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Turquoise Hill Resources Ltd (NYSE:TRQ)
Q2 2021 Earnings Call
Jul 30, 2021, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to Turquoise Hill Second Quarter Financial Results Conference Call. [Operator Instructions]. Also note that the call is being recorded on Friday, July 30, 2021 and I would like to turn the conference over to Roy McDowall. Please go ahead, Sir.

Roy McDowall -- Head of Investor Relations and Communications

Thanks Sylvie and good morning I'm Roy McDowall, Head of Investor Relations and Communications. Welcome to our second quarter 2021 Financial Results Conference Call. There is date. We released our second quarter 2021 results press release, MD&A and financial statements. These items are available on our website and SEDAR.

With me on the call today are Steve, 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 statements section of the Annual Information Form dated March 2000-21 and supplemented by our MD&A for the 3 and 6 months ended June 30, 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 second quarter 2021 Earnings Call. Jo-Anne, Luke, and I will be available for Q&A following our presentation.

Please note slide 2 and 3 contain our cautionary statement and I would encourage you to read through them. I will now walk through the second quarter of 2021 update and open the call up to Q&As.

The Oyu Tolgoi --Turning to Slide 5: The Oyu Tolgoi team turned in another strong quarter from both a safety and production perspective while considering the impact of COVID-19 related challenges. The health and safety of our workforce is our top priority. Oyu Tolgoi reported an all-injury frequency rate of 0.14 for this 6 months ended June 30, 2021 and produce 36.7000 tonnes of copper and over 113 ounces of gold.

From 2021, we are maintaining our production guidance to 150,000 to 180,000 tonnes of copper and 400,000 to 480,000 ounces of gold. The quarter was not withheld its challenges as the surge in COVID-19 cases in Mongolia and onsite prompted the theory of lockdowns and country as a results, in order to go staffing level operating as low as 25% of planned at certain periods during the quarter.

Following the declaration of force mejeure announced by the company in March 2021, constant shipments to Chinese customers and recommence and have begun to ramp up from April 15, 2021 with the transport team continually adapting to the precautionary measures against COVID-19 transmission risks.

Oyu Tolgoi continue to work closely with Mongolian and Chinese authority to manage supply through disruption. The force mejeure will remain in place until sustained volume of convoys, crossing the border can meet Oyu Tolgoi ongoing commitments to customers and on-site concentrate inventory returns to target levels.

We continue to advance the underground development project with overall project construction remaining broadly in line with a definitive estimate and while all project related technical criteria are on track to initiate undercut given the cumulative an ongoing impact of COVID-19, delayed commitment to resulting from the non-approval of the definitive estimate budget by the OT Board and outstanding non-technical issues related to the undercut decision, the company expect that there will be further impact on overall product cost and schedule.

Sustainable production is still targeted for October 2022 and we will continue to monitor the situation and update the market as appropriate. From the financial perspective, our estimated base case incremental funding requirement has increased by $100 million to $2.4 billion at June 30, 2021. Taking into consideration, the resequencing of the open-pit ore faces, the additional 2021 underground development cost impact of the known COVID-19 issues up to June 30, 2021 as well as improved commodity prices forecast.

Our available liquidity of $0.7 billion is expected to be soon to fund the company requirements into Q3 2022.

Moving to slide 6: During Q2 2021 Oyu Tolgoi produced over 36,000 tonnes of copper and then 113 ounces of gold with a C1 cash cost of $0.83 per pound. Production was lower than in Q1 2021 from Q1 2021 due to slower mining rate and the higher grade Phase 4B this resulted in an increase in lower grade stockpile material being processed through the mill. Personnel number on site which at time were below 25% of planned performance adversely impacted both the open pit operation and the underground traffic. On the remainder of 2021, it is anticipated that the mill feed was continue to be comprised of higher grade Phase 4B and lower grade stockpile. However, as like offline in the production, we remain on track for our updated 2021 production guidance.

Mill throughput 9.4 million tons was above nameplate capacity was slightly lower than that in Q1 2021 due to COVID-19 related lower personnel numbers and planned maintenance activities. Despite the COVID-19 challenges Oyu Tolgoi team has done the great job implementing additional controls and implementing and operating the open pit during Q2 2021 and remain on track to achieve 2021 production guidance of 430,000 tonnes of copper and 400,000 to 480,000 ounces on goal good.

With that I 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 and I'll provide a summary of our key financial metrics for Q2 2021. Revenue for Q2 2021 increased 14% from Q2 of 2020. Gold revenue increased by $75 million and that's driven by a 6% increase in average gold prices and 136% increase in the volume of gold in concentrates sold, which reflected the scheduled move to the higher grade area that Phase 4 B.

Copper revenue decreased by 34 million from Q2 2020 reflecting a 51% decrease in the volume of copper in concentrates sold, which was mainly the result of the force majeure, partly offset by the impact of an 83% increase in average copper prices. Cash generated from operating activities before interest and tax, improved by $261 million in Q2 2021 compared to Q1 2021 benefiting primarily from an increase in gross margin as well as favorable movements in deferred revenue. The latter impacted by the timing of ramp up in concentrate shipments during the quarter following the declaration of force majuere as well as related contingency measures to improve OT short-term liquidity.

C1 cash costs and all in sustaining costs both benefit benefited from the $75 million increase in gold revenue credits, for all in sustaining costs this benefit was partially offset by higher royalty costs due to the increased sales revenue.

Capital expenditure in Q1 2021 was $230 million and that comprised of $211 million on the underground and $19 million on the open pits. Capital expenditure for the same period last year was $262 million, despite lower than expected year-to-date 2021, capital expenditure, which was due mainly to the impact of COVID-19 restrictions and controls.

TRQ full-year guidance for open-pit capital of $105 million, $125 million and for underground capital of $0.9 billion to $1.00 billion are still expected to be achieved. So underground capital in particular may come in at the lower end of that range.

Turning to slide 8: Turquoise Hill had liquidity of $0.7 billion at the end of Q2 2021, which is expected to be sufficient to meet the Company's requirements into Q3 of 2022. Additionally, TRQ base case incremental funding requirement increased by $100 million to $2.4 billion as of June 30, 2021 and this increase is primarily related to the resequencing of ore phases of the Oyu Tolgoi open pit mine the additional 2021 underground development cost impacts of the known COVID-19 issues up to 30th June 2021 which are estimated to be approximately a $100 million and these are partially offset by improved commodity price forecast.

Our liquidity outlook and estimated incremental funding requirement will continue to be impacted either positively or negatively by various factors, many of what are outside the company's control. The company continues to monitor commodity markets, the ongoing tax of COVID-19, work underway to result in non-technical undercut and other issues as well as other key factors and assessing its incremental funding requirements and intends to continue its work with Rio Tinto, the Government of Mongolia and other stakeholders to source approvals for and to implement the funding Heads of Agreement what Rio Tinto signed in April. 2021.

Successful implementation of this heads of agreement, is subject to achieving alignment with the relevant stakeholders, which include Rio Tinto, the Government of Mongolia, existing lenders, and any potential new lenders. And TRQ will continue to provide updates as appropriate on the implementations progress.

And with that, I'll hand the call over to Jo-Anne Dudley our Chief Operating Officer.

Jo-Anne Dudley -- Chief Operating Officer

Thank you very much Luke. COVID-19 if we. Sorry. If we turn to slide 9 please. COVID-19 continued to significantly impact the Oyu Tolgoi mine in Q2 2021 with constraints on site personnel numbers and domestic and international travel which adversely impacted both open pit operations and the underground project.

The additional 2021 development cost impact and COVID-19 delays, up to June 30, 2021 is estimated to be approximately $100 million. This estimate includes incremental travel, accommodation, quarantine, and standby costs as well as accounting for productivity impacts as the COVID-19 impacts remain ongoing to monitor them and update the market as appropriate. Despite these additional COVID-19 challenges, overall construction progress on materials handling system. One, which while not required on the commencement is required for sustainable production remains broadly in line with the definitive estimate and is now over 90% complete. We're closer to continue Primary Crusher one it is expected to be completed in Q3 of this year.

Specialized shaft sinking personnel have arrived in Mongolia to prepare for the recommencement of sinking activities on Shafts 3 and 4. While Shaft 3 and 4 are not required to support the commencement of Panel zero but are required to support production from panels one and 2 during the ramp-up to 95,000 tonnes per day.

The commencement of the undercut is a key milestone and these critical to ensure that once commence the uncut drill point construction continues unimpeded. From a technical perspective all lateral development and production drilling initiate the undercut is complete we've supporting infrastructure for Panel zero production on track for completion under the current site conditions. However, the exact timing of the undercut is under increasing pressure principally due to the outstanding non-technical criteria which is yet to be met and also the risks associated with the rapidly evolving COVID-19 situation.

Turquoise Hill through its wholly owned subsidiaries, Asia Gold Mongolia LLC, Heruga Exploration LLC, and SGLS LLC operates an exploration program in Mongolia on three licenses that are not part of Oyu Tolgoi. Current restrictions on people movements in the Omnogovi and Duwanagovi [Phonetic] provinces have resulted in delays to our field work, which we are planning to begin in Q3. Safety remains our first priority and appropriate measures will be maintained to protect our exploration team contractors and the communities in which we work.

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

Steve Thibeault -- Interim Chief Executive Officer

Thank you Jo-Anne. Turning to Slide 10: I would like to online. The key underground development milestone we are focused on for the balance of 2021 and into 2022 taking us to sustainable production for Panel zero. First and foremost the health and safety of our employees and local community remain our top priority. Oyu Tolgoi will continue to work with the Mongolian health authorities to best manage the current COVID-19 situation.

The company continue to focus on meeting the necessary criteria to enable undercut commencement. Although we faced significant challenges during our Q2 2021 including some COVID related constraints all project related to technical criteria to support the initiation of the undercut are either completed or on track to be achieved.

Turquoise Hill, Rio Tinto, Oyu Tolgoi, continue to engage with various Mongolian governmental bodies with a view to resolving our pending non-technical undercut criteria and all parties remain committed to moving the project forward in a mutually beneficial manner. However, as we have previously noted delayed resolution on the non-technical undercut criteria thus far has been in the company expected timing for the initiation of the undercut.

Decision on the non-taking the criteria are, continue to move forward and tier few is currently working to return to Mongolia for formal discussion with government officials as Luke discussed, the company liquidity of $0.7 billion at the end of Q2 2021 is expected to be sufficient to meet its requirements including funding of underground development on to Q3 2022 and we intend to continue to work with Rio Tinto, the Government of Mongolia and other stakeholders to source approval for and to implement the Funding Head of agreement the company will continue to work with Rio Tinto, the Government of Mongolia and other stakeholders with a focus on advancing these important priorities and it will continue to provide update as and when appropriate.

Before I turn the call to our for Q&As, I would like to extend my sincere gratitude to the Oyu Tolgoi team and the Government of Mongolia for their coordinated effort who prior to rise to health and safety of the only to go it workforce and the local communities.

I would like to thank you all for taking the time to join our Q2 2021 Conference Call. And I would now like to turn the call back to the operator for any question.

Questions and Answers:

Operator

Thank you, Mr Thibeault. [Operator Instructions]. And your first question will be from Orest Wowkodaw at Scotiabank. Please go ahead.

Orest Wowkodaw -- Scotiabank

Hi, good morning. Steve. Can you give us a better sense of where things on the discussions with the government, with respect to resolving the non-technical criteria like, are we at the beginning stages, are we close to the end? Any color you can share and whether it's whether you need to split that up by the different issues in terms of the non-technical maybe that would be helpful?

Steve Thibeault -- Interim Chief Executive Officer

Yeah, OK. First, Orest. I think it's important to understand that over the last couple of months, we have a very difficult situation. It's about environment. Okay. We had the COVID-19 that has hit the site in Mongolia; there was the Presidential election, that created a focus on the government on that particular thing and we had, so there was, there was a difficult environment. In meantime, what we've done is that during that period of time, we have our first progress on the technical criteria. As we mentioned, but we have also continue having discussion with some of the government official OK, and we have continued to work continuously with the government bodies to engage and to move a couple of, to move the things on the critical criteria. So work has been done and that's continued.

Okay. Now Orest is very important and I mean everybody wants to all committed to the project and what we want to do is to make sure that we're moving as fast as possible. And that's why the TRQ and Rio Tinto team will be back in Mongolia in August to start the discussion in continued to in discussion on a more full formally base on what more formal basis. But you should expect also that the first discussion would be really to discuss the aspect related to the, undercut criteria. Okay. That will be the first one, and we believe that discussion around cost and benefit and resolution 92 can be in parallel, but will be, could take more time that would be ideal.

Orest Wowkodaw -- Scotiabank

Okay. And just following up on that. Steve, can you --your disclosure talks about that delays in these in starting the undercut at some point, are going to have a material impact on the sustainable first production, capital numbers, etc. I realize it's not linear but at what point does that happen? Is it a 3-month delay a 5-month delay, but when do we need to get concerned that we've reached that materiality threshold of delay?

Steve Thibeault -- Interim Chief Executive Officer

Yeah, I know you're right Orest. It's not linear and it's difficult for me to tell you exactly if a 3-month will give you a significant one, because there's a lot of activity that needs to be undertaken to evaluate what will be the impact and what will be the consequences.

So I would say that, the only thing I can tell you is that we will definitely work and inform you when these things, when we have better information and when we progress on the key point is that we're focusing on the negotiation. We have the team and we're working as fast as possible to resolve it and when we have better information, we'll update you.

Orest Wowkodaw -- Scotiabank

We'll but if this is not resolved in this quarter, let's say, by the end of the 3rd quarter is that material or not material?

Steve Thibeault -- Interim Chief Executive Officer

I would, I mean it's --I don't want to give a number. But I would not, let's say, that would be material. In terms of, it depends on the deal. You're right. But this quarter from my point of view won't that be material.

Orest Wowkodaw -- Scotiabank

Okay, that's helpful. Thank you, Steve.

Steve Thibeault -- Interim Chief Executive Officer

Okay.

Operator

Okay. Thank you. Next question will be from Ralph Profiti at Eight Capital. Please go ahead.

Ralph Profiti -- Eight Capital

Good morning and thanks for taking my questions.

Steve Thibeault -- Interim Chief Executive Officer

Hi Ralph. How are you?

Ralph Profiti -- Eight Capital

I'm good, Steve, and thank you.

I want to sales into specifically the approval of the definitive estimate and the budget uptake and I'm trying to understand a little bit better the body of work that the government is doing to get themselves comfortable with the original cost overruns. Are these strictly discussions that you're having with them and sort of at the table or is the government performing things like independent economic evaluations outside of the scope of the technical report where these go further than just merely discussions of you're getting them over the line and I'm trying to understand what exactly is needed to convince them to sign off on those two specific matters OK.

Steve Thibeault -- Interim Chief Executive Officer

Some work was being done by the OT Board has as commission an independent consulting group to review these costs and the schedule. Okay. And that report will be deposited shortly. And based on that information. The government that will be a report that will be available for the government as a shareholder, as we are in TRQ to understand more clearly the the course. And the reason of the of the delays and also be additional cost and based on that they're going to be, that's done and that basically will be information that will be used. I know also there definitely our assuming we would have thought they would have people that would help them from the financial perspective, through models to understand what it is but personally, the core of the information would be that report for them.

Ralph Profiti -- Eight Capital

Okay, thanks for that. That's helpful.

Steve Thibeault -- Interim Chief Executive Officer

Yeah.

Ralph Profiti -- Eight Capital

My second question is, as it pertains to the debt reprofiling and in the contingency that a drilling delays and the potential to rollover into different tranches of project finance is coming due. Are you limited only to the $1.4 billion in debt reprofiling. Can you go more or does that risk of scheduling and CapEx strictly fall on the potential funding gap from an equity issue perspective?

Steve Thibeault -- Interim Chief Executive Officer

Okay. Luke, would you like to take that, to answer that question?

Luke Colton -- Chief Financial Officer

Sure. I will do my best to answer that question.

So I mean, just generally from a reprofiling perspective. While we do, we do provide the lenders with status updates, etc. We haven't been able to formally progressed those reprofiling discussions, we're still waiting to source the necessary approvals that the OT Board level and to get our fellow directors comfortable with the commencement of those both reprofiling efforts, but we are working hard to do that and that's something that we absolutely want to progress over the next few months.

In terms of the benefit. We think that we can get from reprofiling, we do still think we can get a benefit of up to $1.4 billion, and that's just a function of the sort of principal repayments that come due over the relevant period of the incremental funding requirement. So if we are able to reprofile the debt and our intention is still to do that, then over the relevant funding gap period. The benefit of that would be up to $1.4 billion. So that remains our focus.

Ralph Profiti -- Eight Capital

Got it, understood, OK. Thanks Luke. Thank you, Steve.

Steve Thibeault -- Interim Chief Executive Officer

Thank you, Ralph.

Operator

And your next question will be from Hayden Bairstow at Macquarie. Please go ahead.

Hayden Bairstow -- Macquarie

Hi guys. This is Hayden Bairstow at Macquarie. Just a couple questions from me. Firstly just on the Shafts particularly 3 and 4 just interested to understand the timing on that. I mean you've gone assuming we get a Panel zero underway. I mean at what point do those shafts need to be finished to start the development work. I think Panel 2 is coming for Panel one for memory to make sure that when you run out Panel zero and the full production and then transfer to Panel 2 without slowing down again?

Steve Thibeault -- Interim Chief Executive Officer

Jo-Anne will answer that question for you, Hayden.

Jo-Anne Dudley -- Chief Operating Officer

Thank you, thanks Hayden for that question.

So just in terms of some Shafts 3 and 4. And the delays that we're seeing at the moment as a result of the COVID situation and impact in particular on travel, as well as restrictions on people movement. We don't need shaft 3 and 4 for the Panel zero production to ramp up to approximately 30,000 tonnes a day, we do need to ramp up post Panel zero. And so, as you noted panels two and one. So optimization work is being carried out to date to try to minimize the impact to delays, but there are limits on what we can do with the ventilation that we have and any further significant delays creep back that ramp up post Panel zero causing a delay to the increase in production beyond about 30,000 tonnes per day. We continue to work on trying to optimize the work with some of the ventilation we have, however, the schedule impacts of COVID-19 being assessed and I'll continue to base assessed and will provide an update as and when we are able to, as you can appreciate it is a difficult decision at this time.

Hayden Bairstow -- Macquarie

So, you're comfortable Jo-Anne that the matter how much the delay there is on the all it means is you don't you run Panel zero. We don't have a massive amount of reserves in at 30,000 tonnes of value and you just don't push the expansion through, is that the main impact here or is there a risk to slowing of production between the 2 panels?

Jo-Anne Dudley -- Chief Operating Officer

Yes. So I mean, I guess I would say that you know the kind of delays that we might be looking at at the moment are not long delay. I think that's something to really think about is that we have personnel on site and we'll in-country and some on-site to recommence work and at the moment, we are planning to recommence in August. There are, there are plans at the moment to remobilize larger amounts of people to size and the workforce working on site is vaccinated. So although we are seeing ongoing impacts of COVID. It is a situation that we are certainly working to try to ramp up personnel and so the kind of delay that we are saying that we may see is something that we certainly will come back with. But we're not in the position at this stage definitively say the there is a delay. Hopefully that helps you know that we are hoping to restart sinking in August.

Hayden Bairstow -- Macquarie

Yeah. And then on the undercut itself. I'm just interested to know how many people do you actually need on site to start that up. I mean, but how much of these restrictions need to be lifted and given we saved ways, 2, 3, 4 in some countries 5 how comfortable do you need to be that you can run it and have people restrictions be put back on the business. At some point and still be able to manage the operation. Okay.

Jo-Anne Dudley -- Chief Operating Officer

Yeah, absolutely. And that's, it's a really good question. And you know I guess what I guess, something that we would say is that there is high rates of vaccination and certainly all personnel site are vaccinated right now. We are still adhering to and we always will of course it here to government bodies requests on how to manage COVID.

At the moment, we are seeing ongoing impacts and it in terms of Ross to duration and it, and this requires careful management to ensure that they would be the appropriate amount of personnel and personnel with the right skills available to start on the cutting activities. And so, as you say there is --it is certainly something that needs to be considered prior to starting blasting and we wouldn't start until we are confident that we can maintain staffing levels to allow us to do so safely and efficiently.

So while we've seen some improvement in staffing levels in recent weeks, there headwind is sporadic and they have varied depending on the COVID situation in country and the flow on restrictions that need to be implemented at the mine site and so ultimately will be taking a risk-based decision on this, but it is something that will factor into that.

Hayden Bairstow -- Macquarie

Yeah, OK. Thanks, Jo-Anne. And so you just one last one on the government negotiations I mean, we had to chat with the Rio earlier this week, but I'm just it feels to me like it's more of a, it's just it's everything or nothing. There's not a phased approach you need to, you have to get agreement on everything and another say yes or no. Is that sort of where it's heading to?

Steve Thibeault -- Interim Chief Executive Officer

Yeah. now. I think definitely this, we can, we can resolve and move on some area at short shortly, I believe. Okay. And that I'll, maybe I'll be able to tell you when will be done and finished but in the moment. I believe that we can resolve and focused on the, on the cut criteria. And as I said, I mean a lot of these discussions are not with the overall government or there at the governmental body. Okay. And we're working very close. I mean OT is working very close to get these things moving and we see good improvement in that area and movement and, but, so, personally, I believe that it's not all or nothing. It's there going to be, we hope, I hope that we're going to be able to move on the discussion necessary for the club. And then the cost and benefit and the requirement from the government. We can concurrently move on those things on parallel and resolve them at the right time. But I guess, say you will see, I'll be able to tell you when we're done.

Hayden Bairstow -- Macquarie

Okay and then just a final comment, not I don't. I know you won't comment on what Rio of doing that. The discussions I've had more been saying publicly that clearly taken less aggressive approach with ASG and government relations. So whether that expedites the process. I don't know that I mean, it does result in. So, going a bit more to the government and risk was going to be the case on the previous management?

Steve Thibeault -- Interim Chief Executive Officer

Got no comment on that.

Hayden Bairstow -- Macquarie

Thanks. Okay.

Steve Thibeault -- Interim Chief Executive Officer

Thank you.

Operator

Thank you. [Operator Instructions]. And your next question will be from Dalton Baretto at Canaccord. Please go ahead.

Dalton Baretto -- Canaccord

Thank you. Good morning Steve and team.

I just want to start out by following up on that last line of questioning there so procedural perspective on the assumption that the negotiating team from your side, as well as the government's negotiating team come to terms. Does that agreement then still that need to get approved by Parliament?

Steve Thibeault -- Interim Chief Executive Officer

You know what? I'm not certain of I guess there is --I'll be honest, I'm not quite sure exactly on that process and I apologize for that...

Dalton Baretto -- Canaccord

Yeah, No worries. it's just because it could add substantial time to the process so I'm asking

Steve Thibeault -- Interim Chief Executive Officer

I know, I understand, but I don't want to give you a long answer here. Okay?

Dalton Baretto -- Canaccord

Perfect. On that kind of same vein, if the undercut is delayed like always the suggesting materially do you have a sense for what you're holding cost would be as well as the cost associated with demobilizing and then remobilizing your contractor force?

Steve Thibeault -- Interim Chief Executive Officer

Okay. Jo-Anne, do you have an answer on that or can you provide some insight on this?

Jo-Anne Dudley -- Chief Operating Officer

Thank you, Steve. So in terms of costs. This is something that the projects team continually evaluating and so it is something that is being worked on. We would say that in terms of cost incurred, we've obviously disclosed information we have at hand now and from that we can look at the kinds of costs that are happening at the moment with the current situation and delays that we're having and we are seeing slower costs expenditure then planned reflecting the reduced work at the moment. In terms of what would happen post the on the undercut firing we continue and certainly the team at OT continues to seek opportunities to try to mine time schedule, but they will be a limit ultimately is to how much schedule can be maintained. If we continue to see delays and there certainly are opportunities that are being looked at, to try to maintain that schedule and we'll continue to do that. So that's, it may not be the full, the full answer that you'd like, but that's sort of where we were at, on costs at the moment.

Dalton Baretto -- Canaccord

Yeah, I, no, that's fine, but, and I already assume the schedule is going to slip. I was more concerned around the cost. Okay. Maybe a couple of kind of longer term questions here, first there seems to be some new language and the disclosure around power supply and specifically cautioning that there is a chance you may end up be connected to the Mongolian grid without Tavan Tolgoi online OK. How much of a probability is that?

Steve Thibeault -- Interim Chief Executive Officer

Okay. Luke will answer that question on Belgium.

Luke Colton -- Chief Financial Officer

So the the discussions on power with the Government of Mongolia are ongoing discussions. From an OT perspective. As you can appreciate, it's very important for us to mitigate the relevant risks and to make sure that we do have power certainty going forward and that will be an important focus a critical point of focus for us in in those discussions with the Government of Mongolia. So any solution whatever the solution ends up being is going to have to provide the relevance, the degree of power certainty whether or not that you know the primary solution in in the amended PSFA or if it's one of the alternative solutions in including supply over the relevant period of time, we're going to have to make sure that we have the sort of right back up the ability to access. You know, power while while whatever is being constructed needs to be constructed are upgraded or whatever it is so that that's going to be a focus. It has been and will continue to be a focus in the discussions with government around power the discussions with government around power are actually in process in the moment and we are, hope we are hopeful that we can make good good progress around this particular area. Over the course of the next few months. You know, certainly from our perspective that's the intention, and we will get to an answer that makes sure that OT that we put OT in a position where you know at all points in the process. OT will have stable reliable power got it. Okay, thanks for that. And then another kind of longer term question. So Shafts 3 and 4. For all intents and purposes are now delayed and then have well, with infrastructure moving and so on which is very reminiscent of what happened of Panel zero

Dalton Baretto -- Canaccord

When will we see some sort of estimate in terms, that's going to cost you from a capital perspective, as well as from the scheduled perspective that with you.

Steve Thibeault -- Interim Chief Executive Officer

Jo-Anne would you give the answers on this?

Jo-Anne Dudley -- Chief Operating Officer

Yes. Thanks, Steve. So in terms of what we would say we're at this stage. As I was saying earlier, we are expecting that shaft sinking should be going to commence in the near future. And once we start to see the progress on work and what's going to happen with the COVID situation that will put us in a better position to be able to understand the overarching impacts to the extent, there are some or how large that could be on the overall project cost and schedule at this stage. We've certainly disclosed the information that we have at hand, including where we are on schedule, such that we understand it asI was saying before, the planning team have done the very best to continue to optimize the work that is done to minimize the. But if we continue to see shaft sinking delayed, then we will, we will need to review what that looks like. And so we don't have any update beyond what we've provided to date, but it is a piece of work that we are obviously keeping a very close eye on and we do have a reasonable transparency around that and the working with the OT team on it.

Dalton Baretto -- Canaccord

Understood. Okay. And then maybe just one last one for me, and this is kind of a more definitive answer. The $137 million cash inflow this past quarter that you've or you've attributed to deferred revenue and contingency for OT short-term liquidity and funding. Can you very simply, explain to me what the source of that fund?

Steve Thibeault -- Interim Chief Executive Officer

Yes. Luke will handle that question for you.

Luke Colton -- Chief Financial Officer

I didn't know. I will try to put it as simply as I can.

The process effectively from a from a deferred revenue perspective is at the point where the concentrate inventory gets loaded onto a truck and leaves the mine site, a short period of time after that happens, we received a cash payment from the relevant customer the revenue isn't recognized until the final sale occurs title transfers, etc. And that actually happened. Not when the concentrate leaves the mine site. But when the customer picks up the concentrate from the warehouse in China. So over that period of time between when we receive that initial cash payment and the customer actually picked up the order from the Chinese warehouse, we recognize deferred revenue. So the reason that you're seeing the increase in deferred revenue over the Q2 period, it really does have to do with the ramp up where --we began to ramp up our shipments. Again, in April, following the declaration of Force Majeure and that there have been ups and downs over the quarter, but we just had better ability to get those shipments across the border, toward the end of Q2 of this year and that effectively what resulted in the higher deferred revenue balance this quarter versus last quarter. So in terms of what we might expect going forward. We are hoping, obviously that and all of this is subject to COVID but we are, we are hoping that we're able to bring down our on-site inventory levels over the second half of this year and hopefully put ourselves in a position where we can lift the force majeure that obviously something that we're working toward at the moment. Subject to COVID etc. So we are hoping, obviously that you know we can bring those inventory inventory levels down over the course of the next 3 to 6 months and that will obviously realize the cash that's currently locked up in inventory.

So listen, I don't know, hopefully that was hopefully that was so that was fairly clear and I do understand the deferred revenue side. I was more focused on the contingency funding for OT short term. I was just wondering if you have kind of a separate facility for

Short-term liquidity that's outside of everything we're seeing so the contingency measures that I mentioned in the script, are really around sort of short-term working capital related measures that were implemented to try and to try and bring some cash forward. So as opposed to something sort of short-term facility financing related OT does have a small revolver that it can draw on. And we actually did drawn and I believe toward the beginning of this year or around Q1 and and now it's going to be reflected. Obviously, in our financial statements for the year to date, so it does have a small revolver that it can draw on. Just for mainly to help to manage working capital, but the contingency the contingent measures that I referred to, are more, more around the short-term measures that were implemented over the course of Q2 just to try and bring some cash forward into Q2.

Dalton Baretto -- Canaccord

Understood. Thank you, guys. That's all from me.

Steve Thibeault -- Interim Chief Executive Officer

Thank you.

Operator

Thank you. Your next question will be from Craig Hutchison at TD Securities. Please go ahead.

Steve Thibeault -- Interim Chief Executive Officer

Good morning, Craig,

Craig Hutchison -- TD Securities

Good morning Steve. You guys mentioned the plan to resume the sinking of Shafts 3 and 4. In August, doesn't make sense to invest in the underground work 2 and 3 I surpassed 2 and 1 ahead of an undercut decision on panel zero and I guess, at what point you delay future investments in the underground reserve capital here?

Steve Thibeault -- Interim Chief Executive Officer

Jo-Anne you can which would you like to answer that question. Okay.

Jo-Anne Dudley -- Chief Operating Officer

Yes, sure. Thanks very much. Craig, it absolutely makes sense to resume sinking of the Shafts as soon as we possibly can. There is no doubt that the COVID situation has forced the Payments side to really look at what is the most important components of the scheduled to progress. Given the concerns that we've had around getting people at site and keeping them at site and managing quarantine.

So we've been focused on the materials handling system. One, which of course supports the Panel zero production and so that has gone relatively well given the circumstances. It has been impacted, but that continued to make progress and we understand the rate of progress with the numbers of personnel we've been able to maintain on site over the last few months and shaft sinking to Shafts 3 and 4 is behind that materials handling system one work which is some of the reason that we haven't they now but to progress that, but it also needs a more complex workforce because we do need international experts to provide us with assistance on that shaft sinking work because it is complex work and the safety is complex as well around those shafts and we do a quite a number of people to progression. However, it is very important because these pieces of infrastructure type some time to complete. There is variability around the completion timing depending on the ground conditions and other factors that are encountered during sinking and they support the ramp up of panels 2 and one which are required and we need we require multiple panels to be able to ramp up to the 95,000 tonnes a day and so it is important that we bring those panels on as soon as possible. So that's the reason why that work is absolutely critical at the moment to progress despite the kinds of challenges that you are rising there. I hope that answers your question.

Craig Hutchison -- TD Securities

It does. Thanks. And just maybe one last question for me. Luke talked about the force measure what's going of required to lift that force majeure. I think you guys said earlier that I 100% of your Is now been vaccinated.

Steve Thibeault -- Interim Chief Executive Officer

Luke, you want to answer that?

Luke Colton -- Chief Financial Officer

Sure. I'm Craig, obviously the focus there is getting the concentrate across the border and having enough improvement and concentrate and those China China Chinese warehouses where we have the right level of confidence that we can meet our ongoing commitments to customers. So in that regard. Obviously, we're focusing on measures to get the concentrate across the border more quickly and to bring down those on site inventory levels COVID creating a bit of drama there, but we're doing our best to work through that and we are hopeful that over the course of the second half of this year, hopefully sooner rather than later. We can continue to bring those on site inventory levels down. Get the concentrate across the border. And then when we have the right level of confident that we've got and concrete in the right place to meet our ongoing customer commitment that would be the point that we would consider and hopefully we'll be able to lift the force majeure.

Craig Hutchison -- TD Securities

Okay, thank guys.

Steve Thibeault -- Interim Chief Executive Officer

You got it, Craig?

Operator

[Operator Closing Remarks]

Duration: 53 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

Ralph Profiti -- Eight Capital

Hayden Bairstow -- Macquarie

Dalton Baretto -- Canaccord

Craig Hutchison -- TD Securities

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