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Edited Transcript of MOC.V earnings conference call or presentation 14-Nov-19 3:00pm GMT

Q3 2019 Ascendant Resources Inc Earnings Call

Vancouver Dec 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Ascendant Resources Inc earnings conference call or presentation Thursday, November 14, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher Raymond Buncic

Ascendant Resources Inc. - Co-Founder, President, CEO & Director

* Katherine Pryde

Ascendant Resources Inc. - Director of Corporate Communications & IR

* Rohan Hazelton

Ascendant Resources Inc. - CFO

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Conference Call Participants

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* Gabriel E. Gonzalez

Echelon Wealth Partners Inc., Research Division - Analyst

* Heiko Felix Ihle

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research and Senior Metals & Mining Analyst

* Matthew Dennis O'Keefe

Cantor Fitzgerald Canada Corporation, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and thank you for standing by, and welcome to the Ascendant Resources Third Quarter 2019 Results Conference Call. (Operator Instructions)

I would like to hand the conference over to your speaker today, Ms. Katherine Pryde, Director of Investor Relations. Ma'am, please go ahead.

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Katherine Pryde, Ascendant Resources Inc. - Director of Corporate Communications & IR [2]

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Thank you, operator. Good morning, and thank you for joining us today for the Ascendant Resources Third Quarter 2019 Operational Financial Conference Call. On the line today is Chris Buncic, President and CEO; and Rohan Hazelton, CFO, who will review quarterly results and subsequently be available to answer any questions.

The press release and associated documents being discussed today are available for viewing on SEDAR and on the company's website. Before we begin, I'd like to note that certain remarks made by management today may contain forward-looking statements and/or information. Forward-looking statements and information are based on, among other things, opinions, assumptions, estimates and analysis and are subject to known and unknown risks, uncertainties, contingencies and other factors that may cause the actual results to be materially different from those expressed or implied. For more information, I'll refer you to the detailed cautionary note within yesterday's press release or in any of the company's relevant SEDAR filings. Please note, all dollar amounts mentioned on this call are expressed in U.S. dollars unless otherwise specified.

And I will now turn the call over to Chris Buncic, who will begin discussion of the results.

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Christopher Raymond Buncic, Ascendant Resources Inc. - Co-Founder, President, CEO & Director [3]

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Thanks, Katherine, and thanks, everybody on the call, for joining us today. I'll start the call with an overview of the third quarter and detailed operational results, and then I'll pass the call on to Rohan Hazelton, our CFO, who will review the financial results in detail. After this, I'll close with a few additional comments, and then we will open the call up for questions.

In the first half of the year, our focus was on gaining access to higher-grade material in the mine through increased underground development works in both the upper historical areas of the mine and the current mining areas. In light of the hampered metal pricing environment that persisted over the course of the year, we continue to expect this increased investment will result in improved grade profile of the mine, driving further growth in contained metal production, ultimately benefiting our cost structure and decreasing our all-in sustaining costs to our budgeted target.

For our third quarter results announced last evening, we're very pleased to see our efforts come to fruition, achieving record average head grades and contained metal production at El Mochito and reporting a substantial decrease in mine site all-in sustaining cost to $1.09 per zinc equivalent payable pound sold and $1.13 zinc equivalent payable pound sold on a consolidated basis. We also reported the lowest cash operating cost per payable zinc equivalent pound sold since our acquisition of the mine at $0.70 per pound. Despite our operational success this year and a recent uptick in metal prices in the third quarter, liquidity remains a key concern for us, but I'm confident in saying with the current resources and options available to the company, we're in good shape for the remainder of the year. We're adjusting our short-term liquidity needs at El Mochito with our financing partners, and we're continuing down multiple paths to fund the optimization and expansion program of the mine, which highlights a decrease in all-in sustaining costs to below $1 per pound zinc equivalent. With notable progress made within this quarter, we do hope to provide more information on these initiatives in the near future.

While the zinc prices demonstrated improvement in the beginning of the fourth quarter, we still feel prices are not reflective of the market fundamentals, and higher prices are warranted for the industry to sustain itself as a whole.

Another very good notable success this quarter was the updated NI 43-101 Mineral Resource Estimate at our Lagoa Salgada project in Portugal that we announced at the end of September. It successfully upgraded resources, providing a strong case for the project, which we intend to exemplify in the Preliminary Economic Assessment currently underway and expect to be completed by the end of the year.

Going back to El Mochito, as touched on, our operational performance in the third quarter was exceptional. The third quarter of 2019 represents the 11th consecutive quarter of improved metal production in tonnage since we took over the operations of the mine. The key driver to this success is the focus on higher-grade chimney-type mineral resources, in particular in Esperanza and Port Royal chimneys, but also some production from the upper and historical parts of the mine where higher-grade material is being extracted from pillars in unmined stopes. None of these upper-level resources are currently represented in the Mineral Resource Estimate at El Mochito. However, given the extremely high-grade nature of these resources, mining a small amount of material from [0] can contribute significantly to the metal production and positively impact costs on a per pound basis as seen in the third quarter. We expect this to continue through the fourth quarter and into 2020, and therefore, we should finish the second half of the year very strongly. Management at the mine has done a great job to motivate our workforce to be continuously improving.

Contained metal production in the third quarter this year was 28.8 million zinc equivalent pounds, up 21% over the 23.9 million pounds produced in Q3 in 2018 and up 17% over the previous quarter of 24.6 million pounds produced in Q2 of 2019, which was mainly a function of higher overall grades, especially in lead and silver.

Metal throughput for the quarter was nearly 200,000 tonnes, demonstrating a 4% improvement over Q3 of 2018 and a 2% improvement over Q2 of 2019. The record average head grade of 7.8% zinc equivalent represents a 17% increase over the 6.7% achieved in both Q3 of 2018 and Q2 of 2019, mostly as a result of the 26% increase in lead grades from 2% -- 2.1% in Q2 of 2019.

Silver grades were also up 2% from last quarter to 69 grams per tonne and was 53% above the same quarter last year. The zinc grades remain at a steady 4.4%. Zinc processing recoveries this quarter of 84.3%, slightly lower than the comparable quarters due to the increased volumes of complicated zinc ores mined from the Esperanza ore body. Lead recoveries of 80.6% was in line, up 2% against Q3 of 2018 and down 1% from Q2 of 2019. Silver recoveries were 82.7%, an increase of 6% from Q3 of 2018 and 1% from Q2 of 2019.

I'll now pass on the call to Rohan to discuss the financial overview of the quarter.

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Rohan Hazelton, Ascendant Resources Inc. - CFO [4]

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Thank you, Chris, and good morning.

Revenues in the Q3 2019 were $22 million from the sale of 28 million pounds of payable zinc equivalent metal, comprised of 16 million pounds of payable zinc, just over 7 million pounds of payable lead and nearly 350,000 ounces of payable silver in concentrates, with average provisional metal prices of $1.09 per pound zinc, $0.92 per pound lead and $16.57 per ounce silver. Revenues this quarter were up 65% over Q3 2018 as a result of substantially higher levels of payable metal sold, especially silver, as well as a 15% higher average silver price. Revenues also demonstrated a 22% increase over Q2 '19, also due to greater payable metal sold and improved silver and lead prices, offset somewhat by lower zinc prices. The net loss for the quarter of $5.21 million or a loss per share of $0.07 compared to net income and basic and diluted earnings per share of $3.85 million or $0.05 in Q3 2018 and a net loss of basic and diluted loss per share of Q2 -- in Q2 of $4.18 million or $0.05 a share. Losses from mining operations in Q3 was $300,000.

Adjusted EBITDA for the quarter of $360,000 compared to adjusted EBITDA of negative $1.73 million in Q3 2018 and positive $510,000 in Q2 2019. Operating cash flow for the quarter was $4.69 million compared to negative $1.37 million in Q3 2018 and negative $5.48 million in Q2 2019, due primarily to the change in inventory levels from the timing of sales as well as increases in accounts payable, primarily due to timing of a bank holiday in Honduras, which delayed certain payments until after quarter end.

Cash flows this quarter benefited from the VAT exemption received from the Honduran tax authority on July 24, 2019, and reported last quarter, which is expected to improve 2019 cash flow by approximately $1 million and have an ongoing benefit of approximately $2 million per year, and the exemption is renewable annually.

Capital expenditures totaled $3.25 million for the quarter as compared to $4.2 million in Q3 2018 as well as $4.92 million in Q2 2019. As Chris discussed, the company significantly reduced underground development in the third quarter compared to the substantial investment made in development in the first half of 2019. The decrease in capital expenditures over the previous quarter translates into a higher proportion of fixed costs being allocated to operating costs as such costs are not capitalized and instead flow through to expensed operating costs.

The increased sales and shipments during the quarter also resulted in higher transportation and port charges of approximately $1.30 per tonne as compared to Q2. And finally, costs were further impacted by onetime severance charges of approximately $1 a tonne or $200,000 in the quarter.

As such, direct operating costs per tonne milled was $86.52, demonstrates a 6% increase over the $81.79 in Q2 2019. Direct operating costs this quarter also were 6% above the $81.66 per tonne milled in Q3 2018, which is primarily due to the previously disclosed 15% increase in national power rates imposed in September 2018 as well as the 6% increase in labor costs that took place in October 2018. Direct operating costs are expected to approximate the higher end of our 2019 guidance, while capital expenditures for the year will be towards the very lower end of guidance.

The company has been successful at offsetting cost pressures on a payable pound basis through grade improvements and increased contained metal production as we reported Q3 2019 cash operating cost per zinc equivalent payable pound sold of $0.70, the lowest since assuming operations at a mine, representing a 4% decrease over Q3 2018 and a 9% decrease over Q2 2019. In fact, it should be noted throughout 2018 and 2019, the company has maintained or reduced cash operating cost per zinc equivalent payable pound sold as a result of the continued success with metal production growth.

In Q3, the company also reported the lowest all-in sustaining costs since the acquisition of El Mochito. Mine site AISC of $1.09 per zinc equivalent payable pound sold represents a 3% decrease from $1.14 in Q3 2018 and an 18% decrease from $1.32 in Q2 2019. AISC, on a consolidated basis, was $1.13 per zinc equivalent payable pound sold, a 7% decrease from $1.21 in Q3 of last year and a 21% decrease from $1.43 in the previous quarter of this year. With the high grades and elevated metal production growth expected to continue into the fourth quarter, we anticipate further downward trend in costs on a per zinc equivalent payable pound basis.

I'll now turn the call back over to Chris for additional comments.

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Christopher Raymond Buncic, Ascendant Resources Inc. - Co-Founder, President, CEO & Director [5]

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Thanks, Rohan.

To summarize, I'd like to reiterate that we are very pleased with our operational performance in the third quarter and the team's efforts and ability to push El Mochito further, substantially reducing our unit cost per zinc equivalent pound while we can. We look forward to continued success in the fourth quarter at similar levels of production and cost, especially in the wake of recently improved metal prices. We look to close 2019 on a positive note. We're also very confident in our financial liquidity, and I'd note that we are in advanced stage discussions for the funding of our expansion and optimization project that's driving our all-in sustaining costs below $1 per pound once completed, which we hope to be able to discuss in the near future.

In the third quarter, we completed our 2019 drill program at Lagoa Salgada. The program consisted of 24 holes, totaling 8,200 meters of drilling, and proved very successful. As the results announced in the quarter in September showed, we intersected high-grade intervals, considerably expanding the mineralization in all zones. These results, along with the results of our 2018 program, as well as historical drilling form the basis the updated Mineral Resource Estimate we announced in September, significantly upgrading the resources of the project. Results of the Mineral Resource Estimate demonstrate a material growth in the North Zone, converting substantially all of the resources into Measured and Indicated categories, providing a case for the North Zone, which we plan to demonstrate in the Preliminary Economic Assessment currently underway.

Overall, we're very positive in the near -- about the near-future potential of this project to significantly enhance shareholder value and provide additional optionality as we achieve further milestones and advance this project. We're extremely excited for the future of Lagoa Salgada as we believe it has the potential to be a great driver of value for the company, especially given the characteristics it shares with other projects located in the Iberian Pyrite Belt, which have been transformational for such large-scale miners as Trafigura and Lundin. As mentioned, we expect to provide a case for Lagoa Salgada with a Preliminary Economic Assessment for the project before the end of the year.

With that, we've reached the conclusion of our third quarter 2019 results discussion. We'll now open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Heiko Ihle with HCW.

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Heiko Felix Ihle, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research and Senior Metals & Mining Analyst [2]

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It's Heiko Ihle with H.C. Wainwright. Congratulations on once again growing production and all that good stuff. But can you just provide a little bit of color on zinc pricing on a cash basis that would give you breakeven EPS? I mean we obviously can just add the $5.21 million loss given labor costs and all that stuff. I'm not looking for a scientific answer. I'm just looking for your best guess.

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Rohan Hazelton, Ascendant Resources Inc. - CFO [3]

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Thanks, Heiko. It's Rohan. I mean I guess, the very quick answer would be all-in sustaining costs would be sort of your quick approximation which, of course, we're trending downwards and reducing. The -- looking on the income statement for the full $5.2 million as you referred to, there are -- you look at the other increment expense, and there's 2 large items. One is the way we're required to account for our investment in Lagoa Salgada is essentially to net -- to expense it, and so that's a significant item for our income statement. As well as in the quarter, you'll note the large charge on termination liabilities, which is a onetime event as we've moved over contractors to be full-time employees. And so that charge won't be recurring. I mean there -- in that other income and expenses, there are things like the amortization of the reclamation liability and that termination liability, but so I would look more towards the line above and sort of the mine EBITDA and then covering G&A, which is basically reflected on our all-in sustaining costs. So that would have been $1.13 this quarter.

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Heiko Felix Ihle, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research and Senior Metals & Mining Analyst [4]

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Okay. But I mean internally, that's as closest as you are with planning for like an amount like that?

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Rohan Hazelton, Ascendant Resources Inc. - CFO [5]

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Sorry, planning for what, sorry?

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Heiko Felix Ihle, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research and Senior Metals & Mining Analyst [6]

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For EPS breakeven, your all-in sustaining is the number that you use for internal budgeting.

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Rohan Hazelton, Ascendant Resources Inc. - CFO [7]

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I mean certainly, I mean that's -- I mean the quick answer is yes. Obviously, AISC is a more cash-driven number, and that's more where we're obviously focused on is our cash position and our cash liquidity going forward. EPS, as you point out, obviously has a few other things in there, including depreciation of PP&E, et cetera, but yes, it's what we focus on primarily.

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Heiko Felix Ihle, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research and Senior Metals & Mining Analyst [8]

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Okay. Fair enough. And then moving to Lagoa, which seems to be the -- more and more actually, with every quarter, it seems like that's more and more the future of the company. You've done quite some infill drilling there in the North Zone. I mean I -- just looking at your presentation and the maps, I mean how much more can you still do there, both time-wise and money-wise? And also, on that same token, did your focus change at all throughout the quarter given the results that you got from there?

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Christopher Raymond Buncic, Ascendant Resources Inc. - Co-Founder, President, CEO & Director [9]

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Well, to answer the second part first, I think we've seen these drill results that come through since the second program started in April. And so as we've been voicing our optimism around the project, we've been seeing these results come in since that time. And so we may have twisted and turned on the road, but it's really been focused on expanding that North Zone to show -- to build our M&I, which would allow us to put an economic case around it. Now we've got 10.3 million tonnes at 9% zinc equivalent. We're going through the metallurgy right now, and so that's what's driving the time line. And so again, we should have that PEA this year.

But given what -- using some benchmarking numbers from other mines in the region, we're, of course, very excited about the project. Even if it's starting off small with 10.3 million tonnes, the potential for projects like these, we're talking about 1 BMS target that's been drilled off here. And typically, these things come in clusters. Neves-Corvo is north of 170 million tonnes. Aguas Teñidas is on the belt, that's a massive find that Trafigura owns, of course. Aljustrel is 40 kilometers down the road, so we're -- I'm very optimistic that down the road, this could be a very large project. And this PEA is the start, so our plans are, for next year, to do a little bit of additional drilling and on the -- little bit in the north, some further in the south. We'll also need some additional met holes. And globally, again, of course, we're looking at north of 20.6 million tonnes that we have in the current resource update, and we'll look to increase categories across those. Ultimately, we do want to move this into feasibility and have this be a project that we build out over time. So we are very excited about it.

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Operator [10]

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(Operator Instructions) And our next question comes from the line of Matthew O'Keefe with Cantor Fitzgerald.

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Matthew Dennis O'Keefe, Cantor Fitzgerald Canada Corporation, Research Division - Research Analyst [11]

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Yes, good quarter from an operational standpoint. Obviously, those onetime items, thanks for clearing that up, that -- I hope that onetime item with the transition, that's good to know because it was a bit of a shock to see the difference between your EBITDA and then the big earnings loss there.

But moving forward, just a question on Lagoa. How are you going to -- I mean what's your budget expectation for next year and how are you going to fund it? Because I look at your balance sheet, and I am getting a little -- I would be uncomfortable carrying $17.4 million of deficit -- net working capital deficit. So I'm just -- how do we clean this up? And then what are your -- how do we look to next year for funding some of these growth projects like Lagoa Salgada?

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Christopher Raymond Buncic, Ascendant Resources Inc. - Co-Founder, President, CEO & Director [12]

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Thanks, Matt. So again, firstly, on the working capital, we've mentioned that we've got some flexibility with our funding partners. And so we're feeling pretty confident in our ability to continue to operate with a nice safety net in that regard. And I'll let -- maybe Rohan can elaborate further after I'm done.

But with respect to Lagoa, we've got a number of paths we're going down for financing the exploration program there, all of which are underway. And so right now, we don't have -- we haven't crystallized the budget or the plans. We're waiting for the PEA.

We are doing some additional borehole IP work right now that's going to help define what the drill program looks like, and that's underway right now as well. So we'll look to crystalize those plans in the next couple of months. But I know that's kind of vague on both fronts, but we're working on that right now.

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Rohan Hazelton, Ascendant Resources Inc. - CFO [13]

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Sure. And if I can just jump in. Thanks, Matt. The -- as Chris mentioned, we still continue to have advanced discussions with our different finance partners, both on our bank credit line and also in our revolving prepaid facility. I think importantly, we are just in the process of looking to increase that tenure out to approximately 2 years. That would obviously assist greatly sort of in that very short-term current outlook as well as some of the other financing, of the things that Chris mentioned.

On -- out of the $17 million -- and all on a nondilutive basis. On the negative working capital of $17 million, there's also -- we're still working and expect to -- that a substantial amount of some of the taxes payable and other payables due down to the government that I can -- we're working hard to have those offset as they should be legally against a long-term receivable that we show as our VAT receivable, and that would be in and around the sort of $4 million range, which would make a significant impact.

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Matthew Dennis O'Keefe, Cantor Fitzgerald Canada Corporation, Research Division - Research Analyst [14]

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Okay. And then just on the optimization and expansion plan. I mean that's about a yearlong program, correct? And I mean when -- well, I mean, has the delay affected your -- because we were expecting this to start sort of midyear of this year. It's been delayed because of the need for financing -- the delay in financing. So has the delay, is that going to impact the overall costs or ability to execute on this plan? Like can we still rely on the old numbers in the old plan?

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Rohan Hazelton, Ascendant Resources Inc. - CFO [15]

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Yes. The old plan would still be in place. The project itself hasn't changed in terms of where the subshaft would go nor the plans for the improved pumping scenario as well as the plant expansion. So those would all be the same.

The financing has been delayed, and you can certainly sense our frustration with it. We do have some momentum right now that's somewhat renewed. So recall we had announced that we were working with OPIC for that project financing. And back in the -- I guess back in the early months of the summer, President Trump had tweeted that there was new aid for the Northern Triangle countries, and that really put a -- put that financing into flux.

And just in the middle of October, the Department of Homeland Security announced that Haiti was being restored -- for Honduras and El Salvador and Nicaragua -- for $150 million for Honduras. And so while OPIC is not classified as aid, it was caught up in that whole scenario. Right now, OPIC is still waiting for clarification from the White House before it can resume its process, but we did post our ESIA online with OPIC back in August. And so come middle of October, that 60-day consultation period elapsed, and there were no comments back that needed to be addressed or anything. So right now, it's -- we're sitting in a little bit of limbo, waiting for the restoration of aid to spill over to OPIC, which everyone that we've talked to does expect to happen in the coming weeks or months. So we do have some momentum there. And just the boxes to be checked at that point would just be administrative.

And secondly, we are still talking to -- and working with a local bank who is still working through the final documentation on the project financing. And we just have a few hoops to jump through there, but also, it's making progress as well. It got stalled up for a number of weeks, but that has since resumed. So it's possible that either one of these 2 scenarios will happen by the end of this year, and then we'll kick that off as quickly as we can.

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Matthew Dennis O'Keefe, Cantor Fitzgerald Canada Corporation, Research Division - Research Analyst [16]

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Okay. So OPIC is back on the table potentially, but you've still got the other option that you're also pursuing sort of in tandem?

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Christopher Raymond Buncic, Ascendant Resources Inc. - Co-Founder, President, CEO & Director [17]

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Correct.

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Operator [18]

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And our next question comes from the line of Gabriel Gonzalez with Echelon Partners.

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Gabriel E. Gonzalez, Echelon Wealth Partners Inc., Research Division - Analyst [19]

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Congratulations, again, operational and I think a very solid quarter. Just to follow up on Matt's question. One certainly hopes that the U.S. government isn't taking any favors from the Honduran government. But just on the issue of the financing package, I'm curious if there is a sort of a set trigger date at which you -- at which point you will decide on any one of the -- either the OPIC or the local bank financing packages to finally get the expansion project in motion. Like is there a set date past which you don't want to go without effectively signing a financing package?

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Christopher Raymond Buncic, Ascendant Resources Inc. - Co-Founder, President, CEO & Director [20]

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Well, I think that set date that we didn't want to go past is probably 6 months ago. But with that said, it's, at this point, kind of first past the post. Really, as either package comes available, we'd look to execute on it. So there are differences between the 2 packages, but there -- both of them are for $35 million. Both of them are 7-year tenure with a 2-year construction holiday, and so they both kind of suit our needs for the project. And so it's really a matter of which one becomes available first.

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Gabriel E. Gonzalez, Echelon Wealth Partners Inc., Research Division - Analyst [21]

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Okay. And I'm sorry, could just to remind me again the rate, just [perhaps] mention the 2-year construction holiday. What was the rate you mentioned?

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Christopher Raymond Buncic, Ascendant Resources Inc. - Co-Founder, President, CEO & Director [22]

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It's -- they're both a little bit different. Just to give you a little bit of direction there, I'd say high single digits.

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Operator [23]

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Thank you. And I am showing no further questions at this time, and I would like to turn the conference back to Ms. Katherine Pryde with -- for any further remarks.

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Katherine Pryde, Ascendant Resources Inc. - Director of Corporate Communications & IR [24]

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Thank you. Well, that concludes our call today. On behalf of the management team, I'd like to thank you for joining us. All materials from today's call can be found on our website at www.ascendantresources.com. A recorded playback of this conference call can be accessed on the company's website under the Investors section as of this afternoon. If there are any further questions or concerns, you may reach out to us at any time. Our contact information can be found on our website. Thank you very much.

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Operator [25]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.