Agnico Eagle Mines Ltd (AEM) 2003 Q1 法說會逐字稿

now. We've got everybody hooked up on the conference call line with the operator. Just close the door there at the back.

Welcome to Agnico-Eagle's 2003 first quarter conference call. What we're going to do is obviously do a little bit of a different format here this morning. It's changed from previous quarters. We are having a live presentation here. For those of you who are not in attendance here, you can view a slide presentation that we have on our Web site. The Web site address is www.Agnico-Eagle.com.

And at the conclusion of our formal presentation, we will take questions from the floor first, and we'd ask you go up to one of the microphones and speak into the microphone. And then following that, the operator will open up the lines and take the calls that are in queue on the telephone.

With us today from our management team is Ebe Scherkus, Dave Garofalo, and Barry Landen up front. In the audience with us is Don Allen, - we have Marc Legault, , and we also have our Chairman with us today, Mr. Jim Nasso.

Before we give you the details of our quarter, we are obliged to outline the standard Safe Harbor statement, which is on the screen. And what you should be aware of is that the press release and this presentation contain some forward-looking statements that involve various risks and uncertainties, and there can be no assurance that such statements will prove to be accurate. Actual results and future events could differ materially from those anticipated in such statements.

Two major areas of discussion today will be our first quarter results which will include a review of operations and of mining conditions at LaRonde, and they'll also include an exploration update both on LaRonde and at our Lapa gold property, which is located seven miles from LaRonde. What I'd like to do is begin with an overview of the quarter, and then I'll turn the presentation over to Ebe. And what he'll do is run through a series of slides, and what those slides will do is provide a fuller technical update on both LaRonde and of Lapa.

From a results perspective, we recorded another disappointing quarter. Gold production of 55,000 ounces did not achieve our targets, and unit cost to produce an ounce of gold before royalties of $169 were much higher than anticipated due to lower gold production. As a result, we recorded a net loss of $6.2 million or seven cents a share. Included in this loss was a $1.7 million non-cash charge that was related to the adoption of a new accounting standard - a FASB standard for reclamation obligations.

We clearly need to do better and we will do better, and despite the poor results, as Ebe will outline, we did make significant progress in both our development and our construction objectives. And really in mining, particularly underground mining, this is the groundwork that allows us to open up the deposit, and it lays the foundation for us to do much better in terms of our performance and posting results.

Confronting us in the quarter, as you know, as previously announced, was a fall of ore and waste rock. We don't really want to dwell on this too much, as its impact is temporary, but I did want to provide you with an overview of what happened, why it happened, discuss the impact, and describe what actions we have taken. And Ebe, in his presentation, will give you a much fuller technical view and details of what happened.

What happened and why? Well, mining, as you know, a standard size block of ore on our lowest production level, we had approximately 30,000 tons of ore and waste rock peel away from the area above the mining block that we were mining. This happened over a two-week period, and it was triggered by a production blast which was caused by a buildup of localized stresses as we were opening up the bottom level of the mine.

As Ebe will demonstrate, it was a not a depth issue. There was not a mining method issue. This type of thing has occurred in the past at shaft number one, and those incidents had no impact on production. In this instance, the area stabilized on its own, allowing us to subsequently extract the blasted ore and the material that caved.

As far as impact, there were no injuries, there was no damage to equipment or infrastructure. Mining and milling operations continued, as did underground development and construction activities. The immediate impact is on gold production, and this is more of a timing issue as our large gold reserve and resource is still intact and unaffected.

As a precaution, we decided to alter the mining sequence of block extraction in 2003. As a result, 2003 production is anticipated to decline by 20 percent to 300,000 ounces. What we're essentially doing is deferring the extraction of 10 higher gold grade blocks - and we'll see that in one of our animations - and replacing those 10 blocks with already developed mining blocks in the upper part of the mine which contain primarily zinc and silver ore.

The rock fall has not impacted development or construction progress. Our development objectives in the first quarter exceeded our targets. Construction of the underground crusher and conveyor system is on schedule for completion in May. Second half 2003 production is not adversely impacted, as mining operations are expecting to return to normal.

The bottom line is we have a temporary situation which occurred at really the worst possible time for us as we were nearing the end of the expansion to 7,000 tons a day. But we have addressed the issue; we've taken remedial action; we've moved forward to establish a revised mining sequence in a very conservative manner.

Just like to touch on Lapa. We put out a press release this morning on Lapa. We had signed later yesterday evening a deal with Breakwater Resources where we acquired the balance of the property from Breakwater. We now have 100 percent of Lapa. We paid effectively $9 million - potentially another million dollars in advance royalty would be due when the deposit has a resource of two million ounces. All in, we're looking at a cost per resource ounce of about $11.

In our view, this is the right time to be buying these types of interests in the very early stage with something very close to LaRonde that has exhibited high-grade gold and a defined contact on this belt. It makes perfect sense to us. This is the early stage type of opportunity that we've been looking for to use our skills and leverage off of our infrastructure at LaRonde.

As you know, the resource at Lapa, although it's still early, is 800,000 ounces. It's wide open for expansion. Ebe will show you some of the longitudinal sections. We're aggressively drilling the property. We've added more drills. We've got five drills going now. Our budget this year is two-and-a-half million U.S. on Lapa. Recent drilling has extended the deposit. We extended the deposit by almost 800 feet. We encounter high-grade gold down around 3,800 feet, and Ebe will point this out in his slides.

As we move forward, we're working towards an updated resource calculation, which we expect to have by our annual meeting on June 19. We are also - we've also acquired additional properties on the Lapa trend, and we'll show you that on our - or our view of the - of the area.

We are - we've increased our already dominant land position on this belt, and there is still more work to do in terms of building up our property position, and we are working on other acquisitions along the belt right now. That's an important part of our regional strategy, which we still believe this regional growth strategy centered on LaRonde, which would include potentially the development of Lapa and possibly and certainly deep LaRonde makes not only very good sense from an operating point of view, but also has the potential to add significant value for our shareholders.

There are several advantages to the strategy. One, it is relatively low risk in terms of permitting, political issues, environmental issues, and from a mining and metallurgical point of view, these are relatively low-risk situations. It's very tax effective, as we've said before. We have got over 700 million Canadian in available tax deductions that we could apply to anything that we bring into production in Canada.

This type of arrangement would have low overhead and synergies with LaRonde. It's potentially a multi-mine strategy that would diversify the production base away from LaRonde and would have a very strong gold bias. This strategy has a lot of exploration upside with our dominant land position and extensive - and extensive coverage of essentially two major gold trends - one the LaRonde trend, and one the trend about a mile south - the Cadillac-Larder Lake trend which has historically hosted very high-grade gold deposits. And we've got a very aggressive drilling program planned on that trend based out of Val d'Or.

So we've got a regional knowledge base infrastructure that we're applying to this very dominant land position, and in our view, that's the way to create value because at LaRonde, we were able to outline all of the zones around the shaft for essentially a little more than $2 U.S. So in this situation - particularly Lapa, we paid $11 U.S., which would include the exploration to date, and if we can build these ounces for $40 and product them for 150, then we've got something that has very attractive margins right in our backyard.

This type of strategy would also be earnings positive because there'd be no negative adverse impacts from goodwill because we're not going out and making a major acquisition - so, essentially a relatively low-risk strategy with the potential to create some meaningful value.

On that, I'd like to turn it over to Ebe, and he can give you a much fuller outline of the quarter and of the exploration potential along the belt.

Thanks, Sean. Good morning.

This morning, I'd like to clarify exactly what happened at LaRonde, why it happened we lost the Web site temporarily, so we'll take a pause for the cause - two minutes.

OK, we're back online. This morning I'd like to discuss what actually happened, when it happened, why it happened, also the impact - how we came to those conclusions, and how it impacted on our mine plan.

This is a view of the shaft ore zones. Actually it just - what we want to show with this particular slide is that this incident is very localized in one small part of the mine which is right down here at the lowermost level. And as we - let's go back a bit - there we go. Now, you'll see as we zoom in on this particular animation, you'll be able to see that it affected one stope and it was on the more easternmost limit.

And you can see the caved area as we get closer to it, and that was our mining plan highlighted on a quarterly basis of what we were supposed to extract. And also, you can see this domed area - that was the 30,000 ton of material of ore and waste that actually caved on us.

So, as a result of that, we had a 30,000 ton fall, but most importantly, we didn't have any injuries, and as you'll see in the presentation, it will not have any long-term impact, and as you saw from the previous slide, it is a very isolated incident - an incident that has occurred in the past. However, it did have an impact on the - this quarter, and it will also have an impact on the second quarter.

So here is exactly what happened. We have a view of the two adjacent stopes - stopes 2048 and 2049. And this is what happens when we mine essentially. We open up the mining area or the block from the bottom up. And we had subsequent blasts, so even after the second blast, things were still under control. This is the third blast, and you can see we extract part of the ore.

And now finally on the fourth blast, that's when we had the first incident where you saw a small amount of material that had come down from the upper part of the back.

Now, you'll see in the cross-sectional view in the next slide - this was the first survey that we did. And you could see that the material started doming upwards, up to the next sublevel horizon and it also encroached on the adjacent stope. So this is not a catastrophic event. This is an event that occurred over a two to three-week week time period.

So we did another survey, and that dome just kept growing. And you can see the planned outline of what we were supposed to mine. And it also on the back fill; it also off to the east; and it also came very close to the 209 level.

Now, if you look at this particular situation in cross section, what this particular cross section tells you - we did not lose access to any of our sublevels and this is the first cave where we had 20 feet that came down, but the 20 feet was in the handing wall. And we were only able to come to that conclusion because this particular area here we did not have any access because it was filled with ore. So this is the subsequent cave and this is why we called it "Unraveling."

And this is the final survey, and this was on - that we conducted even April 2. It was still active on April 2. But once again, you can see that there is no access on the bottom levels - on 215 or on the 212 level. So it was very difficult to judge exactly what was happening inside this cavity.

Now, why it happened - , we were in a situation where we were on the lowest level of the mine - 215. We were just starting our pyramidal sequence. And this is a view of the rock mechanic modeling, and essentially the blue areas are areas of low stress and the areas of red are high stress. So you can see we mined this particular stope. So the vulnerable area would be this particular area. We did put in additional rock support, and we felt that we could be able to mine that. And as this is the area, then, that essentially caved.

So this was a stope or a mining block that was mined out of sequence, and part of the reason it was mined out of sequence is, once again, to our delayed development which we had talked about and encountered last year. So, when you're in a horizontal situation like that, we have very little flexibility to mine intermediate stopes or the stopes at the higher sublevels.

So this was something that as we mentioned before, it is part of the challenge of mining. It's a very dynamic situation. We've experienced this twice before and both of those incidents were at Shaft No. 1. The first incident was at 300 below surface below our No. 1 open pit and the second incident was at 1,700 feet adjacent to the and LaRonde boundary, so it really wasn't a depth related issue. Now when we establish a pyramidal sequence, this is the overall mining sequence and the slowest part is when we initiate because we mine upward, so we have to establish the foundation and then gradually you can see the checkerboard pattern develop as we mine upward. And of course, as we mine upward, then you can see the increased flexibility by all of these additional mining areas that become available, but were not available when this situation occurred. And here are the five spokes that we mine, so we had four spokes in production, and this was the fifth one that unraveled and, of course, had an immediate impact in the establishment of this pyramid.

So what are we doing to resolve this? Well, the first thing we have to do is to backfill the caved area and the mined-out area. Now that takes time and once this area is open--why it impacted our second quarter predominantly is we do not want to blast adjacent to this and because we're afraid if we do blast, then that would start--it would initiate caving again. So what we are doing and what we have done already is we've backfilled it up to the 212 Level, but we've also driven a sublevel above and that's normal development. And we've put--we're in the process of putting in a raise, so that'll be phase two, cemented backfill. And the final phase is to fill the top part with paste fill and that will be completed by the beginning of June.

Also what we're doing, we want to establish that or pyramidal sequence a lot faster, so what we have done is that we will have four of these particular stopes. Now these stopes will be 12 meters, or say 40 feet thick, rather than these which are 50 feet thick, and the whole idea behind that is they would be smaller in volume. These are some of the largest stopes that we will ever mine at LaRonde; each of these stopes are anywhere between 30 to 45,000 tons, so they're very big stopes. So we will be cutting down the volume by about 25 percent and ensuring that we get up higher and establish that sequence. Well, this is the reason, once again, we modeled this and you can see, once you have established that pyramidal sequence that all of the areas in blue that we have here are areas of low stress, or that area has been de-stressed. So these areas will facilitate mining in the future.

So this is the impact really of what it has during the quarter. These are our four--or five stopes that we mined and you can see Q2, as we're repairing this area, there will only be three stopes and these stopes are the furthest away from the area that caved. However, in Q3 you can see once that is repaired, then we will fully establish that pyramidal sequence and you can see by the number of stopes that will be mined, that's why we say that production will return to normal levels. And then finally in Q3, once that sequence is fully established, then we will mine the greatest number of tons. And once again you can see the flexibility on that slide, all the intermediate, the secondary zones, all of the sublevels, all of a sudden become available, and so in the past when we had incidents of this sort, then we could adjust production from one stope or to another block and not be as captive or held hostage because we were starting off this pyramidal sequence. However, these are the stopes that are deferred, like because of the delays, especially in the second quarter where we're only mining a small amount of stopes, then these are the 10 stopes that we mentioned in our press release that would be delayed.

So if you look at--as a result of the--that is the main reason. Some people do the math and say, "Well, there's 10 stopes and that's only 60,000 ounces." When we go through our mine plan there's a whole domino sequence. We have to develop other areas of the mine, we have to adjust the mining sequence, and about four other areas of the mine, can we extract the waste, can we hoist that waste, what are the grades of those blocks, and it isn't quite as simple as adjusting a financial model. And we've heard some of the comments that, "You should have known a lot earlier." This is a whole sequence, a domino sequence and it means adjusting the mining sequence of over two million tons across a nine month period, so it isn't exactly an easy exercise. So we did that and this is what we came up with. And we have tried to be as conservative as possible. And so when you look at the revised estimate compared to the prior estimate, well the big number that stands out is obviously the gold. There's over 20 percent reduction in gold production. However, you can also see the increase in zinc as we focus back to the zinc stopes and that is reflected in the slight decrease in grade to .12 from .14. However, we are trying to recover the tonnage and you can see the tonnage is down only 100,000 tons, down from 2.8 million tons to 2.7 million tons. Of course, when we have a declining reduction of 75,000 ounces, there's an immediate impact on the cash cost per ounce so our average, or revised estimate, is $180, up from 125.

However, there are also assumptions. These are the assumptions at the bottom of the table. There is a decrease in silver price, our byproduct revenue. There's also the U.S./Canadian dollar exchange rate that would have an impact on our byproduct--on our byproduct and also on our cash cost per ounce. Now if you look at this in terms of sensitivity, a 10 percent change on the various variables, the more--the largest impact would be the Canadian/U.S. dollar exchange rate whereby each 10 percent would have an impact of $23 per ounce. The rest are fairly low.

So in terms of the--just summarizing this whole event, we feel that it is an isolated event and very importantly for the long term impact of the mine, it isn't depth related. However, since we didn't lose reserves there shouldn't be any impact on the life of mine. We did not lose any reserves and as we go through and repair this particular stope, we expect to have our production pace resumed by June 1st.

However, things really aren't all gloom and doom and you'll be able to see that on the subsequent slides. I think most importantly, we are still in massive construction. Our infrastructure, especially No. 2 crusher, is underway and it's on time and on progress and these are just a couple of pictures of the current status. You can see we've excavated the crusher room. This is already--this is a couple of shots taken about 10 days ago. Steel erection is progressing well. This is already the head pulley to the conveyer way up to the 5,000 ton ore bin, so that is one of the main reasons why we expect also to improve our productivity in the second part of the year. This has to be out of the way. Also what we are doing, we're pushing really hard, especially for the summer months we do not want to have any major construction projects, any significant reduction in contractor workforce, especially during the July or the summer months.

But also, most importantly, here are some performance figures. This is our development operate--update and this is part of the problem that we experienced last year, especially in July and August. This was our objective and what that objective is are development advance per mining crew of about 310 meters per crew. That is what our objective was and then, of course, August we only obtained about 57 percent of that objective. And then heading into the latter part, the fourth quarter of the year, development improved significantly. However, for this coming year we had to play catch-up. We had to do better. So this is now at 410 meters per crew. And as you can see, this is our development performance so far. At the higher rate we had to catch up this amount and so far for the first three months of the year, this is the development in the key area of 194 down to 206, 215; this is where we are going to be mining the ore. So you can see we reaped our delay last year and this year we hope to be able to reap the fact that we are doing significantly better on development.

Now this next slide will also show that we are increasing the amount of tonnage from the lower part of the mine, despite the problem that we had. Last July we had 21,000 tons of ore that were derived from the lower levels. This past March that figure has improved to over 85,000 tons of ore from the bottom of the mine. However, in terms of percentage, you can see that this is where we started having problems with the quarter. We had--in February we had over 50 percent of the ore that came from the bottom part of the mine. However, in March, with the problems on the stope on the 215 horizon, that dropped to 40 percent. But however, we were still able to get more tons out despite that, but the only problem was, that mining block suffered severe dilution and we only came about that once we started extracting the ore. Our overall estimated grade for the mining block was in excess of 5 to 5.5 grams and finally, when we reconciled the stope, it only came out at 2 grams. So that is why there was a significant shortfall announced. But despite that, it still maintained the trend of increasing production from the bottom of the mine.

Most importantly is also our tonnage rate through the mill and, once again, this sort of tracks the problems that we had with our mill last July. But since that time, there's been a steady rise of ore through the mill and ore from the underground workings where March we have the best performance ever; we averaged 6,900 tons per day. But what is even more impressive from our point is during the 10 day period in March we were averaging over 8,000 tons per day from underground, and also here in April we had a 3.5 day shut-down to change the hoist cable, so the mine was down. But since that time, both the mine and the mill have been running at 8,000 tons per day, maintaining this trend of increasing production.

And I just have one quick slide here which--this is the latest mill sheet that we have at the mine and I'd just like to be able to point out a few numbers. If you look at the numbers, 8,128 tons that went through on April 20th--I'll get that up there--and if you look at the average grade, it is close to .16, which you can see here. Also averaged 3.5 percent copper, 3.5 percent silver, .6 copper, and about 3.45 percent zinc. Now also what is interesting, at the bottom of the mine--at the bottom of this sheet you can see payable ounces. That particular day we produced almost 1,160 ounces. Now that is what the mine and the mill is capable of doing once everything is right and working right. We are capable of mining at those grades, those daily ounce production rates, and also in excess of 8,000 tons.

We've also been busy on the exploration front and I'd just like to give you a brief update on 20 North and also on Zone 7. Looking at 20 North, we've continued our program from the 215 level horizon, and these are some of the latest drilling results that we have come across. And you can see the thicknesses vary from 30 feet still all the way up to 72 feet. This is the area where we converted over a million ounces of the resource into reserve last year and we're particularly excited about this hole on the western limit. And that result is actually better than previous results. So far the 215 level exploration drive has been extended almost 700 feet off to the west. So as it heads off to the west we're opening up more areas so we expect to continue increasing the drill density of this particular area and, of course, get more information off to the west.

But our real surprise has been Zone 7 which has been--we haven't spoken a lot about it over the last couple of years because it hasn't been a priority target. But these are some of the most recent results and these results are better than what we had in our reserve and resource model. The grid pattern that you see here, that is the mining block, but what we have been able to find are values of close to half an ounce of gold per ton. Now this particular zone is very close to existing at 215, level 212 infrastructure, and we have not incorporated any of these higher grade material into our current 300,000 ounce estimate. So as we move forward during the rest of the year, we will look and see whether we can recover some of those ounces from Zone 7.

But probably, as Sean mentioned, this is an area that's probably the most exciting part. This is our property positioned along the Cadillac Bousquet belt. It has grown significantly and, as Sean mentioned, we have acquired additional properties lately, especially from Breakwater, the from Royal Standard, and also the Norman Lake property from Breakwater. But this is a blown up view, this is what we had and this is currently what we added. And as Sean mentioned, well what it does do is really reinforce our property position along the two main belts; there's the Cadillac Bousquet belt and this is the belt that the and also the LaRonde shafts happen to be on. And then there's the Cadillac-Larder Lake break and this is the break that stretches all the way from well into the camp and that also happens to be the break on which our new discovery, the happens to be located. So this is a detailed view of the , along with the most recent results.

As we mentioned this morning, we now own 100 percent of this particular deposit. It happens to be located seven miles east to LaRonde. And it is characterized with high-grade visible gold. This latest hole here has spectacular quantities of coarse, visible gold. And why we feel excited about this particular result is that it happens to be or extends the contact zone by over 800 feet.

So, we currently have -- this deposit is definitely open at depth. This particular hole, which we referred to in this morning's press release, stopped the mineralization where we had gold values up to a quarter ounce of gold per ton. But unfortunately, the drill rods got jammed in the hole and we lost the hole.

So, we're currently re-drilling that particular hole. The area is highlighted in yellow. Those are the five drills that we currently have in operation. This one will be -- is on in-field drilling. This particular site is on metallurgical testing. And these ones off to the bottom and off to the east are drills that will be tested for further depth extension and also off to the east.

Now, this particular zone currently contains 815,000 ounces of gold in the resource category and also at a cutoff of 1.5 ounces of gold per ton. Now, once again, if we can extend this particular zone by another 800 plus feet, then we can foresee that this particular figure can grow significantly.

But we've got a lot of drilling to do. The drilling program that we currently have scheduled will be completed by September of this year. So, we hope to have an intermediate resource estimate available in time for the annual meeting and try to quantify some of these latest drilling results.

And that terminates the technical update. And I'd like to turn the floor back over to Sean.

Thank you, Ebe. What I'd like to do is just before we take questions is just review -- I'd just like to review some of the next steps for LaRonde for Lapa and Goldex in terms of information flow over the next couple of months.

Obviously, at LaRonde, the key is to optimize those operations to get them running efficiently at 7,000 tons a day. We will do that.

I think when you see the performance in terms of meeting objectives for underground development and underground construction, those will underpin the deposit going forward. And opening up as you saw on the mining sequence plan, a lot of the not only more primary stokes, but as we move forward, the secondary stokes.

So, we're developing underground on several levels. Those are levels that you will be in a position to see -- for those you that are coming up on May 22nd -- to see things underground, we will get there. We've stumbled a bit, but based on what we're seeing in the major areas, things are actually going quite well.

We will also continue with an aggressive exploration program not only to the west at LaRonde, but also focused around Zone 7, where we've got a higher grade smaller zone shaping up very near infrastructure. That's important to us.

We're also working on a deep mine plan at LaRonde. We expect to have the results of those for our annual meeting on June the 19th. As for Lapa, we're looking to do an updated resource calculation for our annual meeting on June the 19th.

As you saw, we're increasing our drilling program there with an expanded budget and more drills onsite. We hope to complete metallurgical testing on that property by the end of the third quarter and we will also be working on -- as we get drill results -- on some underground scenarios for that property.

Goldex is one we're still studying. We hope to have an updated feasibility study by our annual meeting at June the 19th. So, we are quite active not only on LaRonde, but also on the belt in terms of moving these opportunities forward in addition to looking to acquire and enhance our already dominate land position on that belt.

Just to summarize before we take some questions, we are obviously disappointed with the results. We understand the issue is not really ground. The issue is not meeting objectives.

And all I can say is that I'm confident that we are still situated to demonstrate to the market that LaRonde is a large quality, low-cost mine that will generate substantial cash flows for this Company for many, many years. And we're on the way to doing that. It's just taking us a little bit longer to do.

We're working hard. We'll continue to work hard to earn the trust of our shareholders and our investors and that's a promise from us to our shareholders in the market. We have a good crew despite the setbacks. And it's not for lack of effort that we've missed some of these targets.

I'd just like to remind everyone that on May 22nd, the mine visit is still very much on. For those of you who still intend on attending onsite that haven't expressed their interest, it is filling up fast. We're saving space for, obviously, the research community and the institutional investor community first.

If there's any other space, we'll certainly entertain retail shareholders. If there's enough retail interest, we will look to do a second trip for retail investors who are interested in going up to see the mine.

On that, we'd be happy to first start taking questions from the floor and then we will take questions for those of you who are listening in on the phone and following in on the Internet.

And I'll just remind you, for questions here if you could go to the mike, it would help those who are listening in to follow the question and answer session better.

Gentlemen, Steve Butler from Nesbitt Burns. Could you summarize the reserve resource out of Zone 7, Ebe, if you have those numbers? What quantity of gold are we looking at in Zone 7?

Marc, are you here? I haven't got that off the top of my head.

That particular -- Zone 7 at LaRonde. The Zone 7's in general represent about five percent of the overall tons. In this area I believe the Zone 7's about 600,000 -- 600,000 or 700,000 tons. That in particular.

The grade would be diluted grade. If I recall correctly, it's about .17 ounces per ton. But there's byproduct as well. There's byproduct numbers in that area. That's -- off the top of my head that's about right.

So, these drill results were obviously better than reserve grade and some of them are the lower part of that zone.

OK. And then -- sorry.

The best hit that we did have were right on the 215 horizon. And we are drifting in it as I speak.

Could you summarize the goal of the rock mechanics study at LaRonde Deep?

The overall study that we did was done by a firm called . And they are a firm based from Minneapolis, Minnesota. The whole overall sequence of the mine, the mining levels, et cetera, were all simulated.

This is the same company that is currently modeling the . What we did in the early days of LaRonde -- by what I mean the early days in 1995, et cetera we had from Ottawa that actually went underground as the shaft went down.

And we took actual core samples. We measured in situ stresses. We studied the failure criteria of the rock and all of these criteria were put into the overall model. There are also other issues with respect to why this stope failed, because it shouldn't have failed.

There are other issues such as perhaps improper cable bolt installation. We did find that there was concrete missing on some of the bolts. Also, when you go into these particular mining blocks, as you know, the ore zone tends to pinch and swell. And we also happened to be exactly at one of those points where the adjacent stope was significantly thicker by that 48 stope.

And when we make a decision on how much to mine, it's all based on an basis. And so we cut back on that particular stope. However, the adjacent stope was thicker, so that was why the hanging wall sloughed and then it also carried up to the entry to the cave.

So, there are quite a few issues. Also, when we modeled it on a stope by stope basis, the support that we did put in we knew that there would be an area of potential failure. So, we actually compensated for that. And we put in longer cable bolts than what were originally called for.

So, yes, we have a total of three people in our rock mechanics department that follow the program in detail. Go underground on a daily basis. And we continually update our model. Of course, what we learned from this particular incident we have now incorporated that in our model and we're working closely with our consultants.

Sean, you indicated that you'd be increasing your exploration budget for this year. Could you just give us some sort of idea what you're at now? What part of that might be for Lapa and maybe what you've got -- a little bit of a flavor for what you have planned for Lapa for the rest of the year?

Well, yes. The only increase has really -- has been on Lapa and that is 2.5 million U.S.. We did realize under the previous arrangements with Breakwater, based on results, that our efforts were to spend the previous work commitment of 3.5 million as quickly as we could because we were getting favorable results at depth.

So, that was already in the plan earlier this year. What we've done is we've accelerated that by adding further drills. We initially started that program with three drills. Subsequently added a fourth drill and now we've recently added a fifth drill to followup.

But in terms of the overall exploration budget for the group, it's about 5 million Canadian. , by the way, that 2.5 million is included in the consolidated capital budget of 39 million we disclosed in the press release.

Yes, Barry Cooper of CIBC World Markets. Ebe, the $52.00 cost per ton for Q1. I think for the year you were expecting something in the 47 range.

How much of that 52 would be related to the ground fall problems? And how much can we expect that to improve for the rest of the year? Because your throughput wasn't that bad.

Well, if you look at it on a quarterly basis, the throughput wasn't bad. But we lost about 130,000 tons that we were supposed to get which we didn't get for the quarter. So, we're behind that amount.

And if you look at our milling costs, they're actually better than planned and the main problem was, obviously, mining where it was significantly higher. So, the main denominator -- the numerator, rather, was a lack of 130,000 tons.

And if you were to incorporate that, then the unit cost would continue to drop. For the end of the year we are forecasting a figure in the neighborhood of around 46 to 47. When we redid the figure we really redid the budget as a whole.

And not only did we do the mine plan -- and we also incorporated the latest energy costs. Fuel costs, as you're aware, have gone up significantly. Our hydro rates have gone up. And coal has gone up because of fuel oil. So, we've incorporated all of that into our revised mine plan.

So, we're saying that in the second half of the year our costs should be somewhere in the neighborhood of 46.5 to 48 depending on the month and that is in comparison to 44 to 45, which we had originally expected.

OK. So, then, for the $52.00 ...

That I would say is an alteration ...

... related to the ground fall?

I would say about probably $4.00 would be related to the whole ground issue.

And if you were to split fixed versus variable costs in that 52, what would be the rough split?

I would say the rough split would probably be around 25, which would be -- 25 to 30 percent, which would be fixed. And then the remainder would be variable.

Thanks.

.

Yes, , . A couple of questions. One on the rock mechanics. Is it that did the work on the mine design?

did. did the original stress measurements in situ, which we used in the mine design. They actually went and over cored rock and measured the stresses. And then, of course, they were the people that were selected because they had done a lot of regional work that incorporated the other mines . And we wanted to see whether our measurements were consistent.

What is the background stress measurement for the in situ stress measurement?

I believe the horizontal stress at those depths would be about 80 . And that is higher than our actual rock strength. So, when you looked at that model, all those blue areas -- those areas are essentially areas that have cracked or have failed. And therefore, these stresses have been released and it makes for easier mining conditions.

And can you give us a sense of the footprint or the dimensions for the Lapa property that gave you the 800,000 ounce resource?

The overall strike length so far, Don, that we know base don't the current drilling is 1,600 feet east/west. And vertically with the latest result at depth we're looking at 2,800 feet.

What was the actual dimension that gave the 800,000 ounces?

Sorry?

The original resource was based on what dimension, Ebe?

The original, as I mentioned was based -- the strike length really hasn't changed. So, it'd be about 1,500 feet. And I think vertically we'd be looking at about 2,000 feet down to the deepest drill hole.

And typical thickness?

The thickness, as you're aware, would be highly variable. But I would think it'd be about 10 to 12 feet with the exception of the deepest hole.

And any sense of whether that's getting wider? Is there enough ...

Well, I think right now there's quite an anomaly. You have a drill hole 800 feet below that has a thickness of 12 feet. But the overall mineralized zone with gold values in it is anywhere close to 70 to 75 feet.

So, we don't know adjacent whether there could be more or definitely the mineralization is getting thicker. But we have to do a lot more drilling around that to see whether it'll trend to great thicknesses or whether it will remain at 10 to 15 feet.

Thank you.

Yes, a couple of quick questions. Just the grade for the quarter -- the .1. How much of that reflects stock piled material processed, if any? And how much of it reflects the dilution from the 30,000 tons?

I can think off the top of my head stockpiled material, , would probably be in the neighborhood of 30 to 50,000 tons. That isn't really a significant amount. And also, what we have done, obviously, if you're behind on gold, we stockpile zinc.

And we try to put the gold rich material through first. So, if you were treating stockpiled material, that would typically be 20 more zinc and that would have an average grade of about typically .01 to .02 and anywhere between five to eight percent zinc and a couple ounces of silver.

Got you. OK. The increased capital budget that we've seen. How much of it reflects putting in 209 or just capitalizing for remedial work for this event?

Actually, remedial work will be absolved by operating costs where we have rehabilitation. And there really isn't a lot. Maybe there'd be a small premium because the voids have to be backfilled anyways.

The draw points have to be driven anyways because it's part of the mining sequence. I think if there's premium to pay it's that we're working 24 hours a day, seven days a week to be able to resolve this as quickly as possible.

But there really isn't the premium. I think from the mining cost point of view, that material, that cave, obviously, the fragmentation isn't excellent. So, there's a lot of secondary blasting. There's a lot of problems extracting it. But that is an additional cost that has an impact on our unit mining costs for the month of March.

And also, of course, the total amount of tons that we extract from the stope. So, I would say in terms of the capital there's very little. But if it did hit us on the operating side, which Barry referred to.

OK. And then two quick ones for David. How much is left of the El Coco material to process in the last three quarters? And then, what's the tax rate we should use for this year and going forward?

We budgeted about 380,000 tons of material out of El Coco this year. And I'd say about half of that was processed in the first quarter. So, you're going to see the rate of the El Coco royalty on a per ounce basis start to decline fairly significantly in the last three quarters.

So, what's the residual grade for that El Coco material?

I think it's about .18 -- Ebe?

Yes, .15 to .18.

OK. And the tax rate?

And the tax rate -- the deferred tax rate would be approximately 30 percent this year.

OK. And next year?

I would say that that would probably be the long term rate you can use from a deferred -- we're not paying cash ...

No, I understand.

... other than large corporations tax, which is declining over the next few years.

OK ...

... percent, which is fine.

Thanks very much.

If there's no other questions here in the room, then we can, Operator, take questions that you have queued up on the line.

Thank you. One moment please. Ladies and gentlemen, if there are any questions on the phone lines, please press star followed by the one on your touchtone phone. Please ensure you lift the handset before pressing the keys. The first question comes from Kerry Smith, Haywood Securities.

Good afternoon everyone. My question was on just in terms of the sulfite content of the ore body. Is it fairly low? Is it primarily pyrite? Can you just give me a bit better sense to what the mineralogy is?

The overall mineralogy is about two to three percent sulfites and the breakdown would be about, I guess, of that two-thirds of it would be arsenal pyrite along with excessive repyrite. We have here who is in charge of the project. , if you want to correct me on that?

And minor amounts of as well.

OK. And you don't see any change in the mineralogy of the sulfite content as you go deeper in it or anything?

Well, we have seen a change with decreasing arsenal pyrite and increasing add depth. However, that was the trend we had before the deepest drill hole and with the deepest drill hole, like arsenal pyrite has come back in the more traditional two, three percent range.

So, whether there is a trend that depth, we don't know for certain yet.

OK. And the second question, Ebe, if I could on mining in zone seven. You suggested you may mine some material out of that zone this year. When would that be, like very late in the year?

That would be fairly late in the year. We're looking at the fourth quarter and probably November and December. It all depends on how the pyramid sequence gets developed. It becomes on. If we're ahead of development or continue to be, then we'll be able to use those crews and just - we're about 100 meters away from zone seven.

And we'd be able to come across to zone seven. And so it's all conditional on making sure that the main zone, the main bread and butter goes as planned. And if it does go as planned, or we keep getting that same development performance, then we will then go into zone seven and try and get a couple of blocks.

OK. So you - maybe 100,00 tons you would mind at most then?

We're thinking of probably in the range of 20 to 50,000 tons.

OK. OK.

Because they are narrow. They are massive sulfite, but with 10 feet to 15 feet thicknesses it's pretty difficult to build tonnage quickly.

OK. OK. Thanks very much.

The next question comes from David Mallalieu, Scotia Capital. Please go ahead.

Thank you very much. Question first for Ebe. Question with regards to the dilution at the lower levels and the upper levels. Are - have you perceiving any changes? I mean, it's very early days, but with regards to dilution and the lower levels versus the upper?

I would say yes, David, compared to the upper levels. But why, we are not exactly certain. I would say dilution at the lower levels is probably averaging out by five percent more. But that is obviously skewed by an incident that just happened.

So we haven't mined a lot of scopes. On level 194 we are getting 10 to 12 percent dilution. On the lower levels with five scopes mined, we are getting in certain cases anywhere between 25 to 30 percent and then the adjacent scope will average below five percent.

So there is a lot of variability and we haven't mined enough scope. But to say the average figure compared to the upper part, yes, it is higher.

What are you building into your calculations for mine sequencing?

When we looked at - when we looked at the overall reserve, we used 10 percent and in our revised mine plan we've incorporated 15 percent. But, however, we think we can get it back down to 10 percent by changing a few of our things in our mining procedure.

OK. And what was the impact if it doubles? If it did go up to, let's say, 25, 30 percent with regards to mining costs?

Well, then as far as the overall mining costs per ton there would be very little impact. But then we just wouldn't get the ounces. And on a cost per ounce the impact would be - could be significant.

All right.

... like for mining ounces, not tons.

Great. Question with regards to the engineering. With regards - you indicated you've got three rock engineers dealing with the situation now. Is there ...

We have more than three rock mechanic engineers. We have other mine planners, chief engineer, et cetera. We have engineers in the mining department, the mine superintendent, the mine captains. We have blasting technicians. I mean, there's a lot more than just three rock mechanic engineers.

OK. I was just wondering, is there an independent audit of everything, which is going on in an annual basis now?

Yes there is. Our tasker comes by with periodic reviews, updates their models. They have an underground tour. This is the gentleman that was based in and he comes by and almost, I believe, it's a quarterly basis. And any areas that we have problems with he will go and give us an independent opinion.

Also we - just the normal operating procedures, we have a ground control book that is in the control room. So, any incident that is observed by any employer, be it mine or supervisor, mine superintendent, engineer, gets logged and it's open for anyone to see. So also on the mine trip, to be able to see the sequence of events, anyone that decides to come up is more than welcome to look at the log.

OK.

Actually, I'm surprised Ebe forgot this, but since 1999 we've undergone four exhaustive audits by independent engineers employed by the banks and they still review our work on an annual basis.

OK. Thank you very much.

Ebe's trying to forget about that. They spend too much time bugging him.

I believe so. And my last question then would be for David. With regards to just how the cash costs are done. Very academic question, why is it or what's the process whereby the PCRC's are not incorporated within the cash cost per ounce?

They are incorporated in the cash cost per ounce. They're netted against the by-product revenues.

OK. So that number of $207 for byproduct revenues incorporated the PCRC's in there?

Yes. That would be net charges.

OK. I'll have to get back to you on that one then. Thanks.

Next question comes from John Bridges, J.P. Morgan. Please go ahead.

Hi. Just following on from Dave's question. You were saying that you were going high dilution at the lower levels, I think. Wouldn't you expect that because of higher stress?

We are getting higher dilution because I think the main reason would be obviously stresses have something to do with it, but the main reason would be productivity. These, as I mentioned, are the largest scopes that we currently have. They are 35 to 45,000 tons.

And with the productivities that we have been getting because of materials handling problems, we can only extract them on a rate of about 1,000 to 1,500 tons per day. So if you divide that into, say, a 30,000 ton mining block it would take us in excess of 30 days to be able to extract the ore.

And under normal operating spectrum when we should have productivities between two and 3,000 tons per day. In that amount of time on which the scope is empty and whereupon the stresses can act on the void, increases significantly. So the key for us, and it's always been a key factor in this mining method, is mine it quickly, extract it quickly and fill it quickly.

And if we don't do any one of those three items, then we have problems. And this is exactly what occurred. That particular scope, the adjacent scope was one of our first scopes that we mined and that scope was open for almost a period of two months while we had the problems that we did last fall.

Are you looking at any higher capacity loader type solutions?

Well, I think the main solution is our underground rock handling system. That includes the crusher and conveyer. That would cut our tramming time. Currently all of our tonnage is hauled directly to the station and that is a distance to the shaft, and matters of distance of over 3,000 feet. So once the ore pass system and the crushing system gets completed, that trend gets cut down to about 1,500 feet or less.

And we've also been developing a couple of new ore pass systems. So that alone will double the cycle or cut the cycle time in half and increase the productivity. We have been able to reduce contract workers. And if you look at the chart of the amount of ore that has come through the system from last fall, there has been a steady increase.

So there already have been major productivity gains. But the main gain will be when we can actually handle that ore through the crushing system. One of the main problems is that this ore tends to be large and if we don't have a crushing system, it goes through a rock breaker and a grisly system, which has a mesh size of about 16 by 16.

So a lot of these things are even like there's a traffic jam in front of the rock breaker. Which would not occur if we had a crusher. So this will be resolved by next month.

OK. Great. That's helpful. Also, when did you find out during the quarter that you had a problem with this one scope?

Can you repeat that please?

At what stage, what date in the quarter did you find out that you had a problem with scope run away?

We had the first indications of a runaway scope during the first week or to the second week of February. So what we did, we let the area stabilize and we were confident enough that it was stable so that we actually resumed production in early March.

When we redid the forecast for March, our figures for month, for March rather, were close to 28 to 30,000 ounces. And what we did not realize is that because we couldn't see the mining block about the hanging wall had caved significantly. So number one, we didn't get the tons that we wanted out of that scope. Number two, what tons we did get out were significantly lower in grade.

And when we redid the forecast, we thought the first overall revision for the quarter and for the year, we got that on March 20.

OK. OK. Thanks a lot.

Ladies and gentlemen, if there are any additional questions on the phone lines, please press star one. The next question comes from Barry Allan, Research Capital. Please go ahead.

Ebe, I'm still wrestling a little bit understanding the reason for the shortfall in production in the quarter. When you just said you did not get a130,000 tons, were you referring to you had a shortfall on accessing 130,000 tons? Or were you talking about something else?

I don't quite understand your question, Barry.

In ...

... in under 30,000 tons shortfall was over the quarter. But the main shortfall was from the lower levels. And when we looked we had planned the budget originally we were going to increase the tonnage significantly more each month. But that biggest increase would have been in the month of March.

I see. And when you were answering Barry's question with respect to - you had a - you didn't get the 130,000 tons that you had expected. What were you specifically referring to?

The overall quarterly tonnage that I wanted to process through the mill.

I see, was just lower than what you had expected. In addition to not getting the tonnage and the load rate at depth.

We didn't get the tons and most of those tons did not come from the lower levels.

Right. OK. OK.

But in any situation like that, we always adjust. If you went - go back over our track record over 15 years and compare the actual mine plan with the planned mine plan, mining is very dynamic. And there will always be changes, except this time we had to go back up to our silver zone and also into our stockpile.

No. I understood. I have a better understanding. Thanks Ebe.

Gentlemen, there are no further questions on the phone line. Please continue.

Well, we'd just like to wrap it up here and certainly thank those that took the time to listen in both over the Internet and on the phone and certainly for those that came, walked, over here to this location.

Again, thanks for your attention and remind all of you that on May 22 we encourage you to come up and look at this mine. You're going to spend, for those of you that come, three and half to four hour's underground. There's lots to see. We've - since the last time most of you were up there, would have been about a year ago. It's amazing.

I think at that point you would have just stepped off the bottom of the shaft and maybe walked out a few feet. Here, there are several kilometers of development. We're on many levels and you can just see the amount of progress even though it hasn't been unfortunately reflected in our quarterly ounce numbers.

But that groundwork is there. It's in place so that we can meet our targets beginning in the second half. Again, thank you very much.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating and please disconnect your lines.