New Gold (NGD) Q1 2023 Earnings Call Transcript

New Gold (NGD 3.49%)
Q1 2023 Earnings Call
Apr 27, 2023, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Michelle, and I will be your conference operator today. Welcome to the New Gold's first quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise.

Please be advised that today's conference call and webcast is being recorded. After the speakers' remarks, there will be a question-and-answer session. [Operator instructions] I would now like to hand the conference over to Ankit Shah, executive vice president, strategy, and business development. Please go ahead.

Ankit Shah -- Vice President, Strategy and Business Development

Thank you, Michelle, and good morning, everyone. We appreciate you joining us today for New Gold's first quarter 2023 earnings conference call and webcast. On the line today, we have Patrick Godin, president and CEO; and Rob Chausse, our CFO. Should you wish to follow along with the webcast, please sign from our homepage at newgold.com.

Before the team begins the presentation, I would like to direct your attention to our cautionary language related to forward-looking statements found on Slides 2 and 3 of the presentation. Today's commentary includes forward-looking statements relating to New Gold. In this respect, we refer you to our detailed cautionary note regarding forward-looking statements in the presentation. You are cautioned that actual results and future events could differ materially from those expressed or implied in forward-looking statements.

Slides 2 and 3 provide additional information and should be reviewed. We also refer you to the section entitled risk factors in New Gold's latest AIF, MD&A, and other filings available on SEDAR, which set out certain material factors that could cause actual results to differ. In addition, at the conclusion of the presentation, there are a number of end notes that provide important information and should be reviewed in conjunction with the material presented. I will now turn the call over to Pat.

Pat Godin -- Chief Operating Officer

Thanks, Ankit. And good morning, everyone. Before I turn the call over to Rob to discuss the quarter, I want to provide some brief opening remarks. It has been almost one year since I joined New Gold.

And at that time, I saw a lot of potential for our operation and for our company. We worked hard through 2022, and this momentum has carried into 2023. I'm proud of our team's performance in the first quarter of this year. As I noted in our April production release, the first quarter of 2023 was our strongest start in four years.

I cannot say enough how important safety is to our success. This was a core aspect of the impressive first quarter operating results. Q1 saw no lost time injuries at our operations. New Afton reached a big milestone and exceed 1 million hours without lost time.

Rainy River continued to operate safely and reached 1.6 million hours without lost time. I strongly believe safety and productions are correlated, and our first quarter performance proved this. As a result, we are well-positioned to meet our production and cost guidance set out earlier in the year. During the quarter, we also continued to focus on the long-term strategy of New Gold.

We complete multiple steps to strengthen our balance sheet, which Rob will talk to shortly. And we continue to advance underground future production at both Rainy River and New Afton. Lastly, I would like to talk about our people. Specifically, the appointment of Yohann as new COO, the promotion of Ankit to executive vice president; and Keith to VP Finance; as well as Jean-Francois Ravenelle to VP, Geology; and Luke to VP Technical Services.

These executives will all be great asset to our team as we continue to advance growth opportunities and pursue sustained and safe production at our operation. I would also like to acknowledge Rob's retirement at the end of this year. Rob has been crucial in the turnaround of New Gold over the past five years. Over my career, I have worked alongside Rob several times, and he has been an excellent business partner for me.

We are grateful he is going to be staying until the end of this year to ensure a seamless transition and support Keith in positioning New Gold for success in the years to come. With that, I will turn the call to you, Rob.

Rob Chausse -- Chief Financial Officer

Thanks, Pat. And I'll start with Slide 7, which provides our operational highlights. The production details on that slide are consistent with our production press release from April 10. During Q1, the company produced approximately 105,000 gold equivalent ounces.

The amount consisted of 10.3 million pounds of copper and 66,200 gold ounces from Rainy River and 16,300 gold ounces from New Afton, totaling approximately 82,500 gold ounces, almost 20% higher equivalent gold production as compared to the prior-year quarter and is primarily due to higher gold and copper grades and recoveries, partially offset by lower tonnes processed at Rainy River. Our operating expense per equivalent ounce was slightly higher than the prior-year quarter, primarily due to production from the underground Intrepid zone and timing of mill maintenance performed in the quarter at Rainy River, as well as ore purchase costs in association with our ore purchase agreements at New Afton. Our consolidated all-in sustaining costs for the quarter were $1,486 per equivalent ounce, lower than the prior-year quarter, primarily due to lower sustaining capital spend and higher sales. Turning to our financial results on Slide 8.

Our first quarter revenue was approximately $201 million driven by sales of 87,200 gold ounces at an average realized price of $1,890 per ounce and sales of 9.5 million pounds of copper at $4.10 per pound. Our Q1 revenue was higher than the prior-year quarter, primarily due to higher gold and copper sales volumes, partially offset by lower prices. The first quarter revenue split saw gold contribute 81% to our quarterly revenue and copper 18%. Our operating cash flow before working capital adjustments was $75.7 million or $0.11 per share for the quarter, higher than the prior-year period due to higher revenue.

The company recorded a net loss of $31.8 million or $0.05 per share during Q1 compared to a loss of $0.01 per share in Q1 of '22. The decrease is primarily due to an unrealized loss on the revaluation of the gold stream obligation at New Afton and related to the free cash flow interest obligation. After adjusting for certain charges, our net earnings was $18.4 million or $0.03 per share compared to net earnings of $0.02 per share in the first quarter of '22, with earnings increases primarily due to higher revenues, offset by higher operating expenses. Our Q1 adjusted earnings include unrealized adjustments on the Rainy River stream mark-to-market and the free cash flow royalty at New Afton.

And our MD&A has details on all of those and other non-GAAP measures discussed. Our total capex for the quarter was $63.1 million. $26.3 million was spent on sustaining capital, $36.8 million on growth capital. The sustaining spend was primarily related to planned tailings work at both sites, both operating assets, capital stripping at Rainy River, and stabilization activities at New Afton.

And our growth capital was focused specifically at C-Zone at New Afton and the underground at Rainy River. Slide 9 provides details of our capital structure. Our cash at the end of the quarter is $197 million. And liquidity was $570 million, in line with the end of 2022.

With our investments at site largely offset by the sale of our previously held Artemis Gold shares, which contributed approximately CAD 31.5 million. Subsequent to the quarter, we also amended our credit facility, increasing the maturity date by year to December 26. We continue to execute short-term hedges on CAD and fuel and are hedged on both commodities at 75% for Q2 and approximately 30% for Q3. With that, I'll turn the call back to Pat.

Pat Godin -- Chief Operating Officer

Thank you, Rob. Slide 11 provides additional details on the first quarter at Rainy River. During the quarter, the mine and mill performed well and delivered solid production increase over the first quarter of last year. While the mill throughput was below our plans, I'm confident that we can get to the target rate for the year due to the current investment on planned maintenance for the processing plant.

The average gold rate at Rainy River was 1.12 grams per tonne, well above the first quarter from last year as more underground ore was processed. I'm really excited to say that mining of the overburden is now complete, which will lead to a significant improvement in mining efficiencies. I can also share that mining in the North Lobe has finished, providing further confidence in open pit grade reconciliation through the remainder of the open pit mine life. Actually, completing the North Lobe has created a cost saving and improvement opportunity as this part of the open pit will be utilized to pile waste within the pit going forward.

Over the last year, the operation has made upgrades in preparation to water management infrastructures. We have boosted the pumping system, doubled the pipelines, built open pit diversion channels, and increase the water treatment capacity. I can confidently say Rainy River is prepared to manage any excess water. During the quarter, the open pit pushback was delayed, leading to lower capital spend and budget.

I'm confident that the team will catch up over the year. Turning to the underground. Intrepid development advanced 388 meters in Q1. Production in the quarter include over 69,000 tonnes of ore from the Intrepid underground zone at a grade of 3.52 grams per tonne gold equivalent.

Most importantly, the underground tonnes and grades continue to reconcile well. Going forward, I remain confident that we are well-positioned to meet our annual production and cost guidance at Rainy River. As noted in our guidance, production is expected to get stronger in the second half of the year as planned maintenance activities are to be completed in the first half of the year. With grade expected to normalize in Q2, I want to reiterate our target of 45-55 for the production split between the first and the second half of the year.

Slide 12 provides further details of New Afton's first quarter results. The underground mine averaged over 7,700 tonnes per day of ore mined in the quarter, an increase over the prior-year period as B3 reached steady state mining rate post-completion of construction activities in 2022. The mill averaged 8,100 tonnes per day, relatively in line with daily mining rates incorporating B3 ore mine, as well as ore purchase in relation to our purchase agreement. In short, B3 delivered to plan.

C-zone development continued to advance with 1,172 meters in the quarter. Development fell behind schedule during Q1 due to ventilation constraints related to ground conditions in the air intake vent rates. However, I'm confident in our ability to achieve the critical path of mining first production ore during the fourth quarter and deliver commercial production in the second half of 2024. Going forward, New Afton remains well-positioned to meet its annual production and cost guidance set out at the start of the year.

Before I close out the presentation today, I want to highlight what I view to be the key priorities for the company. First, continue to stabilize our operations. Second, continue to advance our organic growth opportunities. And third, we have safety as the highest priority delivered on our guidance set out earlier in the year.

I'm proud of the commitment of my colleagues who have done an excellent job to start the year. This will continue to drive our success. This completes our presentation. I will now turn it back to the operator for the Q&A portion of the call.

Operator?

Questions & Answers:

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator instructions] The first question comes from Michael Siperco, RBC Capital Markets. Please go ahead. 

Michael Siperco -- RBC Capital Markets -- Analyst

Thanks. Almost, right, Mike Siperco. Just on the quarter, I mean it was obviously a great result, especially from New Afton. You talked about the maintenance in Q2.

But could you talk a bit about how we should look at existing operations going forward, sort of without looking at the C-zone and the ramp-up of underground mining at Rainy? Should we be rebaselining our forecast at least over the course of 2023 on the basis of one?

Pat Godin -- Chief Operating Officer

So, thank you for your question, Michael. The way we should look at this is, actually, we are doing a significant maintenance of the crusher at Rainy River. We plan for the worst, and we wish for the best. So, that's what we are -- which we are doing.

Actually, the crusher is under repair, and we are changing main components after six years of operation. So, we are -- I think we really plan to respect our guidance. So, it's why we indicate 45, 55. It doesn't mean that we will do it because we're actually working really hard.

So, we put in place mitigation measures due to the crusher shutdown. We pre-crush tonnes at site, and we continue to operate the mill. So, the efficiency is less, but it was why we guide you to 45, 55, what we should consider that is the worst position that we can have. 

Michael Siperco -- RBC Capital Markets -- Analyst

So should we be thinking coming out of 2022 and what was a pretty challenging year, should we be thinking of 2023 as a period of stabilization at the operations while you're continuing to develop and invest in the New Gold from 2024 and beyond? Or is it more a case where you are operating at full capacity, if that makes sense?

Pat Godin -- Chief Operating Officer

I can say to you that, first, I will start with New Afton. B3 is the block cave is performing really well. So, we are at the beginning of the block cave. So, we're probably 60-meter of elevation in the block.

So, it's performing well. It's a steady state. So, for this, I'm not concerned about the stability of the extraction at New Afton. For Rainy River, it's the same.

So, I explained to you that we -- one of the reasons why in Q1 we mine a bit less is because we -- it was really less efficient to mine in the North Lobe because it was a narrow shallow pit. So, the phases are small and difficult to interact with equipment in one single phase. And also, we are really happy to say to all of you that we are -- the overburden is over, and it's a really difficult material to handle. So, we maximize the opportunity -- the winter opportunity to extract this.

So, it's behind us. So, in terms of pit, we have a mine life of 3.5 years, '23, '24, '25 and '26 in the first half. So, we will mine in rock. The mine is in good shape.

The ore is -- the pumping system is robust, and the mitigations are all in place. So, we deploy a lot of investment and time and effort and capital to beef up the preventive and predictive maintenance in the mill actually. So, I'm strongly confident that it's why I said to you that our priority is to stabilize. I think going forward, we reduce a lot of risk on the execution of the production and the guidance.

And I'm not seeing any -- other than something that to be out of my control, and the control of our people don't see any huge risk for the operation going forward.

Michael Siperco -- RBC Capital Markets -- Analyst

OK. Perfect. Thank you so much. 

Operator

Thank you. The next question comes from Andrew Dusome, National Bank Financial. Please go ahead. 

Andrew Dusome -- National Bank Financial -- Analyst

Hi, good morning. I just have a couple of questions. On Rainy River, I'm just wondering if you can give some update on how that's proving versus the block model and what your conviction is in that going forward.

Pat Godin -- Chief Operating Officer

You talked about underground? 

Andrew Dusome -- National Bank Financial -- Analyst

Yes, at underground, sorry.

Pat Godin -- Chief Operating Officer

Yeah. So, actually, we have a team that is when we have a new -- as you probably saw, we increased our capacity to do stuff and to look to opportunities. We have Yohann, Luke, and Jean-Francois recently joined us that will support us on this. But we're still working on the block model so to optimize the ore shapes.

We did a lot of work in terms of solution for the extraction under the main zone. So, we're working actively on that. And the optimization of the ground, the optimization of the ventilation, the optimization of the equipment. And the grade up to now in Q1 reconciled really well Intrepid.

And I think we will be well-positioned to finalize our optimization for Q3 this year. 

Andrew Dusome -- National Bank Financial -- Analyst

Great. Thank you. And then just one follow-up, just on the development at the C-zone. Just wondering if you can provide a little bit more color on the delay that you mentioned this quarter and if you see any impacts going forward to the timelines that you've previously provided. 

Pat Godin -- Chief Operating Officer

Good question. Really good question. So, just to summarize, actually, just first, we developed this. We can -- C-zone is split in two.

We have the infrastructures on the ground and we have the development on the ground. And the development, we had what we call a critical path and what are --- the supporting other development -- support development for other purposes. So, actually, we respect the critical path to create the undercut of the block cave and to develop the drawbells and so the extraction levels and also to do the development for the construction of the crusher. So we actually, in development, we're a bit late.

We were late in Q1, mainly because the main fresh air raise for C-zone is 450-meter long, and it's a raise bore. And at the bottom part, we have some zones where we had a case, and we had to spend more time to short-read this and to rehabilitate the part. Actually, it's all stabilized. It's part of mining, and we are full steam ahead.

So, we recently -- if you look, we recently increased a lot our development meters. We did 450 meters in March. Actually, we are rating at 500 meters per month. We reduced the temperature underground from 7 to 10 degrees C.

That is mainly due because we have more exchange. We will -- it's going really well for the development of the exhaust raise too. And we will receive our new electrical equipment in the following days. And first ore is still expected for the second half of 2023, mainly in Q4, and we are still expecting to reach the commercial production or what we call the hydraulic radius for the second half of 2024.

So, our production profile model is still respected.

Andrew Dusome -- National Bank Financial -- Analyst

Thanks for the update. That's it for me. 

Operator

Thank you. The next question comes from Fahad Tariq of Credit Suisse. Please go ahead.

Fahad Tariq -- Credit Suisse -- Analyst

Hi, good morning. Thanks for taking my question. On Rainy River, you highlighted a few different mining efficiencies, underground optimization. Just at a high level, how do you think about aspirationally what the cost profile could look like at this mine? For example, is it possible that the all-in sustaining cost gets closer to, let's say, the $1,200 an ounce range? Just trying to get a sense of like a best-case scenario where costs could end up longer term.

Thanks.

Pat Godin -- Chief Operating Officer

So I think for this, I'll ask you to give me more on time to look at my numbers because we're still optimizing this. So, the fact that we can now mine out of the North Lobe is -- it will provide to us a huge opportunity to short the haulage distance and to backfill this pit. So, that's going to be really significant for us in terms of efficiency and fuel consumption and operating costs. And for underground itself, I think the cost is still in -- the tech report are valid, but we are working again to reduce development as much as we can, reduce the capex, and to maximize the fact that we have the open pit that can be -- we can tie in to reduce development.

So, it's what we are working on, actually, I said to you previously, I said to the previous question, I will be more in position to answer to that in Q3.

Fahad Tariq -- Credit Suisse -- Analyst

Great. Thank you. 

Operator

Thank you. The next question comes from Anita Soni of CIBC World Markets. Please go ahead.

Anita Soni -- CIBC World Markets -- Analyst

Hi, Good morning, Patrick and team. And I have a number of questions. So, hopefully, you'll bear with me. I just wanted to clarify, first, at Rainy River on the grade.

You said the grade is expected to normalize in Q2. Can you talk about what happened in Q1? Like was it positive grade reconciliation in the pit? I know you're pulling tonnes from Intrepid now, but you haven't given us an idea of how much tonnes are coming from underground or -- and from the open pit. But if you could give us a breakout of both of those, the tonnes and the grades, and then also what was different about what happened in Q1, that would be helpful. 

Pat Godin -- Chief Operating Officer

The main comment that has to the normalization is mainly because in the North Lobe, we -- as discussed previously, I think the years before, the reconciliation was more tricky. So, we apply a mine call factor and we use RC drilling to determine the grade. So, we have more volatility in the North Lobe than all the other part of the ore body. So, it's behind us.

It mined out. So, this is why mainly we relate in our comments that we're going to be more straightforward. The reconciliation will be easier for us. For the underground mine, it's higher grade.

So, as I explained to you, is 3.5 grams per tonne, and the reconciliation is as planned. So, we mine mostly compared to the tonne that we process. It's 60,000, 70,000 tonnes compared to 2 million tonnes processed from the pit. So, basically, from an answer's point of view, it's what is making a difference. 

Anita Soni -- CIBC World Markets -- Analyst

OK. And when you say the grade is expected to normalize, so then what you're talking about is that you've mined out the North Lobe and you're going back into the, I guess, the main zone. And that grade should be more along the lines of 0.9, I assume, 0.9, 0.95 or so.

Pat Godin -- Chief Operating Officer

Yeah. Yeah, something like this, yes. But also, more -- it's easy for us to predict the grade. We have a better reconciliation.

Anita Soni -- CIBC World Markets -- Analyst

OK. And so, you are -- when you reiterated the 55, 45, you were talking about, one, the grade; but two, also that the -- you're still going through maintenance in the second half -- in the second quarter. But that should be complete by the end of the second quarter, right? 

Pat Godin -- Chief Operating Officer

Yes. So, the shutdown is actually ongoing, and it's going to end on the beginning of May.

Anita Soni -- CIBC World Markets -- Analyst

OK. All right. So, my next question actually relates to the financials. I noticed that you said New Afton costs are -- they went up as it relates to ore purchase agreements previous agreements.

Could you clarify what those ore purchase agreements are referring to? I apologize. I don't think I've seen that before, but I'm not sure if you had previously mentioned that. But if you'd explain what ore purchase agreements are, that would be helpful.

Pat Godin -- Chief Operating Officer

OK. So, as you -- the New Afton mill is having a throughput capacity of 14,500 tonnes per day and we can increase to 16,000 tonnes per day in peak depending on the work index. Actually, we are using just 60% of this capacity. So, -- and we have neighbors around us who are more smaller operation.

And for us, it's an opportunity to look at. So, this quarter, the ore purchase agreement is mainly -- is generate for us 2,500 ounces of production, and which represents mostly 7% of the New Afton in terms of revenues. And it's mainly -- we have a small operators beside us who are not having milling capacity and ore mill in place, and so it's just an opportunity for us to generate more cash flow. And as we are to our purchase agreement on an ASIC point of view, it's increasing our costs. 

Anita Soni -- CIBC World Markets -- Analyst

OK. So, could you explain like how that ore purchasing agreement works in terms of how it would impact your financials? I mean you guys just -- you mentioned that it added to the cost, but I'm trying to understand, like do you purchase the ore -- the value of spot price less a discount. And then like what's the cost associated with those ounces. How do we figure that out?

Rob Chausse -- Chief Financial Officer

Yeah. We purchased the ore at a factor and/or a discount, if you will. And as we process, we recognize those ounces and generate the cash flow. It's as simple as that.

There's no significant -- it's not complicated formula. 

Anita Soni -- CIBC World Markets -- Analyst

OK. And then just a follow-up, sorry, on one comment. You guys mentioned that in your opening remarks, Rob, you mentioned that you said we are 75% hedged and 35% hedged on both commodities. And I think you were referencing fuel and CAD, but I just wanted to clarify, you meant fuel and CAD and not gold and copper.

Rob Chausse -- Chief Financial Officer

Yeah. No, it's the input costs, fuel and our exchange rate.

Anita Soni -- CIBC World Markets -- Analyst

OK. All right. So, you didn't mean commodities. OK.

All right. OK. Thank you.

Rob Chausse -- Chief Financial Officer

No. We are unhedged.

Anita Soni -- CIBC World Markets -- Analyst

All right. Sorry, I just want to make sure. All right. And then another question I had was -- and probably the last one.

Looking at Note 11 in the financials, I just want to understand there's two different kinds of -- I guess two different kinds of fair value charges that are coming through. And one, I guess, came through the comprehensive income of the owners, and the other one came through the income statement, and it's just a little bit higher than we've seen before. So, I guess I understand the one that went through the income statement. That's related to the Royal Gold and the Teachers' Pension Plan share agreement there.

But I don't understand really the one that's going through the operating -- sorry, the owner's side and then -- and I guess, specifically, why it's called related to our own credit risk. I guess I wanted to understand, is there any implications of the higher rates that are happening now in that particular note?

Rob Chausse -- Chief Financial Officer

Yeah. No, the big change in the Gold Stream obligation and the New Afton free cash flow obligation, as you noted I think in your note, there is some impact on higher metal prices, which increases the liability for both of those. But the bigger change is related to our bond yields and the change during the quarter of those yields, which impacts the discount rate that we use. So, there was a change of approximately 28% in that discount rate downward, which increases the liability.

There is some impact from the risk-free rate, but not as much as what we've seen on that New Gold credit spread if you will. So, it's a part of the option of the model and that we have to use to calculate these liabilities.

Anita Soni -- CIBC World Markets -- Analyst

OK. Yeah. What I wasn't understanding is that it would have implied to discount rate was going down and rates have generally gone up. So, it's your specific -- 

Rob Chausse -- Chief Financial Officer

Specifically, to our -- exactly. It has nothing to do with the open market rates, if you will, at the risk-free rates.

Anita Soni -- CIBC World Markets -- Analyst

OK, thank you very much. That's it for my questions.

Operator

Thank you. Next question comes from Farooq Hamed from Raymond James. Please go ahead.

Farooq Hamed -- Raymond James -- Analyst

Hi, there. Thanks. Good morning. Most of my questions have been asked and answered.

But maybe just following up on Rainy River and the performance in Q1 and what you're kind of guiding for Q2 here. Obviously, Q1 was strong. I think it represents something like 27% or so of your full year guidance, and yet you're calling for a 45-55 split in the second half. My focus is actually on the costs.

Your Q1 costs, despite the good production, were above your guided rate. And I'm assuming that if you have this pullback in grade and lower production in 2Q, I would imagine that costs are probably moving higher in 2Q relative to 1Q. And so, in order for you to hit your cost guidance at Rainy River for the year, that would imply something like operating expense in the $700 to $800 per ounce range in the second half of the year. Is this consistent with your expectations? 

Pat Godin -- Chief Operating Officer

No. First, in terms of the second quarter, I said to you that we plan for the worst and we wish for the best. So, that's one thing. And we mitigate the risk there going forward in our cost, too.

So, we plan in the budget to mine mostly 131,000 tonnes pit per day. We averaged 118,000 in the Q1, but actually, we are hitting 170,000. And we have a certain big part of our mining costs with the same people, same equipment. So, our costs will decrease.

Our capital costs for the pushback will decrease as we are way more efficient in our business. So, in going forward, in terms of ASIC, I'm not expecting that. We are slightly higher in terms of milling costs because of the contractor costs and for the shutdown. But when it will be behind us in the second half of the year, these costs will go back to normal.

And we are in control. We're in total control of our G&A. So, we are operating, we are pretty lean as an organization that really. So, obviously, in terms of ASIC, it's not a proportional going forward now.

Farooq Hamed -- Raymond James -- Analyst

OK. Thanks. That's helpful. I guess I was focused a little more on opex because I figured that there was some capex accounting moving over into the ASIC category there, but just more on the opex because that was already running ahead of your guidance for the year despite the strong production in the first quarter.

So, maybe I can just follow up on that. But unless I misheard you, I'm surprised to hear that you're expecting costs to come down. Were you saying you're expecting costs to come down in the second quarter from Q1 levels? Or is it really just the second half thing? 

Pat Godin -- Chief Operating Officer

It's always a question of a denominator or two, but I think you should look at this on the next quarter, not on one, I think two because we have similar routine on open pit, so compared to an underground mine. So, I think if you just target Q2, it's a mistake. So, you need to look at the cost going forward, and I think we're expecting a strong second half in terms of the cost per ounce produced in 2023. 

Farooq Hamed -- Raymond James -- Analyst

OK. Maybe I'll just switch gears a bit. Just a little bit on strategy. In your wrap-up slide, you talked about your second priority being -- advancing your organic growth opportunities.

Patrick, can you talk to us a little bit about what those organic growth opportunities are? Is that the C-zone and underground at Rainy River? Or is there something else to be considered in that organic growth bucket?

Pat Godin -- Chief Operating Officer

So, it's mainly this -- it's first is the C-zone. So, C-zone, it's an opportunity for us because it's an opportunity. It's not an opportunity. It's our mission, actually.

And we have a strong vision on the copper price going forward, and we want to be fully efficient at the end of 2024, when the copper price is expecting to increase. And for us, it's the execution of the C-zone in terms of development, construction, achievement of hydraulic radius is important because it's a huge -- it's a nice opportunity for us to be well positioned to serve from the copper wave at the end of 2024. In terms of Rainy River, it's an opportunity to increase efficiencies, maximize what we get from the geology, and to see how we can, in addition to the reserve, how we can address the resource underground. And actually, it's what we are looking at, and we are seeing -- we're still seeing this as an opportunity to create more value on an NAV point of view. 

Farooq Hamed -- Raymond James -- Analyst

OK. Thanks. And then maybe just the last question for me. At the beginning of the call, you talked about strengthening your balance sheet.

I believe you sold your Artemis shares in the quarter. You pushed back your date on your credit facility. I'm just wondering why the -- I mean, obviously, it's always good to have a good balance sheet or a strong balance sheet. But I'm just wondering why the focus here, it looks like your covenant positions are in good shape.

It looks like your balance sheet is in relatively good shape. So, I'm just wondering what's driving the focus on strengthening the balance sheet to focus on starting in first quarter of this year.

Rob Chausse -- Chief Financial Officer

Yeah. I think it's just driven by good housekeeping and optionality and just keeping ourselves in good shape and ahead of the game. Nothing specific.

Farooq Hamed -- Raymond James -- Analyst

Perfect. Thanks.

Operator

Thank you. The next question comes from Eric Winmill of Deutsche Bank. Please go ahead. 

Eric Winmill -- Deutsche Bank -- Analyst

It's actually Scotiabank, but thank you very much. I think a lot of what I was going to ask has already been addressed. But maybe just quickly on Rainy and the underground, any additional details there in terms of maybe quantum and tonnes or grade or what you're seeing there in Q1? 

Pat Godin -- Chief Operating Officer

Are you talking about the past production? Or are you talking looking forward?

Eric Winmill -- Deutsche Bank -- Analyst

Well, I guess both, actually, any additional details you could provide.

Pat Godin -- Chief Operating Officer

So, if I'm looking, so just not sure that I understand clearly the question. But the first part is on Rainy, we modified and we changed the mining method. I think we are pretty efficient now, I think. And we are -- what I'd like to say is that at Rainy, we are reconciling the grade in the tonnes.

So, it's always, I would say, an overhang when you start an operation underground like this. And I think it's giving to us confidence. Looking forward, as I explained to you, I'll will be in a better position to explain in the Q2 at the end of the year -- in Q3 where we are positioned with the optimization of the underground mine. Actually, it will be really subjective and not realistic because when we will present to you numbers on the efficiency of the underground, it's number that we will stand behind.

And actually, I cannot talk about this.

Eric Winmill -- Deutsche Bank -- Analyst

OK. Great. And then maybe one more quick one on New Afton. And in terms of additional ore purchase from third party, should we assume that will be the same throughout the balance of the year? Or any sort of guidance there?

Pat Godin -- Chief Operating Officer

Yeah, you can assume that, yes. We're looking at this as an opportunity. And I think we have a strong team, the metallurgist at New Afton are having a lot of skills, experience, credibility, and capacity. And we have an excellent mill, and the reconciliation factors excellent.

We have a lot of maturity, and we want to maximize the value of our infrastructure and people with that.

Eric Winmill -- Deutsche Bank -- Analyst

Yeah, great. OK. Thank you very much. Really appreciate it.

Operator

Thank you. Our last question comes from Mike Parkin of National Bank. Please go ahead.

Mike Parkin -- National Bank Financial -- Analyst

Hi, guys. Thanks for taking my question. Just to follow up there. The regional ore purchases from third parties, was that factored into the original guidance?

Pat Godin -- Chief Operating Officer

No, it was not.

Mike Parkin -- National Bank Financial -- Analyst

OK. And then with respect to drilling off some extensions at the Rainy River underground, when could we expect you guys to be -- like from what I understand, you guys were looking to resume that from underground drill stations rather than from more costly surface locations. If that's still the case, when do you think you'd be in a position to start that up?

Pat Godin -- Chief Operating Officer

So, we did definition drilling at business as usual this year. For the exploration, it will be as difficult for us to drill from the pit because, as you know, we have activities, and we cannot be in conflict, and it can cause severe issues. But we are actually looking at this in our transition to develop drilling platform to drill in advance. It's probably something that will be ready to go in 2024.

Mike Parkin -- National Bank Financial -- Analyst

OK. And then just sticking around. With respect to targeting your commercial production rates at New Afton, when do you -- what percentage of full capacity are you basing that off like 14,500 tonnes per day, mill capacity or something else? What are you -- what's your baseline --

Pat Godin -- Chief Operating Officer

It's a bit. So, usually, the definition of commercial production is when you achieve 70% of your mill rate during 30 consecutive days. In the block caving, it's a bit different. It's when it starts to cave by itself.

So, when you reach where cave is and so just to create the opening, if you have the cave that is already initiated. In our case, it's pretty particular because we're only two mining companies who are doing block caving in Canada. But the way that they established the trigger to be in commercial production is when we reach the regions where it came by itself. So, for us, it can be -- actually, I think it's an average of 12 to 16 drawbell.

I'm not sure the exact amount. It can vary. It can change. It can be 22 or it can be just 10.

But in our case, it's where we called into any previous commercial production. So, when we will start to extract C-zone, we cannot -- each drawbell is having capacity. So, we will not be able to extract at 14,000 tonnes per day C-zone, but we have B3 that is operating at the same time. And it's where the C-zone is coming.

C-zone overtopping B3, and we have a progression up to the moment that we reach at 14,500 tonnes per day. And C-zone will be at maturity, if I'm right, it will be in 2025.

Mike Parkin -- National Bank Financial -- Analyst

OK. And just following up on that, could you give us a sense of how -- what percentage of your operating cost at New Afton is kind of fixed versus variables thinking you've got quite a significant step up in tonnage coming? But that probably doesn't translate into a steady state cost per tonne from where we are today. That likely drives a significant drop with fixed cost being spread out over a bigger number. Is it a little too early to ask that question? Or --

Rob Chausse -- Chief Financial Officer

It is a bit early, but I could start to give you a range of between 70% to 80% fixed. It's a high fixed component. As you know, it's -- but it will be in that 70% range. But I haven't done the math recently, but it should be in that spot.

Mike Parkin -- National Bank Financial -- Analyst

That's good enough. And then has there been any chat with Ontario Teachers in terms of what their intention is, with the Q2 2024 decision to either take a direct interest in New Afton or maintain their interest in the free cash flow?

Ankit Shah -- Vice President, Strategy and Business Development

Mike, it's Ankit here. We have a great relationship with teachers that buy back provisions a year out. So, we maintain open dialogue, but there hasn't been any specific discussions around the buyback. That's a year away from now.

Mike Parkin -- National Bank Financial -- Analyst

OK. All right. That's it for me. And Rob, congrats on your retirement.

I hope you get it on a sailboat or something.

Rob Chausse -- Chief Financial Officer

Thanks, Mike.

Operator

Thank you. There are no further questions. I will turn the call back to Ankit Shah for closing remarks.

Ankit Shah -- Vice President, Strategy and Business Development

Thanks, Michelle. And again, thanks to everybody who joined the call today and asked those great questions. As always, should you have any additional questions, please feel free to reach out to us by phone or email. Have a great day.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Ankit Shah -- Vice President, Strategy and Business Development

Pat Godin -- Chief Operating Officer

Rob Chausse -- Chief Financial Officer

Michael Siperco -- RBC Capital Markets -- Analyst

Andrew Dusome -- National Bank Financial -- Analyst

Fahad Tariq -- Credit Suisse -- Analyst

Anita Soni -- CIBC World Markets -- Analyst

Farooq Hamed -- Raymond James -- Analyst

Eric Winmill -- Deutsche Bank -- Analyst

Mike Parkin -- National Bank Financial -- Analyst

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