And then, for 2021, we revert back more to broker consensus really, which is what we would use for both copper and gold. So, I know that's not a 100% answer to your question. But hopefully, it helps to answer the question and gives you a better flavor.

Oscar Cabrera -- CIBC -- Analyst

No, that's helpful, Luke. Thanks very much and best wishes everyone.

Luke Colton -- Chief Financial Officer

Thanks.

Operator

Thank you. Your next question comes from Dalton Baretto from Canaccord Genuity. Please go ahead.

Dalton Baretto -- Canaccord Genuity -- Analyst

Thank you. And good morning, everybody. Ulf, I'd like to take up on your discussion with Oscar there on the power plant, did this option up in government actually building and it's funding the power plant and supplying you guys, I mean, clearly, that's a business critical risk, not just from a reliability perspective, but also from a negotiating perspective. Should this be the way going forward, what type of contingency are you thinking in terms of power supply?

Ulf Quellmann -- Chief Executive Officer

Dalton, just to clarify, when you say, contingency, you -- what are you thinking about?

Dalton Baretto -- Canaccord Genuity -- Analyst

A backup power supply.

Ulf Quellmann -- Chief Executive Officer

I would say, look, it's a good question, Dalton. If you -- I'd ask you probably to have a little bit of patience, only because this option was put forward by the government relatively recently in the middle of April. So, less than a month ago and I would say, like you, there is lots of questions that we would have as well to be able to run the ground with the government. The one you are mentioning is one. There is a few others, as well. So, at this stage, Dalton, I think where we are is, to really focus on making sure that we can address all of these options and therefore make an amendment to the agreement to provide us to do the flexibility to do so.

As you rightly pointed out, Dalton, at the end of the day, power is an absolutely critical component for OT to be able to run the business and that is why ultimately, Oyu Tolgoi does need to be in a position to decide what the best option is to run the business. But at the same time, we want to make sure we have an option that if the best for Oyu Tolgoi that also has the full support of the government and to do that, to run that to ground, putting an amendment in place to give us more time and flexibility to explore that would be important. And once we've done that, Dalton, then we need to be in a position to answer some of the questions you raised and Oscar raised, because ultimately OT is to make a decision and to do so, certainty, capacity, funding, permits, all that would need to be answered to be able to make a final decision. Up to day, it's only four weeks after we received the proposal. It's premature for us to comment on that, Dalton.

Dalton Baretto -- Canaccord Genuity -- Analyst

Yes, OK. That's fair. So, maybe I'll switch gears and I think you were talking about this updated guidance if you will on capex and schedule. I mean, I apologize if I missed this in your earlier comments. But does this guidance factor in any of the COVID-19-related delays? That's number one, and then, number two, I know you said, you said, you can't comment on the contingency. Can you maybe talk about how much of the contingency has been consumed already, given the delays today?

Ulf Quellmann -- Chief Executive Officer

Dalton, I did answered to my questions. But just to be clear, when you say guidance, I think you are referring to the guidance on the underground not to 2020, right?

Dalton Baretto -- Canaccord Genuity -- Analyst

That's correct. Yes, the schedule and capex, yes.

Ulf Quellmann -- Chief Executive Officer

Yes, yes. I know, that guidance does not include any potential negative impacts on COVID-19, point number, to be clear, does not. And the second point is, we are in a position to provide any update on contingency, how much is in there and therefore where we are, Dalton, I am afraid, that's the level of -- at this, we are not in a position to provide to the market. I know it's disappointing, but at this stage, we can't do that.

Dalton Baretto -- Canaccord Genuity -- Analyst

That's fine. So then, when you do put out the Definitive Estimate, will that then update these numbers based on the delays you've seen so far or do you think it's just stick with us and see how it all unfolds?

Ulf Quellmann -- Chief Executive Officer

No, no, absolutely, so, you are exactly right, Dalton. So, the Definitive Estimate is meant to have a very high level -- execution level of accuracy, both on schedule, as well as on costs. And so, where we are at the moment, Dalton, is really in the process, right. If you remember, July last year, we started off by saying 16 to 30 months and $1.2 billion to $1.9 billion. Now, we've given you a range of 25 month to 29 months and $1.3 billion to $1.8 billion. So, it's still a range. It's still fairly broad, but it's narrower, and importantly, it stayed within the range we've given, it hasn't gone outside of that. You should expect us we get to the Definitive Estimate that those ranges become very, very narrow and might even converge on any number.

Dalton Baretto -- Canaccord Genuity -- Analyst

Excellent. OK, that's all for me guys. Thank you.

Ulf Quellmann -- Chief Executive Officer

Thanks, Dalton.

Operator

Thank you. The next question comes from Craig Hutchison from TD Securities. Please go ahead.

Craig Hutchison -- TD Securities -- Analyst

Good morning. In terms of the updated Panel Zero mine design and the incorporation of the structural pillars to the north and south of the boundaries, do you think that's going to have any impact on your ultimate reserves?

Ulf Quellmann -- Chief Executive Officer

Craig, morning to you. Jo-Anne this feels like for you, if you are OK to take this one?

Luke Colton -- Chief Financial Officer

Yes, of course, of course, Ulf, thank you very much. Thanks, Craig. So, the impact on reserves is still being assessed as the pillars and there are recovery options, recoverability options being assessed in this next level of design refinement and so, we will understand more about this as the next three months progress, what's progresses in the next few months. So, that's really the focus at the moment. So, does that answer your question? Is there a second part to it? Sorry, it's getting a bit lousy.

Craig Hutchison -- TD Securities -- Analyst

No, I mean, no, I just -- so, I wanted to know if there is any materiality to those-the size, I guess, and the tons and grade that's in those structural pillars, in terms of the sequence in ramp up?

Jo-Anne Dudley -- Chief Operating Officer

And really, those pillars are going to be -- are being less fair to provide support for the ore handling system, which in this case is to move ore off the footprint to the crushers via trucks and those pillars -- the ore handling system will be able to used by Panel 1 and 2 and it provides some redundancies. So, there is no benefits to adding those pillars. In terms of recoverability, we are really working on what options that we have at the moment to look at what the outcomes might be and it's just too early for us to draw any conclusions, because of where they planning process is at. But it is something that we are looking at closely. Ulf, would you say any more about that?

Ulf Quellmann -- Chief Executive Officer

No, that's I, just to say, work is going on too early at the moment and when the work is completed, then we'll know and move from there accordingly, Craig. We just at the moment, it's just too early, simply said.

Craig Hutchison -- TD Securities -- Analyst

OK. Thanks for taking my questions.

Operator

Thank you. There are no further questions. I will turn it back over for closing comments.

Ulf Quellmann -- Chief Executive Officer

Thank you very much, operator. Look, thank you everyone for joining us this morning. I will keep it very, very short in terms of my closing remarks. We have talked a lot about COVID-19. I do not want to delay with the point anymore than we need to, but at the same time, it is the biggest event that is impacting all of our lives as well as the business at the moment. I think we've been able to draw it on the call today that, up until now, the business has done an outstanding job and the government is being extremely supportive in putting us in a position we are to-date, both as far as the operations are concerned, as well as the underground development, lateral development has not been impacted, but at the same time, we are mindful that going forward, it is likely to have an impact, but how much? We don't know; and so, the team is working very hard to be as creative as possible to find ways to mitigate those options and again, to work with and get the support of the government to be able to do so. The second point I am going to make is, we have made an important decision, when I say we, that is the TRQ Board, to approve the mine design option for Panel Zero.

What does it mean? Well, it means we are on track in relation to the timetable we laid out late last year as to what are the steps that allow us to work through, address some of these initial stability concerns that we had identified. The Definitive Estimate is due for this -- later this year subject to any delays by COVID depending on how that plays out. We have provided you some ranges, some updated ranges today in terms of capex, as well as schedule. So, 21 to 29 months and $1.3 billion to $1.8 billion and that funnel will narrow and converge on a number. By the time we get to the Definitive Estimate. So there is still an inherent degree of uncertainty in these ranges today, because of course, the level of accuracy we have today. But we have now picked an option and we now can take this option and develop it to an executional level -- degree of certainty and finally, on funding and power work is ongoing. We have a plan. We have engagement and on the financing side, as Luke commented, we are working toward putting an interim funding facility in place really to give us time and flexibility to make sure we can explore long-term funding options that address that minimum funding gap that Luke was talking about and I think on parallel, you've hears on the call that there are discussions going on with the government. There is an agreed framework in place that provides the legal framework and within that, we are trying to work the government to put amendments in place to allow us really to investigate the options that are best for the business, but also important that the option that the government would like to pursue and an amendment would allow us to do that.

So with that, let me leave it there. Thank you for joining us on our call this morning. Stay safe, and thank you very much and goodbye.

Operator

[Operator Closing Remarks].

Duration: 75 minutes

Call participants:

Roy McDowall -- Head of Investor Relations and Corporate Communications

Ulf Quellmann -- Chief Executive Officer

Luke Colton -- Chief Financial Officer

Jo-Anne Dudley -- Chief Operating Officer

Orest Wowkodaw -- Scotiabank -- Analyst

Hayden Bairstow -- Macquarie -- Analyst

Oscar Cabrera -- CIBC -- Analyst

Dalton Baretto -- Canaccord Genuity -- Analyst

Craig Hutchison -- TD Securities -- Analyst

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