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Alamos Gold Inc (NYSE:AGI)
Q4 2020 Earnings Call
Feb 25, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. I would now like to turn the meeting over to Mr. Jamie Porter, Chief Financial Officer. Please go ahead, Mr. Porter.

Jamie Porter -- Chief Financial Officer

Thank you, operator, and thank you to everyone for attending Alamos' Fourth Quarter and Year-end 2020 Conference Call. In addition to myself, we have on the line today, John McCluskey, President and CEO; Peter MacPhail, COO; and Scott R.G. Parsons, Vice President of Exploration. To address any questions with respect to our reserve resource update, we also have on the line Mr. Chris Bostwick, our Vice President of Technical Services. We will be referring to a presentation during the conference call that's available through the webcast and on our website.

I would also like to remind everyone that our presentation will be followed by a question-and-answer session. As we will be making forward-looking statements during the call, please refer to the cautionary notes included in the presentation, news release and management's discussion and analysis as well as the risk factors set out in our annual information form. Technical information in this presentation has been reviewed and approved by Chris Bostwick, our Vice President of Technical Services and a qualified person. Also, please bear in mind that all of the dollar amounts mentioned in this call are in U.S. dollars, unless otherwise noted.

And now I'll turn it over to John to provide you with an overview of the quarter and year.

John A. McCluskey -- President, Chief Executive Officer and Director

Thank you, Jamie. 2020 was transformational for Alamos as we delivered on key catalysts and transition to strong free cash flow generation. In July, we completed the lower mine extension of Young-Davidson, announced plans for the Phase three expansion of Island Gold, and commenced construction on the La Yaqui Grande project. These were all achieved while managing our operations through the COVID-19 pandemic. Our health and safety protocols evolved through 2020, and by the end of the year, we had performed over 13,000 COVID-19 tests on Alamos employees, contractors and visitors as part of our enhanced workplace screening.

The testing programs that we implemented have been instrumental in identifying and preventing the spread of the virus at our operations. Our operations performed well in the fourth quarter and we met full year production guidance for the sixth consecutive year, producing 427,000 ounces of gold. Total cash costs of $761 per ounce for the year were below our guidance range, while all-in sustaining costs of $1,046 per ounce met guidance. In particular, our Canadian operations had a strong finish to the year. Young Davidson is starting to hit its stride, with mining rates ramping up to average a new record of 7,650 tonnes per day in the fourth quarter, exceeding year-end guidance.

This drove record quarterly mine site free cash flow of $31 million. Island Gold had another record quarter with respect to production and another record year of mine site free cash flow, generating $101 million, a 57% increase from the previous record in 2019. Our strong operating performance, combined with a higher gold price, drove another solid quarter financially, including operating cash flow of $127 million and free cash flow of $58 million. For the full year, we set a number of new financial records, including record operating cash flow of $383 million. We had another successful year from an exploration perspective, despite our programs being limited due to COVID-19.

Reserves and resources at Island Gold increased an impressive one million ounces across all categories and now totaled 4.7 million ounces. Since we acquired Island Gold in November 2017, reserves and resources have increased nearly three million ounces net of depletion. The one million ounces we added in 2020 and continued exploration success demonstrates the significant upside potential beyond what we detailed in the Phase three expansion study last year. Globally, our reserves increased slightly to just under 10 million ounces, with growth at Island, Young-Davidson and Lynn Lake more than replacing mining depletion last year.

Looking at slide four. As outlined in December, we expect Young-Davidson to drive a 15% increase in global production to a range of 470,000 to 510,000 ounces, and a 3% decrease in total cash costs to between $710 and $760 per ounce in 2021. All-in sustaining costs are expected to remain in a similar range as 2020, reflecting higher sustaining capital at Mulatos for the pre-stripping of the El Salto portion of the pit. Our capital budget is expected to increase from 2020, reflecting a larger exploration program and the ramp-up of spending on the high-return La Yaqui Grande project and the Phase three expansion at Island Gold.

Turning now to slide five. The reinvestment into high-return internal growth projects is a key component of our focus on operating a sustainable business model that can support growing returns over the long term. As part of our balanced approach to capital allocation, we expect to fund this growth internally while continuing to generate strong free cash flow, which will further strengthen our balance sheet and support higher dividends to shareholders. Reflecting this strong outlook, we are pleased to announce a further 25% increase in our dividend to an annual rate of $0.10 per share. This marks our second consecutive quarterly increase for a combined increase of 67%.

I'll now turn over the call to our CFO, Jamie Porter, to review our financial performance. Jamie?

Jamie Porter -- Chief Financial Officer

Thank you, John. Moving on to slide six. We ended the year on a very strong note from a financial perspective. We sold 424,000 ounces of gold for record revenues of $748 million in 2020. As John mentioned, Island Gold was the highlight once again, generating a record $101 million in mine site free cash flow. Young-Davidson also demonstrated strong free cash flow growth in the second half of the year following the completion of the lower mine expansion. Including generating a record $31 million of free cash flow in the fourth quarter. Fourth quarter revenues were a record $227 million from sales of 122,000 ounces at an average realized price of $1,860 per ounce.

Total cash costs were $733 per ounce, below the low end of full year guidance and all-in sustaining costs of $1,030 per ounce were at the low end of guidance. For the full year, total cash costs and all-in sustaining costs met or were better than guidance. Operating cash flow before changing to the noncash working capital improved 55% year-over-year to a near record $127 million or $0.32 per share in the fourth quarter. For the full year, operating cash flow before changes in noncash working capital was a record of $383 million or $0.98 per share.

A 31% increase from the prior record set in 2019. Our reported net earnings of $77 million in the fourth quarter or $0.20 per share included unrealized foreign exchange gains of $16 million, which were recorded within deferred taxes and foreign exchange and other onetime gains of $2 million. Excluding these items, our adjusted net earnings were $58 million or $0.15 per share. Our full year adjusted net earnings were $157 million or $0.40 per share, representing an 87% increase from 2019. Capital spending totaled $73 million in the fourth quarter, including $28 million of sustaining capital, $42 million of growth capital and $4 million of capitalized exploration.

Growth capital increased with the ramp-up of construction activities at La Yaqui Grande and the Phase three expansion at Island Gold. For the full year, capital expenditures of $246 million were slightly above guidance, primarily due to higher capital at Young-Davidson reflecting the COVID-19-related delays in completing the lower mine expansion. We returned $31 million to shareholders in 2020 through dividends and share buybacks, double the amount returned in 2019, with a further 25% increase in the dividend to an annual rate of $0.10 per share starting this quarter, we are on track to return $40 million in dividends in 2021.

As previously announced, we repaid the $100 million drawn at our revolving credit facility in the fourth quarter and are once again debt-free. We ended the year with $221 million in cash, $44 million of equity and securities, and $500 million of undrawn credit capacity. We are well positioned to fund our internal growth projects while continuing to grow our cash position and returns to shareholders.

I will now turn the call over to our Chief Operating Officer, Peter MacPhail, to provide an overview of our operations.

Peter MacPhail -- Chief Operating Officer

Thank you, Jamie. Moving on to slide seven. Young-Davidson continues to perform well. Producing 48,000 ounces and generating record mine site free cash flow of $31 million in its first full quarter operating from the new lower mine infrastructure. With a strong finish, full year production totaled 136,000 ounces, in line with revised guidance. Mining rates increased to average a record 7,650 tonnes per day in the quarter, exceeding the year-end target. We expect mining rates to average about 7,500 tonnes per day in the first half of 2021 and increase to the design rate of 8,000 tonnes per day in the second half of the year.

Total cash costs of $792 per ounce and mine site all-in sustaining cost of $934 per ounce in the fourth quarter were both down significantly from earlier in the year, reflecting efficiencies of operating from the new lower mine infrastructure. On a full year basis, both were in line with revised guidance. As previously guided, we expect 2021 production of between 190,000 and 205,000 ounces, a 45% improvement compared to 2020.

Total cash costs and mine site all-in sustaining costs are expected to decrease to between $790 and $840 per ounce and $1,000 and $1,050 per ounce, respectively. We also expect capital spending to decrease significantly to approximately $75 million in 2021 and trend down to a long-term rate of $50 million per year over the next few years now that the lower mine expansion is behind us. With higher production, lower costs and lower capital, we expect record mine site free cash flow of $120 million in 2021.

Over to slide eight. Island Gold set another quarterly production record producing 41,000 ounces of gold in the fourth quarter at total cash cost of $481 per ounce and mine site all-in sustaining costs of $676 per ounce. With record production and strong margins, the operation generated $32 million of mine site free cash flow in the quarter, bringing the full year to a new record of $101 million.

Full year production of 139,000 ounces was in line with guidance, with total cash cost of $451 per ounce and mine site all-in sustaining costs of $660 per ounce, both well below guidance. Work on the Phase three expansion continued to ramp-up in the fourth quarter, with activities focused on permitting, detailed engineering of the shaft and associated infrastructure and procurement of long lead items.

Looking forward to 2021, we expect Island Gold to produce 130,000 to 145,000 ounces, a total cash cost of between $430 and $480 per ounce, and mine site all-in sustaining costs of between $750 and $800 per ounce. Exploration results at Island continue to impress. The Phase three expansion study released last July was based on the reserves and resources at the end of 2019. 1 million ounces of high-grade reserves and resources added in 2020 and ongoing exploration success clearly highlight the significant upsides to already attractive economics.

Following my remarks on the operations, Scott Parsons, Vice President of Exploration, will provide a summary of the ongoing exploration success. Moving on to slide nine. Mulatos produced 31,000 ounces in the fourth quarter, down from earlier in the year, reflecting planned lower grades. Full year production of 151,000 ounces exceeded revised guidance. Total cash cost increased to $986 per ounce in the quarter, reflecting the lower grades, but were below guidance for the full year, averaging 816 per ounce.

Mine site all-in sustaining cost also increased to 1,426 per ounce in the quarter, reflecting the higher total cash cost and capitalized stripping at El Salto. Mulatos is expected to produce 150,000 to 160,000 ounces in 2021, at total cash cost of $840 million to $890 million per ounce. Mine site all-in sustaining costs are expected to increase to $1,060 to $1,110 per ounce and will be higher during the first half of 2021, reflecting $25 million to complete the pre-stripping of the El Salto pit area.

Over to slide 10. Construction of La Yaqui Grande continues to ramp up with $8 million spent on the quarter -- in the quarter as we focused on clearing the project area, early mining activities, construction of the camp, detailed engineering and procurement. Restripping activities are ramping up as we speak, with the project contract for initial production in the second half of 2021 -- 2022, sorry. With mine site all-in sustaining cost expected to average $580 per ounce, La Yaqui Grande is expected to significantly reduce Mulatos' combined cost profile.

I'll now turn the call over to Scott Parsons to discuss the reserve and resource update.

Scott R.G. Parsons -- Vice President, Exploration

Thank you, Peter. On slide 11, we had an excellent year with respect to exploration, even with smaller than planned programs due to COVID-19. Global reserves increased to 9.9 million ounces from 9.7 million ounces. The increases at Island Gold, Young-Davidson and Lynn Lake more than offsetting depletion of 555,000 ounces. Global measured and indicated resources were down 3% to 6.9 million ounces, reflecting some conversion to reserves at Young-Davidson and Lynn Lake. Most impressively, deferred resources increased 16% to seven million ounces, driven by another exceptional year of growth at Island Gold.

Moving on to slide 12. Island Gold, once again, was the main driver of our combined reserve and resource growth in 2020. Despite only completing about 60% of our planned drilling in 2020 due to COVID-19, reserve and resources increased by combined one million ounces across all categories, net of depletion. Reserves increased 8% to 1.3 million ounces, with additions of 239,000 ounces in Island Main and East areas, more than offsetting mining depletion of 144,000 ounces.

On slide 13, the primary focus of Island Gold remains in defining new near-mine resources, and that is where we continue to see the bulk of our growth. Inferred resources increased 910,000 ounces or 40% to 3.2 million ounces, the largest annual increase to date. Grades also increased 9% to 14.4 grams per tonne, with the average grade of the addition significantly higher at 18.6 grams per tonne.

Most of the additions were in Island East, including a 95,000 ounce increase in the middle portion of Island East, effectively closing the gap between Island Main and East. The largest and highest grade increase was in the lower portion of Island East where inferred resources increased 590,000 ounces, significantly larger inferred resource block now contains a total of 1.3 million ounces, grading 18.3 grams per tonne in proximity to the planned shaft. We saw excellent exploration results in this area in the latter part of 2020, and with the ore shoot open laterally up and down plunge, this area will remain a key focus in 2021.

On slide 14, combined reserves and resources at Island Gold now totaled 4.7 million ounces, a nearly three million ounce increase from the 1.8 million ounces at the time of acquisition in 2017. Since acquiring Island Gold in 2017, inferred resources have converted to reserves at a rate of more than 83%. On top of that, we have grown inferred resources by an additional 2.2 million ounces, with our overall discovery costs averaging $8 per ounce over the past year and $11 per ounce over the past three years. We see excellent potential for this growth to continue with our largest exploration budget to date planned in 2021.

We've increased our global exploration budget to $50 million in 2021, double what we spent in 2020. Half of the 2021 budget is allocated to Island Gold, where our focus will remain on adding new near-mine resources as well as evaluating regional targets. We've also increased our exploration budget at Mulatos to $9 million and $7 million at each of Young-Davidson and Lynn Lake. We're encouraged by our early exploration success at Young-Davidson having intersected higher grade mineralization below the existing deposits, and at Lynn Lake where reserves have increased 9%, given the success we're having around the MacLellan deposit.

With that, I'll turn the call back over to John.

John A. McCluskey -- President, Chief Executive Officer and Director

Thank you very much, Scott. So that concludes the formal presentation. I'll now hand the call back to the operator to open your -- open the call to your questions.

Questions and Answers:

Operator

[Operator Instructions] The first question is from Tyler Langton from JPMorgan. Please go ahead. Your line is now open.

Tyler Langton -- JPMorgan -- Analyst

Good morning. Thanks for taking my questions. I guess, just to start at Young-Davidson, I guess. Kind of looking at Q4 results, kind of annualized production would kind of get you to the low end of 2021 guidance, and then the cash costs for the quarter were kind of below the low end of your guidance for 2021. I guess, does that give you maybe some confidence that you could kind of hit the higher end of production in 2021 and the sort of the low end of cash costs? Or was there anything, I guess, sort of unique about Q4?

Peter MacPhail -- Chief Operating Officer

Yes. It's Peter here. Thanks, Tyler. I guess, I mean, Q4, we weren't yet running at -- I mean, as we did 7,400 -- sorry, 7,600 tonnes a day. We expect 7,500 tonnes a day in the first half of 2021 and 8,000 in the second half. So I think Q4 might be a decent proxy. It could be a bit low given the fact that we aren't quite up up checking and we will be in the second half of the year.

Tyler Langton -- JPMorgan -- Analyst

Okay. And then just with, I guess, the Phase three expansion at Island Gold and then La Yaqui and Mulatos. Just with those projects, are you seeing any signs of cost inflation, just given kind of the recent run-up in steel prices and oil and diesel. So any concerns there?

John A. McCluskey -- President, Chief Executive Officer and Director

So I'll start with La Yaqui Grande in Mexico. I mean, most of that capital project -- I mean, a big chunk of it is pre-stripping, and those costs are pretty locked in. It's just basically mining costs, which we haven't escalated. There's not a lot of steel or anything like that involved in that project. There's some earthworks. And so we haven't seen anything there yet. And we've made a lot of our orders of things like crusher parts and whatnot are already behind us.

So -- and on Phase III, we're just -- I wouldn't expect anything significant there. There's -- there'll be normal sort of inflation over the course of the next three or four years as we bring that into production to start spending a bit more money on it. But I think we're in good shape with our estimates there.

Tyler Langton -- JPMorgan -- Analyst

Good. Perfect. Thanks so much.

Operator

Thank you. The next question is from Kerry Smith from Haywood Securities. Please go ahead your line is now open.

Kerry Smith -- Haywood Securities -- Analyst

[Indecipherable] Peter, just for YD, you were suggesting 7,500 tonne a day as an average for the first half of this year. You did 7,650 tonnes a day in Q4. Is there perhaps two mill shutdowns? Or maybe you could just tell me how many days of mill shutdowns you've got in that first half?

Peter MacPhail -- Chief Operating Officer

There will be a liner change in the first half. I think we're expecting it to happen in April, but we do run that mill to absorb those, that would be like a three or four-day shutdown to absorb those shutdowns. You run at a higher rate and the days you're operating and expect to be down for those three or four days, it wouldn't impact our 7,500 tonne a day for the H1 target.

Kerry Smith -- Haywood Securities -- Analyst

Okay. But I guess my question is, why wouldn't it be able to get higher? You are already out of the gate at 7,650, I would have thought 7,500 seems pretty doable?

Peter MacPhail -- Chief Operating Officer

Yes. We're hoping it's pretty doable. We expect it to be pretty doable.

Kerry Smith -- Haywood Securities -- Analyst

Okay. Okay. And for -- maybe Scott can answer this question. Just on the Island exploration budget of $25 million, how much of that, say, as a percentage might be spent on the regional targets, which you haven't done much work on? Obviously, now you've got the trailing ground? Maybe just as a percentage, could you give me a sense?

Scott R.G. Parsons -- Vice President, Exploration

Yes. Of the $25 million, we're budgeting about $6 million for the regional exploration program. It's focused on targets across the broader property that we've developed from building out the geologic model down on gold deposit and testing several targets we've identified as a result of that.

Kerry Smith -- Haywood Securities -- Analyst

Right. And I think you'd said that it's probably not likely to be much spent at Trillium because you just got that ground and there's work to be done there before you start drilling, I think.

Scott R.G. Parsons -- Vice President, Exploration

Yes, we're going to build the kind of exploration foundation on the Trillium ground in 2021, and we'll be more actively exploring that with drilling in 2022 and beyond.

Kerry Smith -- Haywood Securities -- Analyst

Okay. Great. And Jim, can you just remind me what your Mexican peso assumption was today? I know I should know this, but I forget.

Jamie Porter -- Chief Financial Officer

Sure, Kerry. Yes. I believe we've budgeted 20 to one. We've got about 45% of our exposure hedged between '21 and '25. We're pretty well protected in terms of both our operating costs and our capital spending at La Yaqui Grande.

Kerry Smith -- Haywood Securities -- Analyst

Okay. Okay. Great. And Peter, just one last question on Young-Davidson, the CAD44 committing and time for your mining costs in Q4. Would that be a pretty good number for a go-forward number for, say, 2021 and 2022?

Peter MacPhail -- Chief Operating Officer

Yes. I mean, that's where we're heading to. I think, once we get to 8,000 tonnes a day, and through this year, we're heading into that kind of range. I mean, it takes a few quarters to see it get dialed in. I think it all -- it does bounce around a little bit, depending on how much capital development we do versus operating development. So there's always some noise in it because of that, but it's definitely trending to there.

John A. McCluskey -- President, Chief Executive Officer and Director

And Kerry, just as a reminder, we're budgeted for low 50s for the first half of the year, dropping to kind of the mid-40s, so where we were in the second half of 2020. We think we'll get back there for the second half of 2021.

Kerry Smith -- Haywood Securities -- Analyst

Okay. Perfect. Thanks very much. That's all my questions.

Operator

Thank you. The next question is from Cosmos Chiu from CIBC. Please go ahead. Your line is now open.

Cosmos Chiu -- CIBC -- Analyst

Thanks, John, Jamie, Peter, and Scott for the conference call here. It's great to see the increase in reserves and resources and also the increase in the dividend. Maybe my first question is on the Island Gold increase in inferred resources. It seems like it's a lot of it, as you mentioned, coming from Island East. Could you remind me how tight is the spacing in terms of drilling right now to get into inferred? And what kind of drill spacing do you need it to be to get into M&I and later on reserves?

John A. McCluskey -- President, Chief Executive Officer and Director

Scott, do you want to take that, at least the start of it?

Scott R.G. Parsons -- Vice President, Exploration

Yes, I can take the start. So typically, for inferred resources, we're anywhere between 30 and 75 meters, depending on where we're drilling at. The average, I would say, is around, say, between 50 and 75 meters. Again, these inferred resources are defined in the geologically constrained structure. So they're -- it's predictable and a strong understanding of the controls on mineralization of Island, and we have high confidence in that classifying those as inferred resources at that spacing, which is, I think, realistic, for sure.

Cosmos Chiu -- CIBC -- Analyst

And as a follow-up, it's great to see the Island East. You're looking at 18.59 grams per tonne, it's certainly higher than your reserve grade at this point in time at Island. But again, inferred, I would imagine mining dilution wasn't factored in. Maybe still early stage at this point in time, but could you remind me what kind of mining dilution assumption you've put into your reserves? And can that be potentially, even at this early stage, be applied if I want to compare apples-to-apples here?

John A. McCluskey -- President, Chief Executive Officer and Director

Maybe Chris, you want to take that.

Chris Bostwick -- Vice President, Technical Services

Yes. I'll answer that. Yes. We've got a variable dilution factor depending on the scoping type of the area and past experience, and it ranges anywhere between 25% and 50%. But I think, overall, a good average to use would be about 35%.

Cosmos Chiu -- CIBC -- Analyst

And based on your knowledge right now, that's still seems kind of reasonable, if I were to apply that to Island East. Again, fairly early stage, but...

Chris Bostwick -- Vice President, Technical Services

Yes, that's reasonable.

Cosmos Chiu -- CIBC -- Analyst

Okay. Sounds good. And then bigger picture here, John, as you mentioned, some of these exploration results at Island could potentially add to the value of the new shaft. I would imagine, right now, the mine plan is fairly flexible for you to kind of change things around potentially to maybe get to some of the higher grades first. Again, very early stage right now, but is that a possibility?

John A. McCluskey -- President, Chief Executive Officer and Director

It's certainly a possibility. There's a lot of flexibility in the way we're approaching this project. And we still have really another two years of exploration that we can get under our belt before we start to make decisions that limit our options. So we still have a fair amount of flexibility for the next 24 months anyway. So that puts us in a very comfortable position.

An interesting thing about the overall global resource that I think isn't always zeroed in on very quickly is the fact that we've been -- over the last couple of years, we've been depleting higher cost, lower recovery ounces in our open pit operations, and we're effectively replacing them with high grade, low-cost ounces in our Canadian operation, particularly to Island Gold.

So while the -- you see an incremental increase in the overall reserve picture, the reality is that we're replacing them with far better ounces. We'd rather have ounces with a 95% recovery as opposed to an ounce with a 70% recovery. And ounces in Canada, in our opinion, are a lot more favorable than ounces anywhere else. So from the overall quality of the reserve, I think we've made a real improvement.

Cosmos Chiu -- CIBC -- Analyst

Yes. That's great to hear. Again, on Island Gold, as you -- I think you or Scott have mentioned Trillium Mining previously. How does that -- you just made the acquisition here. So again, fairly early, but how does that sort of fit into the whole picture here? And I haven't looked at -- I haven't seen the rocks here at Trillium Mining yet. So is it -- it's to the east of Island. So is this potentially on trend with Island East? Is it the same type of rocks? How should we look at it at this early stage?

Scott R.G. Parsons -- Vice President, Exploration

No, I can take that one. Yes, I can take that one. So Trillium, essentially, two main strategic reasons for the acquisition. One and the most important is, as we've been drilling off Island East, to the east and down plunge, we've obviously been interpreting the strike and dip of the deposit as we've been going. And it does appear that, eventually, it will come close or cross over the property boundaries. So what the acquisition did for us is remove any sort of land tenure risk that we'd be worried about from an exploration perspective in the long term. So it's a long-term strategy. It really opens up the deposits down plunge and the long strike to the East.

And the second part of that is the Michipicoten Greenstone Belt, which is where Island Gold deposits located, has seen 100 years of kind of off and on exploration. Going back to kind of the same showings that have been defined over the years. And we feel with the approach we're taking in terms of a systematic exploration approach across the broader belt, that there are significant opportunities that can be unlocked.

So from a regional exploration perspective, it fits well with our strategy of consolidating around our operations in Island Gold and applying a systematic approach, understanding the controls of mineralization and targeting and exploring from there.

Cosmos Chiu -- CIBC -- Analyst

Of course. Maybe a financial question here. As you talked about in the MD&A, you're making a deposit of $20 million in terms of taxes payable in Q1. That's how it is, I know, given the timing of these tax payments. But I guess my question is, with all the money you're spending on La Yaqui Grande in 2021, would that capex be able to offset some of your profits at Mulatos in 2021? And what should we make as an assumption here?

John A. McCluskey -- President, Chief Executive Officer and Director

Yes, absolutely, Cosmos. I mean, you would have seen that we generated $68 million in free cash flow at Mulatos in 2020. So that's the reason behind the big $20 million-plus tax installment that's due here this quarter. We can absolutely deduct the majority of those stripping costs and other construction costs at La Yaqui Grande against our 2021 cash flow. So we'd expect a substantially lower tax installment in Q1 of 2022.

Cosmos Chiu -- CIBC -- Analyst

Great. And then one last question on foreign exchange here. With the Canadian dollar strengthened quite a bit year-to-date, if I go back to your MD&A, I think, right now, you're assuming 0.75 to one in terms of the C dollar-U.S. dollar exchange rate, every $0.05 change is a $30 million difference in free cash flow. I think only a small portion of it is hedged at this point in time. Jamie, could you remind me what your hedging strategy is and how you look at it given the current strengthening of the Canadian dollar?

John A. McCluskey -- President, Chief Executive Officer and Director

Sure. Yes. I mean, we've been looking for opportunities, obviously, to increase our hedge position over, I'd say, probably the last six months, but the Canadian dollar has seen some pretty significant strength. So we haven't been able to do as much as we'd like. I think we've got about 10% of our 2021 exposure covered between $0.76 and $0.72. So it is a small portion. If we do see a pretty dramatic weakening in the Canadian dollar, then we'd be aggressive in terms of hedging. Otherwise, we'll be price takers for the time being. And it does have an impact currently at $0.80 relative to our budget, that's a $30 million impact on our free cash flow for the year.

Cosmos Chiu -- CIBC -- Analyst

Great. Thanks a lot, everyone. Those are the questions I had. I look forward to the remainder of 2021.

Operator

Thank you.The next question is from Fahad Tariq from Credit Suisse. Please go ahead. Your line is now open.

Fahad Tariq -- Credit Suisse -- Analyst

Hi, thanks for taking my question. I apologize if I missed this, but as you think about capital allocation, maybe in the medium term, if you were to get the permit approval or the renewal at Kirazli, is it fair to think that Lynn Lake competes for capital with Kirazli? Is there a preference for one project over the other? Any color there would be helpful. Thanks,

John A. McCluskey -- President, Chief Executive Officer and Director

Yes, I can fill that. I would suggest that Lynn Lake is still 18 to 24 months off before we start spending any significant capital in getting it going because we've just got to go through the normal permitting process, whereas Kirazli is fully permitted at this point. So theoretically, if we were to get our licenses renewed, we'd be able to get back to work there fairly quickly. But it's -- the approach that we're taking right now is one of talking to Turkish mining companies.

We've been approached by several, and we're talking to Turkish mining companies about coming in alongside of us and partnering on that project. So since we're sort of talking theoretically anyway, theoretically, I would envision, as we take the next significant step going forward in Turkey, we're likely to do that with a partner, which would significantly offset our capital commitment there.

Fahad Tariq -- Credit Suisse -- Analyst

Okay. Great. And maybe just as a follow-up then. So theoretically, if you were to get a partner at Kirazli, then, is the idea that the partner would help with maybe some of the permitting issues? Or is it more that it would free up capital to -- than do Lynn Lake as well or both?

John A. McCluskey -- President, Chief Executive Officer and Director

Probably both. Clearly, one of the reasons to bring on a partner is that they're going to help you in some way, shape or form. And since we have all the technical expertise we require and we have all the money that we require in order to build that project, where we're going to need the most help is just sort of navigating the Turkish politics, navigating the upside of it. So hopefully, we were smart enough to bring on a partner that can legitimately lend a hand on that front. So certainly, any capital that they would put up in terms of purchasing an interest in the project, that would go some way to giving us additional capital that we could redeploy in Canada.

Fahad Tariq -- Credit Suisse -- Analyst

Got it.That's very clear. Thank you.

Operator

Thank you. [Operator Instructions] We have a question from Mike Parkin from National Bank. Please go ahead. Your line is now open.

Mike Parkin -- National Bank -- Analyst

Hi, guys. Thanks for taking my question. And congrats on the good quarter. Most of my questions were answered. But could you just speak to why the lower mine has been running now for several months kind of effectively two quarters to date? Can you give us some commentary in terms of how it's performing? Is it on a daily rate, are you seeing basically exceeding expectations? And can you just remind me on the permit there? Do you have a daily operating cap? Or is it an annual average?

John A. McCluskey -- President, Chief Executive Officer and Director

Thanks, Mike. Yes, I mean, the ability to operate at YD with that lower mine infrastructure is kind of night and day from what we had in the upper mine. It is performing very well. You can tell by our tonnages that we're exceeding numbers. We -- I don't think we've ever exceeded our -- or very rarely exceeded our expectations in the past, and we're exceeding our -- have been exceeding our expectations. So it continues to perform well and running since, I guess, mid-July. We've had daily rates. I mean, to average 8,000 tonnes a day, you need to have -- because you have to be down for maintenance various times, you have to be skipping waste also.

I mean that shaft needs to put out 10,000 tonnes a day. And we do that, right? Some days, ore and waste. Some days, just ore. We averaged 7,500 tonnes a day. So we see that no longer being an impediment to getting to our 8,000 tonne a day target, it's operating very well. You have to develop all the stopes in front of it and be in a good shape otherwise and have everything feeding properly, and we're there. I think the second part of your question was the permitting...

Mike Parkin -- National Bank -- Analyst

If you have the operating permit.

Jamie Porter -- Chief Financial Officer

Yes. So it boils down to a milling permit, and it is a per day number. And it's quite high. It's well above what we would -- we over permitted there. I think we're permitted to 10,000 tonnes per day. We won't -- we don't have any plans to operate at that level. So we are not in a situation where the mill will slow us down. And we even think the mill can do -- the mill can even do 10,000 tonnes a day. But we're permitting -- currently, I mean, yes, sure, you could do something to get it there, but it has no problem doing on average 8,000 tonnes a day.

Mike Parkin -- National Bank -- Analyst

All right. Super. And then maybe a question for the Scott Parsons and the exploration side of things. With YD, you made the smart decision to kind of halt further drilling at depth at YD until you kind of got down lower. Are you kind of established and set up to resume that drilling to continue exploring deeper into the YD West extension?

Scott R.G. Parsons -- Vice President, Exploration

Yes, absolutely. So with the lower mine infrastructure in place, we did start drilling in 2020 with a limited program and really starting to test opportunities down plunge of the deposit, both at YD West and the main part of Young-Davidson. But also, I can't emphasize enough the exploration potential in the hanging wall, footwall of the deposit. It's really seen limited testing. We're sitting along the Cadillac water lake salt system. There's significant opportunities there. And as I alluded to at the end of my exploration update, we did intersect some higher grade mineralization in both the hanging wall and footwall.

And this is going to require, obviously, a lot more work to define the geometry of these structures and any potential continuity of mineralization, but it just points to the upside. So not only do I see upside in expanding the existing reserve and resource within the cyanide, but also other opportunities in different settings, geological setting. And then we will be ramping up, as I mentioned, to a second drill, underground drill within the next few months and start evaluating some of those opportunities.

Mike Parkin -- National Bank -- Analyst

Thanks very much. That's it for me, guys.

Jamie Porter -- Chief Financial Officer

Thanks, Mike.

Operator

Thank you. The next question is from Lawson Winder from Bank of America. Please go ahead. Your line is now open. Your line is open. Please proceed with your question.

Lawson Winder -- Bank of America -- Analyst

Yes. Thank you so much, operator. And hi, guys. Thank you for taking my question. Today, I'll hold to you all. Just I wanted to ask about the stockpile at both Island and YD. And particularly at Island, it seems the underground has been running a little bit ahead of the mill. Are you able to provide where that stockpile sits today?

John A. McCluskey -- President, Chief Executive Officer and Director

Yes. We've got about 30,000 tons at around five grams.

Lawson Winder -- Bank of America -- Analyst

Okay. Great. And then at YD?

John A. McCluskey -- President, Chief Executive Officer and Director

Not a significant stockpile. It's maybe coming into the year, we had, again, maybe 30,000 tonnes at typical kind of reserve grade, but it doesn't last so long at YD, the milling rates we have there.

Lawson Winder -- Bank of America -- Analyst

Okay. That's great. And then just...

John A. McCluskey -- President, Chief Executive Officer and Director

We have some very low-grade stockpile that's on the books as well, but I mean that's for sometime way in the future.

Lawson Winder -- Bank of America -- Analyst

Yes. No, of course. Peter, just in a similar vein at Island. The -- for Q4, I had expected you guys would be a lot closer to the 1,200 tonnes per day. And I'm just curious, is the reason that you're -- and I apologize if you already touched on this. I -- unfortunately, I was on the call a little bit late. But is the reason that you're a little below that 1,200 tonnes per day related to COVID at all? And then looking forward into 2021, is it fair to expect 1,200 tonnes per day to be achieved on sort of like a full year basis?

Peter MacPhail -- Chief Operating Officer

Yes. So the mining was at 1,200 tonnes a day. I think you're referring to the milling rate, which was just a bit below that. We did have some unscheduled crusher challenges in the fourth quarter, which had us down for four or five days and caused our tonnage to be a bit off for the quarter. We were -- Island has the benefit of being able to juggle high grade, medium grade and low grade stockpiles, so we can still make our ounces for the quarter. But yes, we -- you should expect 1,200 tonnes a day for 2021.

Lawson Winder -- Bank of America -- Analyst

Great. Super helpful. And then just a question on capital allocation and capital return. You guys, for the last couple of quarters, have clearly indicated a preference for the dividend. But just going forward, can we expect that to continue to be the case B2B the buyback?

Jamie Porter -- Chief Financial Officer

Yes, Lawson, it's Jamie. I can take that. I think our preference has always been to return the majority of what we're going to return to shareholders through the dividend rather than a buyback. We use the buyback opportunistically when we see a pretty significant dislocation in the share price, but there's limitations associated with normal course issuer bid that we're blacked out about 50% of the time.

So it's often hard for us to act on it when we'd like to. So I think we like the discipline and -- the discipline associated with the dividend, and I think we're comfortable with the level in fact currently of about USD40 million annually. I think that's a decent return and something that we can well afford at the same time as investing in our other growth projects.

Lawson Winder -- Bank of America -- Analyst

Okay. I mean it's actually below the payout percentage where it's been historically. So I don't disagree with you on that. And then just maybe one final contextual question. On Mexico and going forward, basically, the history of Alamos since I've been following it has been a transition away from Mexico and toward Canada. And I mean, would it be fair to think that the investment you're doing now in La Yaqui is potentially the last big investment you do in Mexico?

Or looking the other way, do you see additional potential exploration upside in the Mulatos area or in anywhere in the jurisdiction? How do you think about Esperanza? And just how do you think about Alamos and being in Mexico as a jurisdiction going forward?

John A. McCluskey -- President, Chief Executive Officer and Director

It's John. I can take that. We still believe Mexico is an attractive jurisdiction. I think there's going to be lots of opportunity in the years ahead in Mexico. They're going through a difficult time right now. The country has been hit very hard by COVID. As everyone is aware, there is ongoing issues with narco trafficking in that country, and it started to directly affect the mining industry over the last couple of years as that criminal element turned its interest toward the mining industry and started to rob gold mining operations, including ours last April. So those were certainly significant cause for concern for us.

But as things have been unfolding in Mexico, Alamos has benefited tremendously from continuing to explore in the Mulatos district. And as we made new discoveries, we've extended mine life from what we had originally, which would have seen us stop production back in 2012. Here, we are still mining in 2021, and we have good sightlines through 2027. It's been fortunate for us that every couple of years, we've made a really good discovery in that Mulatos district, and that's kept us going. But it's just a fact that earlier on, it was easier because we were going after the most obvious things.

Most of the things we ended up developing, they had pretty good surface expression that we were able to follow up on. But going forward now, the challenge is to be able to use geophysics and other geological exploration techniques to effectively look down beneath cover and try to find the more hidden deposits that may be existing in that district. We've still only covered maybe 20% of the Mulatos district, the holdings that we have under claim. So there's still a substantial amount of exploration upside there.

We're -- under the current circumstances, we're not particularly aggressive about making further acquisitions in Mexico. And we do have a very strong preference for Canada, for obvious reasons. The reality is, Alamos has always been very opportunistic and also very patient. So when we see opportunities evolve and if we see the country continue to evolve and turn its attention to attracting and encouraging investment there again, we'll respond.

But for the time being, I think our better opportunities lie in Canada, and that's why we've been heavily investing there. And in the meantime, we'll continue keeping things going in our Mulatos district, where by any measure, it's been a tremendous success. A project that we acquired for $10 million originally. We've made well over $400 million from that project. And it's -- we wouldn't be where we are today without it. So we're very grateful for Mulatos and for the start it gave us.

Lawson Winder -- Bank of America -- Analyst

That's a great quarter, John. Much appreciated. Take care, guys. That's all for me.

Operator

Thank you. There are no further questions at this time. This concludes this morning's call. If you have any further questions that have not been answered, please feel free to contact Mr. Scott Parsons at (416) 368-9932, extension 5439. Thank you for your participation.

Duration: 25 minutes

Call participants:

Jamie Porter -- Chief Financial Officer

John A. McCluskey -- President, Chief Executive Officer and Director

Peter MacPhail -- Chief Operating Officer

Scott R.G. Parsons -- Vice President, Exploration

Chris Bostwick -- Vice President, Technical Services

Tyler Langton -- JPMorgan -- Analyst

Kerry Smith -- Haywood Securities -- Analyst

Cosmos Chiu -- CIBC -- Analyst

Fahad Tariq -- Credit Suisse -- Analyst

Mike Parkin -- National Bank -- Analyst

Lawson Winder -- Bank of America -- Analyst

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