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GATO Gatos Silver

Participants
Stephen Orr Chairman and Chief Executive Officer
Dale Andres President
Roger Johnson Chief Financial Officer
Adam Dubas Chief Administrative Officer
Cosmos Chiu CIBC World Markets Inc.
Michael Siperco RBC Capital Markets
Ryan Thompson BMO Capital Markets
Call transcript
Operator

Good afternoon. Thank you for standing by, and welcome to the Gatos Silver 2Q 2021 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised today's conference is being recorded. [Operator Instructions] I would now like to turn the call over to Gatos Silver, Chief Executive Officer, Stephen Orr. Sir, I give it to you.

Stephen Orr

Thank you very much.

Before I begin, I would like to caution our attendees that I'll be making forward-looking statements. And these statements are not guarantees of future performance. I'd like to start the presentation on Slide number 3.

So we previously mentioned that 2021 is a year of optimization for Gatos Silver. Many of the initiatives that we have previously discussed focused on Cerro Los Gatos. But most recently, we executed initiatives to strengthen the Gatos Silver balance sheet and provide greater financial flexibility to the company. In July, we entered into a revolving $50 million debt facility with the Bank of Montreal, and it has an accordion feature, which will allow us to expand this up to a $100 million. Then in mid-July, we completed a primary equity offering, raising $125 million. Proceeds from the equity offering along with a modest drawdown from the revolving debt facility and corporate cash, allowed Gatos Silver to retire its 70% share of the Cerro Los Gatos term debt facility, and concurrently, our joint venture partner, Dowa Metals and Mining, retired their share of the term debt, thereby, extinguishing the entire Cerro Los Gatos term debt facility. This frees up additional cash flow from the operation to fund our sustaining capital projects, which will further improve the operating performance and create additional value at Cerro Los Gatos. And we will discuss all of this in greater detail later in the presentation. And as previously released, Cerro Los Gatos achieved record ore production, exceeding its tpd designed production rate from the mine and the processing plant achieved or exceeded design recovery for all four of our revenue metals.

Our exploration programs continued during the quarter with 19,000 meters completed at the Cerro Los Gatos resource conversion program since its inception late last year. This program has been successful beyond our expectations, and we actually recently expanded the program. At Santa Valeria, the first phase of that program has been completed and the exploration team is conducting data analysis for the design of a second phase. At Esther, we are in the early phases of the program with 3,100 meters of the planned 19,000 meter program completed today, and we are intercepting the mineralization where we expected and pleased with the results. I'd now like to introduce Dale Andres, President for Gatos Silver, who will provide detail on our operating performance during the second quarter. Dale, over to you.

Dale Andres

Thanks, Steve. And I will start on Slide 4. At our Cerro Los Gatos mine, we have a strong and unwavering commitment to safety and to the surrounding communities.

We have robust systems in place to ensure we are working consistently to reduce our safety incidents and we continue our constant focus on strengthening our safety culture.

Our COVID management protocols are working well and our daily screening and testing program is still in place and the number of vaccinated employees are steadily rising as the rollout continues in Mexico.

In fact, today, we currently have over 40% of our employees with at least one shot. We recognized that it is essential to conduct our operations in a manner that protects the environment and benefits our local communities. This is not only through employment opportunities, but also education assistance, medical care support and provision of sustainable clean water.

As a priority, we hire our employees locally and over 20% of our employees are female.

We continue to focus on improving the lives of those within our area of influence on the project and this has been recognized by the government and importantly, by the local communities.

Turning to Slide 5.

We are very pleased with our record setting performance in the second quarter. In the mine, we had both record tons and grades delivered to the plant, helping to drive record metal production for the quarter. We averaged 2,638 wet tons per day, up 13% improvement over the first quarter in the mines. The mine has consistently delivered expected feed rates to the plant since the shutdown in February caused by a storm-related power outage event we experienced. Contributing to this performance, we completed over 1,700 meters of development work underground with a continued focus on accessing deeper and higher grade portions of the mine in both the Northwest and Central zones and continue to build flexibility into the mine plan as we further optimize.

Turning to Slide 6.

We also had record setting performance at our plant operations in the quarter. We processed an average of 2,535 tons per day through the plant above design capacity and we know the plant has capacity to do much more. We achieved excellent metallurgical results helped by the silver grade, which averaged a record 322 grams per ton for the quarter with recovery of silver at 89%, which is fantastic and we continue to focus on driving that even higher. Recoveries for both lead and zinc were excellent as well.

We have lots of improvement initiatives underway, including the use of new reagents to further improve recoveries and there will be more initiatives to come as we move into the second half of this year. A plan was put in place to make up for the shortfall in the first quarter after the power outage and we continue to execute very well against that plan.

We also continue to maintain the original guidance set for the year, including our cost guidance for both sustaining capital expenditures and all-in sustaining costs on a unit cost basis. Slide 7 shows some highlights of our record setting performance in the second quarter.

As we disclosed in our production release in July, we produced 2.1 million ounces of silver, as well as records for lead and zinc production. To put the quarter's performance into perspective, it is worth noting that our production was an annual run rate, significantly higher than the top-end of our guidance.

So we are making up for that first quarter shortfall.

Our cost performance was also excellent with our all-in sustaining costs on a by-product basis, averaging $12.63 per payable ounce of silver. This was helped by the significant increase in production during the quarter, including by-product volumes and prices, as well as our efforts to control operating and capital costs. Sustaining capital costs are back-end weighted to the second half of 2021.

So we do expect these all-in sustaining unit costs to be higher for the next few quarters, but with overall unit cost for the year is still anticipated and tracking towards the bottom end of our guidance range and it attracts the way it's going, we'll come in under. On an operating cost basis, unit cash costs after by-product credits were under $3 per payable ounce of silver showing the cash generation potential of this high-grade deposit as we finished some of our key sustaining projects in 2022, and as we continue to optimize the operation.

Turning to Slide 8. The table clearly shows the dramatic improvement in the second quarter compared to both the previous quarter and 2020 performance on key production and cost metrics. The annualized rate of silver production achieved in the second quarter was double the rate from 2020 and the all-in sustaining cost of $12.63 per ounce dropped by over a third from the first quarter of this year. Steady feed from underground with much higher grades and excellent plant performance with record recoveries has been key to the success.

Looking at the bottom section of the table, showing the breakdown of unit costs.

You can see the split between operating unit costs, the by-product credits and the sustaining capital portion, our cash unit cost performance before sustaining capital, as I said, was under $3 per ounce and a significant improvement in both operating costs and very strong by-product credits in the second quarter as you can see.

Our focus for the second half of 2021 is to complete our planned sustaining capital projects that are currently in progress, such as the second refrigeration plant and the new underground dewatering system, both of which will support mine production and development work as we go deeper in the mine. Together with the next lift of the tailings dam to support future production and all of these projects will be complete by the end of the year. The paste plant project started construction this month, and this is a key project for Cerro Los Gatos, which will both improve flexibility in the mine plant and importantly, reduce operating costs and reduce the amount of tailings sent to the storage facility. The project is expected to be commissioned in the third quarter of 2022, that's next year and we are targeting to remain above 2,500 tons per day through the plant in the second half of this year, as we implement various improvement projects and continued to access lower levels in the mine, which gives us more flexibility. With that, I'll turn it over to Roger Johnson, our Chief Financial Officer.

Roger Johnson

Thank you, Dale.

Looking at Slide 9. I also have record financial results to talk about.

For the first half of 2021, Gatos Silver had almost $12 million of net income or $0.20 per share, and we had $0.23 per share for the last three months period.

Our exploration expenses were essentially as we had expected for the period and general and administrative expenses are higher in 2021 due to the higher public company costs, in particular, non-cash stock option expenses. The LGJV had record earnings in the second quarter, resulting in $21 million for our equity income in JV for the first half of the year. Recall, our ownership increase from 51.5% to 70% in mid-March. I am very pleased to discuss the LGJV financial results on Slide 10. The excellent operating performance drove record financial performance. We had record sales of $75 million for Q2 on higher metal prices and the increased production. The higher metal prices continue to be favorable. In early August, the silver price was $25.58 only slightly below the $26.18 per ounce realized for Q2 and both the zinc and lead prices are higher than where they were for what we had achieved for the second quarter.

As for costs, Dale already discussed operating costs, which were less than $3 per ounce of silver after by-product credits.

As far expectations, we had slightly higher mine costs, dewatering costs and professional services costs per ton that were offset by the higher grades in the materials.

As a result, the LGJV had net income of $36 million for the six-month period.

Looking at cash flows on the right-hand side.

For the first half of 2021, operating cash flows were exceptional at $56 million, driven by the items I just mentioned. Consistent with Dale's comments on sustaining capital, we invested almost $39 million of cash in mine development and other capital projects in the first half.

We also spent $17 million in financing activities of which $16 million was the first payment on the dollar term loan. And as Steve mentioned, as of July 26, the LGJV is substantially debt free as the dollar term loan was extinguished through capital contributions to the LGJV at the end of July. I'll turn it back to you, Dale.

Dale Andres

Thanks, Roger. Slide 11 shows the 103,000 contiguous hectors of mineral rights controlled by the Los Gatos joint venture. This mineral rights package is the second largest of our operating tiers in Mexico and we also own the surface rights over the Cerro Los Gatos deposit, the Esther Resource and Amapola Resource all shown in blue. We initiated three separate exploration and resource expansion programs, and there are currently five active drill rigs turning. Three of these drills are focused on expanding and upgrading the resources at the Cerro Los Gatos deposit with one drill currently on the resource expansion program at the adjacent Esther deposit and we also had one drill conducting initial exploration at Gatos Silver's 100% owned Santa Valeria project near to but outside the Los Gatos joint venture. The initial 5,400 meter program that Steve mentioned earlier, at Santa Valeria is not finished and we are assessing the results, which will take a number of weeks before deciding next steps on this target.

We have tremendous upside potential with lots of drilling targets of mineralized zones already established as well.

And so while we assess the Santa Valeria drill results, we planned to move this drill to the other exploration targets identified on the Los Gatos joint venture property. The program at Cerro Los Gatos is being expanded, as Steve mentioned, from 27,000 meters to 45,000 meters with the focus continuing on both the Northwest and Southeast zones.

We have completed about 19,000 meters of this program to-date on Cerro Los Gatos at the end of Q2 and we will be releasing preliminary results of this program very shortly. Based on the expanded program at Cerro Los Gatos and the 19,000 meter program is still completed at Esther, were only about 3,000 meters into that, we are in still pretty early days, we are also looking at bringing in additional drill rigs. In the second half of this year, we will be completing a new resource model, analyze the mine plan update. Once that work is complete, we will reinitiate spends in early 2022 to look at various expansion scenarios. Previous studies targeted 3,000 ton per day for an operation and expanded operation and we will be looking at options about this as well.

We have a strong team and a proven track record of delivering projects on time and on budget, which sets us up very well for executing on future growth options as we continue to define the full district potential. And I do finally also want to reiterate how pleased we are with our record setting Q2 operating and financial results and we look forward to providing further updates as we progress through the year. With that, I'll turn it over to Adam.

Adam Dubas

Thank you, Dale. This is Adam Dubas. And once again, like to thank you all for attending today's call. This presentation and the full Q2 financials of Gatos Silver will be available later today on our website.

Now, at this time, we'd like to open up the call for Q&A.

Operator

Thank you. [Operator Instructions] And our first question is going to come from the line of Cosmos Chiu with CIBC World Markets.

Cosmos Chiu

Thank, Steve, Dale, Roger and Adam. Maybe my first question is on grade.

Looking at it, certainly, Q2 grades improved quite a bit quarter-over-quarter. I guess the first part of my question is, is it all due to mine planning or is it – is there some kind of positive grade reconciliation to the block model that you can speak to? And the second part of my question is on sustainability. If I were to look at your technical report, I think you're forecasting even higher grades on an annual basis.

I think 368 gram per ton for the year.

So to confirm, is there still room for you to improve on that grade as we look into the second half? And is it coming from the – Dale as you mentioned, the lower parts of the deposit?

Dale Andres

Yes. I can take that question, Cosmos.

Cosmos Chiu

Thanks, Dale.

Dale Andres

Yes.

So the grades are variable depending on the zones that we're mining, but they definitely get higher as we go lower – deeper. And as we’re able to advance through the ramps, both in the Northwest Zone and the Central Zone, and in particular, over the last three to four months, that has enabled these higher grades that we saw in the second quarter.

So we're going to continue to drive those ramps slower. There is higher grades as we go lower. I just do want to flag that like any mining plant, sometimes they go up, sometimes they go down, but you can expect similar grades for the remainder of this year, and that's what we're targeting and similar as I’ve pointed out, running – continuing to run above the 2,500 tons per day. Right now the mines operating really well and we think that both the tons and the grade are sustainable. But I just do want to caution on a quarter-by-quarter basis they can swing around at the margins. But in general, we'll be producing similar on both tons and grade.

Cosmos Chiu

Of course. Maybe moving on to costs, and certainly your $12.63 per ounce on sustaining cost came in lower than what I had expected. On that, I think, Roger had mentioned that maybe on a unit cost per ton basis, it was slightly higher. Could you give us a bit more color in terms of how that looks in terms of cost per ton and what are you targeting for the year?

Dale Andres

Again, I can just offer some brief comments and Roger, you may want to – or Steve, they may want to follow-up on that. But yes, I mean when we look at the significant drop, a lot of that is due to the increased production, and that's why we decided to put a table to actually show the breakdown of the site operating costs as well as the by-product credits and the contribution of the sustaining capital.

So sustaining capital is fairly consistent. It is going to go up on a total dollar value basis in the second half of this year, so that will drive costs up as I mentioned in the third and fourth quarter. But it really is tonnage and grade dependent. And if we're able to continue to drive the kind of tonnages we have and similar grades, there'll be some impact with a higher sustaining capital cost going forward, but we're quite pleased with that. And I think we maybe mentioned it on previous calls, there is some cost impact with COVID-related protocols. We still have the majority of those costs in our cost profile that we're spending to date. With 40% of our workforce vaccinated and more being vaccinated every day, we do hope to be pulling back a significant portion of those costs towards the end of this quarter. And I think you'll start to see that translated into our cost performance going forward as well. But obviously, the more tons we pull up, the lower cost per ton is on a tonnage basis, and there's no significant cost driver that is being introduced. We're not a huge fuel consumers.

So in general, I think we're doing fairly well.

I think there's more opportunities, I would say than pressures that we're currently facing.

Cosmos Chiu

Great. I guess, Dale, bigger picture, it seems like every conference call these days, there's always a question on inflation.

As you said, you're not a big consumer of field, but we're also hearing some cost pressures on other input costs, maybe labor as well. Could you make a comment on potential inflationary impact? What you've seen so far? Have you been impacted so far and do you see that as a risk?

Dale Andres

Yes.

I think I would frame it that we're always going to have some cost pressures and with the – I guess with the market the way it is, and I would say it's not just on operating costs, even on sustaining costs as well.

I think we have lots of focus on how we're managing those costs and are doing so.

So we will continue to see some I don't think it's significant because our labor costs on a per ton basis or a per ounce basis isn’t that significant compared to other more, I’ll call it, other costs like supplies, but we're not seeing a huge amount of the escalation that we will see.

I think we're targeting to offset that with our improvement projects, both in increased tonnage and production, as well as just straight up cost reductions, things like going back to COVID costs.

So I don't see a tremendous risk on that front. If anything, maybe there is – and I think we're managing it well, but maybe some risk on the long lead items for sustaining capital projects. And we put the orders in on the paste plant for things like the electrical gear and the pumps, and by getting those orders in right away, I think we can mitigate any kind of risks on schedule on that front.

Cosmos Chiu

Great. Thanks a lot for answering all my questions.

Roger Johnson

This is Roger.

Just to maybe finish that up on your cost per ton question.

We are running right around $100 per ton for the following six-month period. We were slightly below that for the three-month period as we had – as you know, the slight delay in February for the power outage.

So you can probably count on around the $100 mark or maybe slightly below that per ton basis.

Cosmos Chiu

Yes. Thanks, Roger. That's really helpful. And thanks again for answering all my questions. Thank you.

Operator

And our next question will come from the line of Michael Siperco with RBC Capital Markets.

Michael Siperco

Thanks guys. Thanks for taking my question.

If you could expand a little bit on the expansion scenarios you're thinking about for next year, you mentioned you had looked at 3,000 tons per day maybe looking higher than that, while also running at higher than designed capacity now. Can you talk a little bit about what the major drivers would be in terms of, I guess, that first step of expanding to 3,000 tons per day? And then what would really trigger a decision to go higher? Would it be developing satellite operations or executing more than you have to date on the resource conversion or both?

Stephen Orr

So maybe – yes, Mike, maybe I can jump in. This is Steve. And then I'll turn it over to Dale.

As you know, Mike, we contemplated going to 3,000 tons per day even as part of the feasibility study.

And so some of our capital investment we made in the plant was to allow us to very easily ramp the processing plant up. And we're very pleased that we had the foresight to do that because, as Dale mentioned earlier, already, the plant performs so efficiently that it's been able to take everything the mine can provide it.

So it's given us a great deal of comfort that without much, if any, capital investment, we can take the plant to 3,000 tons per day.

And so our focus has been on the mine and getting its production rate up on a consistent basis. And you can see we are achieving that now.

So we're going to keep pushing this thesis that without much capital investment, we can get close to 3,000 tons per day.

And so that's something to watch it in the quarters – forthcoming quarters, but the resource conversion program at Cerro Los Gatos exceeded this, and we're having such good success converting the remaining 3.7 million tons per resource intimation indicated that we've decided – and plus we've made new discoveries, and you'll see some information on that soon. That's the reason that we have made an internal decision to expand that program. And depending on where we end up on that program, that'll keep vector as they end upon where we could possibly take this operation to it. It won't be an issue on the processing plant better, it'll always just be an issue on the mine. And Dale, over to you.

Dale Andres

Yes. Thanks Stephen. And maybe I'll just add.

I think you've covered it really well. Maybe I’ll just add. I don't think either the progressive steps that we're taking as Steve outlined with little to no capital towards that 3,000 ton mark or we'll call it a modest expansion decision to go to 3,000 tons or something above that to invest something if we needed to make that sustainable is dependent on other deposits, so developing other deposits.

I think, we have that in our sites for Cerro Los Gatos, I think as we progress the programs at Esther and other deposits – other Amapola or new deposits that we hope to progress resources on in the future.

I think that just opens up the door for other opportunities. I don't think the immediate expansion in optimization program is contingent on exploration. And I think as Steve pointed out, we're hopeful to do, we'll be quite successful in the resource conversion on the Cerro Los Gatos deposit itself to support that.

Michael Siperco

Okay. Fair enough. Thanks for the answer. Maybe one other, I had some trouble getting on the call, so apologies if you have covered those. But just on the guidance for the balance of the year, heard a bit of it, but obviously, you're about at the halfway point from original guidance, Q2 was obviously well above pace.

Given that you haven't changed guidance, how should we be thinking about the second half? Is it just some conservatism about maybe some variability or is there something with respect to the sustaining activities that you have going on in 2H that we should be aware of in terms of a final number?

Dale Andres

Yes. And maybe I'll take that. It’s Dale.

I think it's both, so we want to make sure we account for any quarter-by-quarter variability, but our guidance for the sustaining capital is unchanged of the $65 million to $75 million. We're just getting underway in our paste plant, which we hope to progress as quickly as we can, but we've only spent less than half of the plant program on the sustaining program in the first half.

So it will be higher sustaining costs.

So on a per ounce basis, you can expect the sustaining capital costs to go up.

I think for the first half, if we averaged out the first quarter and the second quarter, we're in and around the $16 range. And as I mentioned in the previous remarks, we're trending even with that higher sustaining capital in the second half towards the bottom end of our range on that $17 an ounce range. And obviously, we're going to try and do everything we tend to beat up.

Stephen Orr

And on the production side, I mean, if we see a repeat plus or minus of Q2 and Q3 and Q4, my numbers anyways suggest that we'd be well above guidance.

Dale Andres

Yes.

So just I’d say, looking at silver as an example, we produced 3.6 million ounces year-to-date to the end of June.

So I think if we did repeats, it would be comfortably within the guidance range of 2.1 – or 2 to 2.1 in the third and fourth quarters of this year would be comfortably within the guidance range.

Michael Siperco

Okay. Fair enough. Maybe one more for me.

In terms of the increased flexibility on the balance sheet, if the suggestion is that it wouldn't take much in terms of capital to increased throughput beyond 3,000 tons per day, and obviously you can look at a bigger scenarios. Has there been any initial thoughts given to what you would look to do at a corporate level with that free cash flow potential for dividend, corporate strategy, M&A, all those kinds of things? Can you talk about that a little bit?

Stephen Orr

I'll take that question. Mike, we haven't talked a great deal about that yet. And the reason is that, one, we’re really focusing on these sustaining capital projects, and it's the four that Dale mentioned in his presentation because they do so much in terms of giving us certainty that Cerro Los Gatos can consistently perform to expectations and actually beyond current expectations.

So that's our – first and foremost, that's our focus.

Secondly, the best way that we can add value legally to shareholders is through exploration.

Now that the Cerro Los Gatos is performing, now that the deposit is performing, I think it's given the market a great deal of confidence in the integrity of the asset itself, but we have so many more regional targets and of course, we are on Esther now. We've just started that. Dale mentioned that we are now considering expanding the number of drills at Esther and we're looking at that very seriously because we want to generate information faster from Esther. We're already getting good results from it. And I think this will be the market confidence that not only does Cerro Los Gatos have integrity, but as the company’s represented, we have an entire district of this with multiple zones with mineralization.

So I think in the short-term, certainly through the remainder of this year, you'll see cash flow directed to the performance improvement initiatives in sustaining capital and exploration.

Michael Siperco

Very good. Thanks very much, guys.

Stephen Orr

Thanks Mike.

Operator

[Operator Instructions] Our next question will come from the line of Ryan Thompson with BMO Capital Markets.

Ryan Thompson

Yes. Hey guys. Thanks for the updates. Cosmos sort of already asked my question on grade.

So maybe I'll just ask a follow-up, maybe just looking a little bit further out. It sounds like you’re kind of guiding to flattish grades into Q3 and Q4. Is it possible – can you give us a little bit of color as to sort of what you expect into 2022? I know that the technical report is calling for the grades to move up into the 400.

So how should we be thinking about that?

Dale Andres

Ryan, it’s Dale. At this stage, I think we will be giving 2022 guidance at the end of the year.

I think it's important to do the resource conversion and the new life of mine plan update before we speak too much about that.

I think there is a focus obviously on accessing the deeper zones and the next levels that we do access to have higher grades. But I don't want to put out any specific number at this stage until we update those – both the resource model and the life of mine plan and obviously that'll feed into the 2022 budgets and guidance.

Ryan Thompson

Okay. Fair enough. Understood. Maybe just one other quick question here. There's been some talk on new laws in Mexico relating to sort of outsourcing and how contractors are paid and so on. Can you just talk a little bit about that new law and if there is sort of any expected impact to the Gatos?

Dale Andres

Do you want me to take that, Steve? Or Roger, do you want to do it?

Stephen Orr

Actually, Roger had a – can you go ahead and talk about that?

Roger Johnson

This is Roger.

Let me give a response.

So the new law does impact the ability to do outsourcing and how the – how – and as you consider that to be contractors, I think that's a good way to put it as well, Ryan.

So this new law has been actually extended. It was supposed to take effect now, but it's been extended.

However, we have made the changes and modify whatever we need to do, so we're effectively in compliance with the new law.

So that new law will require a certain amount of reorganization in our group to now place some employees who were in another entity that we had used as an internal outsourcing environment and we will have to it [indiscernible] participate in the profit sharing up to 25% of their annual salaries as additional compensation. And we will see some higher costs from that. At this point, if they're not going to be significantly higher costs, however, they could be in the range of $3 million annually, all those costs per higher labor costs.

So this kind of dovetails into an earlier question about, are we seeing inflationary impacts for wages. And this would be one, I'd say, we are.

So if you're modeling, you could probably – you should plan on that we’ll be having higher costs beginning in the fourth quarter, and we may implement this study earlier, but certainly in the fourth quarter and going forward, we'll have the higher cost of roughly $3 million annually in our estimates.

Ryan Thompson

Perfect. That's a helpful thing. Thanks for that.

Adam Dubas

And Ryan, this is Adam.

Ryan Thompson

Go ahead.

Adam Dubas

Sorry, Ryan. Can I add just one other item that Roger summarized it. We were quite successful in actually completing our reorganization in July – by mid-July, prior to the August – the original August 1, deadline. And one piece to note about that new outsourcing regulation is it doesn't eliminate all or eliminate the possibility of outsourcing any jobs. It's only the core services as defined in your company charter.

So as we come through and update our charters, there’s still many outsourcing entities will be able to use those who have now met the new standard.

So it's not a holistic.

Now there is no outsourcing available.

In fact, only certain specialties could be outsourced to individual company.

Ryan Thompson

Got it. Thanks for the added color there, Adam. And maybe just one last question, just on the tax line and modeling taxes going forward.

I think, off memory you do have some sort of tax law pools that could be applied.

If you have the number – do you have any guidance as to when those sorts of tax laws pools would sort of be fully utilized and how we should be just sort of thinking about taxes in general going forward?

Dale Andres

I can take that one, Roger.

Roger Johnson

Yes, please.

Dale Andres

So from some of our previous calls, you'll recall, we have two elements.

You're right, we do have some tax NOL carryforwards to be used at our disposable against taxable income, and there's also a portion of VAT receivables that are available for offset against those same taxable income. These relate to much more older VAT receivables that we incurred during the construction phase of the mine.

So while the VAT carryforwards has to be utilized first, those will be from a modeling perspective. It's likely that those will be fully utilized by the end of the year, especially given as you've seen the robust production in certainly the record financial results we just reported.

So it's reasonable to expect those would be absorbed in the primary operating entity, Operaciones by the end of the year. There's some tax carryforward losses with our other entity Minera Plata Real that will likely extend much past this year into 2022. The good news is that a lot of the VAT receivables that I just referred to, that are also available to offset some of that taxable income are primarily on the operating entity, Operaciones.

So those will then come into the frame much more quickly, and you should expect to see that those VAT receivables will then start to come down due to that resulting offsets here, if not 2021 certainly into 2022.

Ryan Thompson

Perfect. Thanks. That's very helpful. And that's all I had. Congrats on the good quarter guys.

Operator

Thank you. And with that I see no further questions. I'd like to turn the conference call to Stephen Orr for closing comments.

Stephen Orr

Thank you very much. Thank you for attending our Q2 presentation. We're very, very pleased with the performance of the operation and we fully expect that will be within our guidance range for the remainder of the year. Thank you again.

Operator

Thank you. And with that, we'd like to conclude today's conference call. Once again, we do appreciate your participation.

You may now disconnect.