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Turquoise Hill Resources Ltd (NYSE:TRQ)
Q1 2021 Earnings Call
May 14, 2021, 11:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Turquoise Hill First Quarter Financial Results Conference Call. [Operator Instructions]

I would now like to turn the conference over to Roy McDowall. Please go ahead.

Roy McDowall -- Head of Investor Relations and Communications

Thank you, Joanna.

Good morning. I'm Roy McDowall, Head of Investor Relations and Communications. Welcome to our first quarter 2021 financial results conference call.

On Wednesday, we released our first quarter 2021 results press release, MD&A and financial statements. These items are available on our website and SEDAR. With me today on the call are Steve Thibeault, our Interim 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 statement section of the Annual Information Form dated March-8, 2021, and supplemented by our MD&A for the three months ended March 31, 2021.

And now I'd like to turn the call over to Steve.

Steve Thibeault -- Interim Chief Executive Officer

Thank you, Roy, and good morning to everyone.

Thank you for joining us for our first quarter 2021 financial earnings call. The first quarter of 2021 has proven to be an eventful quarter. Oyu Tolgoi reported exceptionally strong revenues in copper and gold production. And although we paid a non-scheduled $356 million to the Government of Mongolia for tax assessment, modified our mine design to adapt to the Q4 geotechnical event and faced increased safety measures due to the COVID surge in Mongolia, our expected funding gap has remained unchanged at $2.3 billion and our liquidity has also remained unchanged at Q3 2022. The Oyu Tolgoi team has continued to show their outstanding ability to adapt to the challenges they face, and we continue to focus on reaching first sustainable production in Q4 2022. In addition, shortly after the quarter ended, we announced a binding Head of Agreement with Rio Tinto that provides an updated funding plan for the completion of the Oyu Tolgoi underground development.

The impact of COVID-19 on our operation and underground development continued to fluctuate through Q2, and we are proud of how the team has prioritized safety of our workers and local communities.

I will now walk through the first quarter of 2021 update as efficiently as possible and open the call up to Q&A. Please note, slide 2 and 3 contain our cautionary statement and I encourage you to read through them.

Please move forward to slide 5. Operationally, the first quarter was extremely positive for both -- from both a safety and production perspective. Oyu Tolgoi achieved an all-injury frequency rate of 0.2 per 200,000 hours worked during the quarter and continued to maximize production from the open pit from Q1 production of 45,000 tonnes of copper and 146 ounces of gold. Oyu Tolgoi has updated the copper and gold production forecast for 2021 and is now expected to produce 150,000 tonnes to 180,000 tonnes of copper and 400,000 tonnes to 480,000 ounces of gold. This updated guidance incorporates the impact of the modified mine design due to the geotechnical issue in Q4 2020 and the impact of the increased precautionary measures we have had to introduce due to the recent COVID surge in Mongolia.

The Company is currently assessing the significance and extent of the impact resulting from the COVID-19 pressures. The vaccination program in Mongolia continue to roll out, and as of yesterday it is estimated that over 80% of the adult population have received their first dose while over 30% have received their second dose. We are seeing area of our operation where we believe we can start to relax some of the COVID-related precautionary measures but remain vigilant in ensuring the safety of our employees and the community.

At the end of March 2021, Turquoise Hill had $700 million of available liquidity, which is expected to fund our operations and underground development into Q3 2022, as stated earlier. Our expected funding gap remains unchanged at $2.3 billion.

The improved copper price in Q1 largely mitigated the impact of the unscheduled tax payment, and we remain encouraged with the commodity pricing we have seen so far in the second quarter.

Moving to slide 6. Breaking down our operating performance during the first quarter. In addition to the strong production mentioned in the highlights, our mill throughput remained above nameplate capacity while our C1 copper cash costs were $0.08 per pound. However, we'll also note the reduced 2021 production outlook we provided in the highlights. The reduction from our previous outlook reflect the modification of the mine design in Phase 4B to resolve the geotechnical concern related to a multi-bench failure in December 2020 and the impact on productivity and increased uncertainty resulting from COVID-related control now in place at site.

The challenges of managing the impact of COVID-19 on both our open pit and underground operation continue through the second quarter. The underground development and concentrate shipments continue to ramp up since declaring force majeure toward the end of Q1, while Oyu Tolgoi continue to prioritize the health and safety of its employees and cooperate with the Government of Mongolia as vaccination program rolls out.

With that, I will now hand the call over to Luke Colton, our Chief Financial Officer.

Luke Colton -- Chief Financial Officer

Thanks, Steve, and good morning to everyone on the call.

Please turn to slide 7 for a summary of our key financial metrics for Q1. Revenue for Q1 2021 increased 303% versus Q1 2020, and that's driven by a 29% increase in copper production and a 462% increase in gold production, as well as increases of 52% and 14% in the average prices of copper and gold, respectively. The improved production metrics reflect the scheduled move to the higher-grade areas in Phase 4 B, which we expect to see continue throughout the remainder of the year. The increase in revenue was the primary reason for the $247 million increase in cash generated from operating activities before interest and tax, although the revenue benefit was partially offset by unfavorable movements in working capital and deferred revenue relating to the force majeure that was announced in March of 2021. The $157 million increase in gold revenue credits was the main reason for the significant decrease in the unit cost basis for both C1 cash costs and all-in sustaining costs, together with the benefit arising from the increased copper production. The full year guidance range for C1 cash cost has been adjusted to negative $0.20 per pound of copper produced, which is mainly a result of the decrease in gold production guidance for 2021.

Capital expenditure in Q1 2021 was $250 million, comprising $242 million on the underground and $8 million on the open pit. The slowdown in spend so far in 2021, which was principally due to the impact of COVID-19 restrictions and controls, has led us to reduce our full year guidance for underground capital to a range of $900 million to $1 billion, and for open pit capital, the full-year guidance has been reduced to a range of $105 million to $125 million.

You can please turn to slide 8. You'll see that Turquoise Hill had liquidity of $0.7 billion at the end of Q1 2021 which is expected to be sufficient to meet our needs -- our requirements into Q3 of 2022. Although the Company made unscheduled tax payments to the Mongolian Tax Authority of $356 million in Q1 2021, operational performance, strong sales and pricing allowed the Company to maintain its liquidity horizon. Additionally, our base case incremental funding requirement has remained at $2.3 billion, and we of course continue to monitor commodity markets, the undercut, COVID-19 impacts and other key assumptions in assessing our future funding requirements.

Looking forward, we are engaging with the relevant stakeholders to advance implementation of the heads of agreement with Rio Tinto, and we will continue to provide updates in due course with respect to progress made. Our liquidity outlook and estimated incremental funding requirement will continue to be impacted either positively or negatively by various factors, many of which are outside the Company's control. Successful implementation of such options may require us to achieve alignment and agreements with the relevant stakeholders, which would include Rio Tinto, existing lenders, any potential new lenders, as well as the Government of Mongolia.

With that, I will hand the call over to Jo-Anne Dudley, our Chief Operating Officer.

Jo-Anne Dudley -- Chief Operating Officer

Thank you very much, Luke.

If we now turn to focus on slide 9. Despite COVID-19 impacts, the overall project construction progress on the Materials Handling System 1, which is required for sustainable first production, remains broadly in line with the definitive estimate. During Q1 2021, Primary Crusher 1 bottom shelves are installed and the top shelves removed for the crusher chambers' installation. In addition, conveyer belt pulling commenced on main conveyor between Primary Crusher 1 and Shaft 2. Although progress on Materials Handling System 1 is expected to slow in Q2 '21 due to site COVID restrictions, it's not expected to materially impact the timing of the undercut commencement and sustainable first production.

Ongoing work suspensions continue to affect progress on Shaft 3 and 4, and the overall impact of these delays are under review. Progress of works remains dependent on mobilizing key vendors and additional sinking resources into country and clearing them from quarantine. Additional shaft sinking specialists are now in Mongolia and are expected to arrive on site during May. Shafts 3 and 4 are not required to support Panel 0 commencement. However, they are required to support production from Panels 1 and 2 during the ramp-up to 95,000 tonnes per day. COVID-19 impacts are expected to continue through quarter two despite the rapidly progressing vaccination program.

The conveyor decline continues to progress with 800 equivalent basis completed in the quarter. Underground development progressed 3,500 equivalent meters, and we completed 13,500 cubic meters of mass excavation. It's anticipated that lateral development rates will continue to be impacted into quarter two, and although development work has slowed as a result of the reduced site workforce numbers, almost all of the development required for the commencement of undercut is complete. The commencement of the undercut in mid-2021 is a key milestone, and it is critical to ensure that once commenced the undercut and drill point construction continues unimpeded. Achievement of the technical criteria required for a mid-2021 commencement of the undercut remains on track. However, the exact timing of the undercut is under increasing pressure, principally due to the rapidly evolving understanding of the recent COVID-19 impacts.

In terms of exploration, Turquoise Hill, through its wholly owned subsidiaries, Asia Gold Mongolia, Heruga Exploration and SGLS LLC, operates an exploration program in Mongolia on licenses that are not part of Oyu Tolgoi. In Q1 2021, Turquoise Hill successfully tendered for a new lease, Khatavch. With the addition of Khatavch, Turquoise Hill now has three licenses. The exploration work plans for the three Turquoise Hill licenses have been finalized and submitted to the local authorities. So Turquoise Hill Bag and Od-2 licenses, the exploration team plans to continue with geophysics program. And on Khatavch lease, the team plans to undertake several geological surveys. The timing of the field season is dependent on the COVID-19 situation but fieldwork is expected to begin in late Q2 or early Q3 2021 once the required approval has been received and the entire team is vaccinated. Due to our in-country expertise and experience, TRQ is well placed to undertake regional exploration activities.

With that, I'll now hand the call back to Steve.

Steve Thibeault -- Interim Chief Executive Officer

Thank you, Jo-Anne.

Moving to slide 10. I'm going to use the key milestone outlined on slide 10 to provide an overview of what we are working through for 2021 and on to 2022 to keep us on track for first sustainable production in October 2022.

The first milestones are the ongoing negotiation with the Government of Mongolia, which are critical to ensure the undercut can commence. As Jo-Anne pointed out, from a technical perspective, the criteria required for the mid-2021 commencement on the undercut remain on track. However, it is a non-technical criteria, including confirmation of necessary regulatory and legislative approval required by the Government of Mongolia that are still pending and are critical elements for consideration to proceed with the decision to commence the undercut. Constructive engagement was achieved with the Government Working Group in Mongolia in April and we anticipate a resumption of discussion in June following the 2021 Mongolian Presidential Election.

The second milestone of 2021 is the undercut blasting currently scheduled for mid-year. Once commenced, the undercut and drawpoint construction continues unimpeded and we will be looking forward to ramping up to first sustainable production.

The third key milestone is funding. In April, Turquoise Hill and Rio Tinto announced a binding HOA to provide the funding plan for the completion of the underground development. The funding plan is designed to address the estimated remaining funding requirement of approximately $2.3 billion, which is based on our current commodity assumptions. We remain committed to continue delivering benefits to all stakeholders, including Mongolia and its citizens and to delivering significant long-term value for Turquoise Hill shareholders.

I would like to thank you all for taking the time to join our conference call. And we'd now like to turn the call back to the operator for questions.

Questions and Answers:

Operator

[Operator Instructions] First question comes from Orest Wowkodaw at Scotiabank. Please go ahead.

Orest Wowkodaw -- Scotiabank -- Analyst

Hi, good morning. I realize you've left official -- all your official guidance kind of unchanged for the underground with respect to timing and capex and so forth, but at the same time your release -- it's pretty clear that you're worried about increasing pressures, I guess both technical and non-technical. How should we think about this moving forward? I mean, it sounds like you're going to be likely increasing the capex and pushing back the schedule unless things radically improve. Is that the right way to think about it? And does this really revolve around both the government giving you the non-technical issues that you need, plus sort of the lifting of COVID restrictions?

Steve Thibeault -- Interim Chief Executive Officer

Okay. There is couple of elements, Orest -- I mean, thanks for your question. And there is a couple of elements in your question. What we're focusing right now is on the undercut decision. And we've been very clear that the undercut decision has two main elements, one of technical criteria, OK, which includes elements of drilling and all elements. And as mentioned by Jo-Anne, OK, the achievement of the technical criteria required for the mid-2021 commencement, they remain on track. I mean, Orest, let's face it, like everybody, we had some headwinds with the COVID, but definitely we believe that -- and we're on track from our point of view for a mid-year start on that one.

The other elements related to the non-technical that we refer, and you could see that as the approval from the Government of Mongolia related to our license to operate the underground -- or the underground. And we need to work with the government to proceed with these approval, and that's not different from any mine in the world that you need -- you need some approvals on some elements. And so, I mean, as of today we haven't received those ones, but we keep working with the government to receive these approvals and be able to proceed. Okay?

Now, in term of COVID and the impact, I mean, the main impact of the COVID was in Q2, OK? But as you've seen, there are some significant improvement in the vaccination and also the procedure that we're putting in place. We're focusing first on the safety of our employees. But we expect that over the next couple of weeks, we should see an improvement in the situation in Mongolia overall and on our site and we should be able to ramp up the operation. So I'm not telling you -- but the important point is, we need to evaluate what will be the impact. And today, I don't have the information available.

Orest Wowkodaw -- Scotiabank -- Analyst

And as a follow-up, can you -- are you able to quantify like what does every one month delay in the undercut -- what does that translate in terms of say, impact on the capital number?

Steve Thibeault -- Interim Chief Executive Officer

Yeah. Jo-Anne, would you like to cover that, please?

Jo-Anne Dudley -- Chief Operating Officer

Yes, absolutely. And thank you for your question, Orest. So, it depends on the reason that the undercut may be delayed, and certainly as Steve was indicating, we aren't planning for any particular delay in the undercut, certainly not a scenario that we've been putting a lot of work into understanding at this point in that we're working toward the start of the undercut as soon as it's possible to do so.

In terms of other work that continues, once the undercut starts blasting, we'll do continue to work on the Materials Handling System 1 as well as other important work in preparation for the start of production. And so, depending on the reason for a particular delay that could be encountered, preparatory work for commencing production could continue, and that this would obviously depend if the delay was as a result of more numbers on site and the inability to continue working, then that might impact that as a scenario. But the Materials Handling System 1 has remained ahead of schedule, actually up and -- even now, we're saying it's forecasting ahead of schedule. But we can see that there has been pressure on the schedule in recent weeks due to the accelerated impacts of COVID control at the site.

Orest Wowkodaw -- Scotiabank -- Analyst

But, I mean, as a follow-up, are you able to quantify like if the undercut is delayed because you -- the non-technical criteria is not met, what is the impact, say, per month of delay to the capex?

Jo-Anne Dudley -- Chief Operating Officer

Right. And we're still trying -- we still would be assessing that as known delays would start to occur. But given that some -- quite a lot of work could continue. It's not something that we necessarily understand right at this moment because they would be -- there would be work that would be ongoing. So capital would continue to be spent in other areas, albeit potentially at a reduced rate, and there will be ongoing assessments of the overall impact on cost and schedule as we understand the situation better.

Steve Thibeault -- Interim Chief Executive Officer

Orest, I think the better way to look at it, Orest, is that it's not a one month for this capital, because other works -- it's a complex development and other work will be done elsewhere and some expenses will not be done, so there will be just a delay. Now, that being said, it also depends on the timing. I mean, at the moment we're seeing that we're within -- we're within the midyear. And so I would not say one month is equal to that much capital additional, and I don't think that we're not looking at the -- at the midyear timing as having an impact or significant impact on the capex. You should not look at it this way from that point.

Orest Wowkodaw -- Scotiabank -- Analyst

Okay. Thank you. And just a final clarification. The $6.75 billion capital number for Phase 2, does that include the sustaining capital related to the underground that we're now seeing being incurred? We saw some in Q1 here and just curious if the sustaining capital between now and first sustainable production included is in that $6.75 billion number.

Steve Thibeault -- Interim Chief Executive Officer

Okay. Luke, you want to give the answer on that?

Luke Colton -- Chief Financial Officer

Sure, happy to, Steve. And thanks for the question, Orest. The answer to that question is, no, the $6.75 billion does not include -- the $6.75 billion is for underground development capital expenditure. It excludes underground sustaining capital expenditure. And that's always been the case. If you go back and look at the different technical reports we have issued in 2016 and again last year in 2020, there's always been a distinction between the $6.75 billion underground development capital expenditure and then additional underground sustaining capex.

Orest Wowkodaw -- Scotiabank -- Analyst

Okay. Thank you.

Steve Thibeault -- Interim Chief Executive Officer

Thank you very much, Orest.

Operator

Thank you. Next question comes from Craig Hutchison at TD Securities. Please go ahead.

Craig Hutchison -- TD Securities -- Analyst

Good morning, guys.

Steve Thibeault -- Interim Chief Executive Officer

Good morning, Craig.

Craig Hutchison -- TD Securities -- Analyst

I'm trying to get a little more granularity around your guidance cut, particularly with gold going from 500,000 to 550,000 down to 400,000 to 480,000. How much of that is COVID related, how much of that is grade related? And we're kind of halfway through Q2 here. Any kind of color in terms of what we should be thinking for throughput and grades here in Q2 would be appreciated. Thanks.

Steve Thibeault -- Interim Chief Executive Officer

Okay. I'll let Jo-Anne respond to that, Craig, OK? Jo-Anne, can you take...

Jo-Anne Dudley -- Chief Operating Officer

Thank you. Thank you, Steve. Thank you, Craig. Yes, no problem. Can you hear me?

Craig Hutchison -- TD Securities -- Analyst

Yes, I can.

Steve Thibeault -- Interim Chief Executive Officer

Yes.

Jo-Anne Dudley -- Chief Operating Officer

Okay. Sorry. Just wanted to check there. Sorry. Yes. So, in terms of the change in particular around the production guidance of gold, the majority of the change in terms of the gold production has been the deferral of material site 5 as a result of the mine redesign and we would say the delivery of that material in approximately two to three years' time. There are some other additions that have played into that change. And as you know, COVID and assumptions around productivity over the next period has also been factored into that change. So it is a combined change of the mine redesign as well as some productivity impacts and then some other assumptions around the ore type being fed and the processing results we would expect from that.

In terms of looking forward to the rest of the year, we have had a good quarter in terms of gold production. And we do expect to see Q2 having some productivity impacts from the operation in terms of productivity from the open pit and the concentrator due to the COVID controls that have been implemented at site. However, with the vaccination program and the controls that are being used, we expect to see some recovery of that and we will be remaining in that high-grade area of Phase 4B for all of the quarter of 2021 and we -- and of course, having just updated guidance, we do expect to remain within that guidance for 2021.

So hopefully that draws enough of a picture for you there, Craig, in terms of how those quarters will play out. I mean, I guess something else to add would be, in this part of the pit the grade is quite good and we can see the grade change when we move around in different areas of the pit. And so, it isn't straightforward to just tell you that the grade is going to be the exact same over the next three quarters, but just to let you know certainly what we can is, which is we will remain in the high grade for the remaining quarters of this year and we do expect to meet that newly released guidance.

Steve Thibeault -- Interim Chief Executive Officer

Craig, the same way to look at it -- I mean, if I would be you, I would say that -- like Jo-Anne was saying, overall, the grade would be roughly the same on all of the quarters except because of the COVID situation in Q2, I would make an adjustment and probably spread it over the next quarters, roughly.

Craig Hutchison -- TD Securities -- Analyst

Okay. I mean, grades were quite high in Q1, right? They were 0.68, I think.

Steve Thibeault -- Interim Chief Executive Officer

Yeah. But we're -- we expect it to be in that grade. There's always variability, OK, but we're expecting to be in these -- in the high grades in the pit for pretty much all the year. I think maybe December, a little bit, but it's not -- it's not even the concern, but I think that you should assume all year with good grade.

Craig Hutchison -- TD Securities -- Analyst

Okay. I mean, I just say -- it seem like the grades would have to fall quite sharply from Q1 in order to hit sort of the midpoint of your guidance. But, OK, just in terms of sales, do you guys anticipate catching up here in Q2 or do you think there'll be some carryover into Q3?

Steve Thibeault -- Interim Chief Executive Officer

Luke, can you answer that, please?

Luke Colton -- Chief Financial Officer

Yeah, no, I will. Happy to do that. Craig, it's a good question. We did obviously declare force majeure in -- I think it was 30th of March of this year. We are now -- concentrate shipments have started again. They started again kind of mid-April, and we do expect them to continue to ramp up over the course of Q2 as the COVID situation in Mongolia hopefully improves with vaccinations, etc., and that's what we're aiming to do and we're working very closely with the government -- the Government of Mongolia and the Government of China to sort of resume normal shipping operations as soon as possible. But as Jo-Anne has alluded to, there have been COVID related impacts. We are expecting to see some COVID related impacts in Q2. So what I would suspect is that you should see improvement over the course of Q2, but I expect there will probably still be a fairly high inventory balance at the end of Q2 which we will continue to draw down. Hopefully, in Q3 -- we will get back to normal by the end of Q3. That's kind of what we're targeting at the moment in terms of getting our inventory balances back down to normal level. So I don't think it's something that will completely resolve itself in Q2, Craig, down to your question. I think it's probably going to be something that resolves itself hopefully in Q3, but definitely over the remainder of the year.

Craig Hutchison -- TD Securities -- Analyst

Okay. Thanks. Maybe one last question -- sorry, go ahead.

Steve Thibeault -- Interim Chief Executive Officer

Craig, just to give you a bit of flavor. I mean, all truck drivers have been vaccinated, but there is additional procedures at the border and that's increased the cycle time of the delivery. But like Luke was saying, definitely, we're working and putting additional resources to make sure that we can move that inventory, but that will take a while.

Craig Hutchison -- TD Securities -- Analyst

Okay. Thanks. Maybe just -- one last question for me. Just in terms of how important are the Mongolian Presidential Elections on resolving the Parliamentary Resolution 92. Do you need presidential sign-off or -- I guess I'm kind of wondering why those negotiations stalled and will resume post the presidential election outcome. Thanks.

Steve Thibeault -- Interim Chief Executive Officer

Yeah. No, the context is more like -- we had -- I mean, TRQ and Rio Tinto teams were in Mongolia for discussion with the Government of Mongolia from the end of May -- from the end of March to April, the end of April. I mean, definitely, Craig -- I mean, Mongolia was facing a significant surge in the COVID and we were in the election and we believe that the best -- the best for everyone was to resume the discussion after the election, OK, where we would be -- that would be -- that will be completed. And so I don't know exactly in term of detail, but definitely a couple of points here. All the parties are committed to -- I mean, we all have a common interest, OK, being the -- the proceed or proceeding with the undercut decision, OK. We know that we need to resolve and have discussion around resolution 92 or a question that has been raised by the government, and we're definitely committed to have -- sit down and have the proper discussion in order to have. But it is also likely that we -- I mean, we will -- I mean there is some discussion to have related to the undercut -- to the undercut criteria and the non-technical that we talked before. And like I said, these are license to operate -- or elements of license to operate that we need to -- we need to have. But I would expect that the discussion with the Government of Mongolia definitely will-- I mean like I say, will resume after and we'll have also, after Naadam, we'll have other period to have some discussion. But the point I want to make, Craig, is that you should not necessarily link together the undercut decision with the discussion with the government. Some elements of that would be common, but not everything.

Craig Hutchison -- TD Securities -- Analyst

Okay. Thanks, guys.

Steve Thibeault -- Interim Chief Executive Officer

Okay.

Operator

Thank you. Next question comes from Ralph Profiti at Eight Capital. Please go ahead.

Ralph Profiti -- Eight Capital -- Analyst

Good morning. Thanks for taking my questions.

Steve Thibeault -- Interim Chief Executive Officer

Good morning, Ralph.

Ralph Profiti -- Eight Capital -- Analyst

Good morning. Steve and Jo-Anne, I wanted to come back to the development rates in Q1 and that are also going to impact Q2. And if we just exclude the critical elements, these non-technical factors, what sits behind commencement of the undercut as a critical factor? It doesn't seem like it's Shaft 3 and 4. Is it really drawbell development and construction or materials handling? Can you help me understand that a little bit better?

Steve Thibeault -- Interim Chief Executive Officer

Okay. I'll let Jo-Anne to answer your question there, Ralph.

Jo-Anne Dudley -- Chief Operating Officer

Okay. Thank you. Thanks, Ralph. So, you're correct in terms of what you were saying that it's not camshafts [Indecipherable]. They support the lighter ramp-up. The Materials Handling System 1 has been a key priority. And as we've mentioned, it has been ahead of the definitive estimate in terms of schedule, but we're seeing headwinds with these latest acceleration of COVID control. And the other piece is lateral development, as you mentioned, and almost all of the development required to commence undercutting is complete. So the development is well advanced at the moment. We still do have aspects of the materials handling system that are under construction and they will continue right up until the start of production but the schedule is going relatively well. And they really manage that extremely well given the current or certainly the situation with COVID has had. It might be worth just mentioning that the Materials Handling System 1 was prioritized and so they've done quite well. It does not currently have no active cases of COVID and additional personnel are planned to be transported to site to increase numbers on construction over the next few weeks as well, as well as the vaccination program progressing. So we are certainly seeing green shoots here, but we also recognize that things have been difficult for the chain leading up to the end of this quarter and into Q2. Hopefully that's helpful.

Ralph Profiti -- Eight Capital -- Analyst

It is. It is. Thank you for that. Jo-Anne, it's also my understanding that sustainable case propagation occurs at 30 drawbells. Just wondering, do you have a target rate for drawbell construction? Where are you now, where do you expect to be, say, mid-2021, end of 2021? Can you help us with a little bit of a schedule on drawbell construction?

Jo-Anne Dudley -- Chief Operating Officer

Yeah. So there certainly is a schedule for drawbell construction. With the style of cave mining that we're using at this one of Oyu Tolgoi, the Hugo North mine, the undercut passes over at the extraction level prior to the development and the blasting of drawbells. So we currently don't have any drawbells and we won't until we start firing the undercut and we actually are able to safely start doing that work. And so that is something that is after we started undercutting if you like. In addition, in terms of the actual timing of sustainable first production, the estimates of the number of bells is a reasonable estimate as we understand the rock mass. But ultimately, the start of production is governed by the rock mass and its behavior after we undercut, and this has the cave instrumented to understand when caving commences. And that will be when the first sustainable production actually commences. So the number of drawbells is an approximation. It should be reasonably close, but ultimately we will be looking to the rock mass to give us the go-ahead there and make the criteria to start production in 2022.

Ralph Profiti -- Eight Capital -- Analyst

Got it. Well understood. Yes. Got it. Thanks very much.

Operator

Thank you. Next question comes from Jackie Przybylowski at BMO. Please go ahead.

Jackie Przybylowski -- BMO -- Analyst

Thanks very much. I guess I just wanted to circle back to Steve's response to Orest and then to Craig. I mean, you've mentioned a couple of times, Steve, you need to see a license to operate in Mongolia and I think this is specifically related to resolution 9. But also, I mean Jo-Anne when she was answering Orest's question, she said that you're still doing prep work on materials handling and other items. Is it one or the other, like do you need a license to operate, should you both to undercut and I mean spending any other capital underground when that going to be the same? I'm just -- I'm a little confused as to why you were pursuing some of the development activities but not the undercut, why wouldn't they be kind of under the same kind of thought process.

Steve Thibeault -- Interim Chief Executive Officer

Yeah, yeah, let me answer that, Jackie. I think there are a couple of elements you had in your statement or your question here that I just want to -- I just want to answer. The first one relates to the non-technical and the resolution 92. You should separate those two, OK? Because in order to operate any mine in the world, you need some approval by the government and some elements that are related to your license to operate. For example, OK, an annual mine plan approved by the government, OK? And these are -- I mean that's just one example among other things that you would have. And so there is elements right now that we're waiting approval -- we submitted but we're waiting approval from the government to be able to proceed. And where -- this is where we need to discuss with the government and the different departments to make sure that we're moving on these elements, and some of those have not been received yet and we want to proceed there.

The second element is that on the negotiation you put that separate, OK? But it's also important to understand that, once you start the undercut, that's it. I mean, you cannot stop it. So you need to make sure that you have the proper authorization and approval to proceed with it because there is no -- there is no other way to change it, OK? The underground mine itself and the lateral development is not mining yet, it's getting ready for the -- for mining but it's not necessarily the mining yet, OK? But when you start doing the cut, you're really starting the mining operation and you cannot stop it. And we want to make sure that when we start, we won't have any delay because what is most important during the undercut is to make sure that you progress at the right level so you guarantee the sustainable production at a specific time. Okay?

Jackie Przybylowski -- BMO -- Analyst

So is it fair to say -- so thanks for the clarification. Is it fair to say that the undercut can start before the investment agreement is finalized?

Steve Thibeault -- Interim Chief Executive Officer

I would say yes.

Jackie Przybylowski -- BMO -- Analyst

Okay.

Steve Thibeault -- Interim Chief Executive Officer

I think that it would be a reasonable -- Jackie, it would be reasonable to say that we could proceed without having resolved these elements because we are committed to resolving it, OK, because that's important and needs to be resolved, but at the same time we could definitely -- when we get the approval to proceed with the undercut, we can move ahead.

Jackie Przybylowski -- BMO -- Analyst

Got it. Thanks very much for that clarification. That's really helpful. Thanks, Steve. That's it for me.

Steve Thibeault -- Interim Chief Executive Officer

Yeah. You're welcome. Thank you.

Operator

Thank you. Next question comes from Dalton Baretto at Canaccord. Please go ahead. I do apologize. Orest Wowkodaw with Scotiabank.

Orest Wowkodaw -- Scotiabank -- Analyst

Thanks for taking the follow-up. This one is actually for Luke. On your estimate for the financing requirement, the $2.3 billion, can you give us a little bit more color on minimum cash assumptions in that? Like, i.e., does your existing debt require you to maintain a certain minimum cash or does that assumption or is that not the case? And does that estimate of $2.3 billion assume you're taking your cash effectively to zero at some point next year?

Luke Colton -- Chief Financial Officer

Yeah. So the estimate of $2.3 billion would assume that we're taking the cash all the way down to zero. Obviously, we wouldn't want to get to that point, but the $2.3 billion does assume we take the cash balance all the way down to zero. And of course, the objective at the moment is to focus on implementation of the HOA so we're able to resolve that funding gap well in advance of getting to that point.

Orest Wowkodaw -- Scotiabank -- Analyst

Thank you for that. But does your existing debt require you to maintain a certain minimum cash balance or do you have no restrictions?

Luke Colton -- Chief Financial Officer

I'm going to have to get back to you on that question. I don't believe it does but I'll have to follow that -- I'll have to follow that question up and I get back to you.

Orest Wowkodaw -- Scotiabank -- Analyst

Okay. Thank you.

Steve Thibeault -- Interim Chief Executive Officer

And, Orest, I would say that there is -- there is a lot of elements, and you've seen the -- I'm not saying that it's going to be less, guys. I'm just saying that our estimate is $2.3 billion, but there is a lot of -- there is a lot of information in the pricing and all that that's happening, so it's very variable environment at the moment. But like Luke is saying, we'll get back to you on that $100 million or any amount required if we have any.

Orest Wowkodaw -- Scotiabank -- Analyst

Okay. Thank you.

Operator

Thank you. Next question is from Dalton Baretto at Canaccord. Please go ahead.

Dalton Baretto -- Canaccord -- Analyst

Thanks. Good morning, everybody. Steve, I want to pick up on what Jackie was asking...

Steve Thibeault -- Interim Chief Executive Officer

Good morning, Dalton.

Dalton Baretto -- Canaccord -- Analyst

Good morning, Steve. I want to pick up on what Jackie was asking you about and specifically what you said in terms of the undercut being able to progress without resolution 92 satisfied. Is that something you guys would be willing to do? My understanding was that Rio refused to progress unless that happens. Specifically, because as you said, once you start the underground, there is no stopping. So if resolution 92 is not resolved yet, you're basically a hostage now.

Steve Thibeault -- Interim Chief Executive Officer

There are a couple of elements there, OK? The first one, we need -- how can I approach that? The key elements, OK, is that from a -- the first element we need to resolve is make sure, Dalton, that we have the license -- the elements or the approval from the license to operate, OK? We are committed -- I mean, let's face it, there is differences and the resolution 92 bring some concern from the Government of Mongolia to be resolved, and it's around the cost of the projects and the distribution of benefits. I mean, this is negotiation that we're going to have and will take a certain time. However, both party have committed to make sure that we are creating and we're proceeding with the value of the project. And despite the fact that it may take some time for these -- all the detail of resolution 92 to be resolved, OK, what's important is that we move ahead with the approval of the -- I would call it the regulatory approval to proceed with the underground, and we can work together to fix -- not to fix but to discuss the resolution 92 and be able to move forward. So there is a scenario where you definitely can separate the two and have a proper discussion around the elements are concerned that we have ending resolution 92 while still proceeding with the undercut. But I would say, Dalton, we're -- I mean, we have 79 floors of that 80 floor building done. What's important is that we move ahead and we're creating the value while we are having this discussion, the proper discussion with the government around the -- their concern around the cost and the benefits.

Dalton Baretto -- Canaccord -- Analyst

But I guess I'm wondering, a, why would the government give you approval to proceed if the economics are uncertain, and, b, why would you guys want to proceed if the economics are uncertain.

Steve Thibeault -- Interim Chief Executive Officer

I think that -- I mean, how can I -- definitely what is important for us -- first, Dalton, we are aligned. The government and the Company, we are aligned that we need to create and generate the value. The distribution of that value is going to be something that we're going to have to discuss and have the proper discussion. From my point of view, I mean, we are there. We need to -- so, we're at the -- like I said, this project is mostly completed and we need to make sure that we're proceeding and moving with the important element, which is the undercut and we need to find a way to resolve the funding at the appropriate time and have the dedication to do it on both side. And I think that's doable. That's my view.

Dalton Baretto -- Canaccord -- Analyst

Okay. So, on the assumption that you get the approval to proceed with the undercut and that you initiate the undercut and then you get to a point in the negotiations where you're at an impasse on resolution 92, how do you handle that if you can't stop the undercut?

Steve Thibeault -- Interim Chief Executive Officer

I mean, definitely, I'm confident that we can find a path forward, Dalton, definitely.

Dalton Baretto -- Canaccord -- Analyst

Okay. Maybe switching gears to something else Craig asked you about and I was sort of confused as to the answer, and that's got to do with the gold production this year. If your gold grades are going to stay approximately the same, what's driving the lower guidance? Is it throughput? I mean, where exactly is COVID-19 impacting it?

Steve Thibeault -- Interim Chief Executive Officer

Yeah. Jo-Anne, do you want to answer that, please?

Jo-Anne Dudley -- Chief Operating Officer

Yeah, sure. And I think that was -- I'm really pleased you asked that question, Dalton, because I don't think that was the right takeaway. It certainly wasn't what I was trying to say. What I was trying to say is that there has been -- if we look at the guidance for the year, and we do some simple math on the gold that has been produced in Q1, then we look at the remainder of the year. We're still going to have production in each of those quarters from the higher grade area of Phase 4B. However, we can also say that quarter two will have some impact on production from the pit and through the plant as a result of the COVID-19 controls that we've had in place over recent weeks at site. So there will be an impact on Q2. However, we do remain in nice high grades and we've just updated the production guidance. So, is that helpful?

Dalton Baretto -- Canaccord -- Analyst

It is. I'm just trying to understand [Technical Issues]

Jo-Anne Dudley -- Chief Operating Officer

Sorry. We lost you.

Steve Thibeault -- Interim Chief Executive Officer

Does it -- I think we lost you, Dalton. Operator, are you still...

Operator

Dalton is still connected. Perhaps his line may have gotten muted. Dalton?

Dalton Baretto -- Canaccord -- Analyst

I'm still here. Can you hear me now?

Jo-Anne Dudley -- Chief Operating Officer

Yes, go ahead.

Steve Thibeault -- Interim Chief Executive Officer

Yeah, we can.

Dalton Baretto -- Canaccord -- Analyst

Sorry. I've been having issues with this call for the last 30 minutes or so. So yeah, my question is, if you're going to be in the higher grades, should we then assume that the impact is on the amount of material mining and processing and then is that restricted just to Q2 or the rest of the year?

Jo-Anne Dudley -- Chief Operating Officer

Yeah. So, I mean, I guess I was not -- to be clear, I was not saying we will be processing the same grade for every quarter of the year. So what I was saying is that we will be in the higher-grade areas of the pit for the remainder of the year, but if we do some math between the production guidance just released and what's been produced in Q1, we'll see what we think will happen over the remaining three quarters, and that's as much guidance as I can give. There is variability in those high-grade areas. It's not -- we're not mining iron ore or bauxite. There is a lot of difference in the grades in these parts of the pit and there is variability with COVID that we're seeing for the rest of the year. So, I'd love to provide you with a bit more granularity but I just don't think it's appropriate given the uncertainties around which we're talking.

Steve Thibeault -- Interim Chief Executive Officer

Dalton, another way to look at it is that the -- and I guess you're speaking mostly around the gold, OK? When you look at the gold, the gold is at more specific area in the pit; it's right on the bottom, OK, in very specific area, and you can [Indecipherable] because of the slip, we had to do a step-in. So that means that we have to -- we have to make -- lost some benches, OK, and make it less accessible at the bottom of the pit. So technically, OK, with that current 4B -- we modified the current 4B where we don't have all the access that we wanted to have at the bottom of the pit where some of the high-grade gold was, OK? It will be mined later, OK -- we'll be able to mine it later, but this year, we don't have access.

Now, on the copper side, we have other area because the distribution of the ore, the copper ore is different we have access elsewhere. So that's why we have less of a change in the copper guidance. That's mostly what it is.

Dalton Baretto -- Canaccord -- Analyst

Okay. So that's more clear because we keep talking about the COVID-19 impact, but what you just said is it's a function of the pit wall slip. And that's kind of what I was trying to get at because in your Q4 disclosure, it said that there wasn't going to be an impact on guidance. And so I just wanted to clarify. So this is a function of the pit wall slip and access to certain zones that you had planned on mining but can't right now.

Steve Thibeault -- Interim Chief Executive Officer

It is. And the reason why we -- I mean, if we said that -- it takes a while. You understand that evaluating the fold and how it would behave and you try something and it doesn't work, you have to step in more, that has an impact eventually, and that's what we're seeing this quarter that -- finally it has a bigger impact to what we originally had planned because we had not finished all the analysis.

Dalton Baretto -- Canaccord -- Analyst

Understood. Thank you, guys.

Steve Thibeault -- Interim Chief Executive Officer

Okay. Thank you.

Operator

Thank you. That concludes today's Q&A session. I will now turn the call back over for closing remarks.

Roy McDowall -- Head of Investor Relations and Communications

Yes. Thank you very much, everybody, for attending this call. Really want to appreciate your time and your interest. If there is any follow-up questions, you can reach out to myself, Roy McDowall, info@turquoisehill.com, or my email address. So on that, thank you again for attending. And hope Everybody has a great day. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Roy McDowall -- Head of Investor Relations and Communications

Steve Thibeault -- Interim Chief Executive Officer

Luke Colton -- Chief Financial Officer

Jo-Anne Dudley -- Chief Operating Officer

Orest Wowkodaw -- Scotiabank -- Analyst

Craig Hutchison -- TD Securities -- Analyst

Ralph Profiti -- Eight Capital -- Analyst

Jackie Przybylowski -- BMO -- Analyst

Dalton Baretto -- Canaccord -- Analyst

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