Agnico Eagle Mines Ltd (AEM) 2003 Q2 法說會逐字稿

Good morning, Ladies and Gentlemen. Thank you for standing by. Welcome to the Agnico-Eagle Mines Second Quarter 2003 results. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulty hearing the conference, please press "*" followed by 0 for operator assistance at any time. I would like to remind everyone that this conference call is being recorded, and we'll now turn the conference over to Mr. Sean Boyd, President and CEO. Please go ahead.

Thank you. Good morning, everyone. Welcome to our 2003 Second Quarter Conference Call. With us today from our team is Ebe Scherkus, Dave Garofalo, Barry Landen, Alain Blackburn, Don Allan and Marc Legault. Please be advised on the forward-looking Safe Harbor statement that this presentation contains certain forward looking statements that involve a number of risks and uncertainties. There can be no assurance and such statements will prove to be accurate.

The two major areas of discussion today will obviously be the second quarter results, which will include a review of the underground operations and the mining conditions at LaRonde and we'll provide you with an update of the regional exploration and development strategy, including a discussion of our recent property acquisition in the vicinity of the LaRonde mine.

The highlights essentially for the quarter is the acquisition of Erics property interest along with cad BUSKE belt which includes the BUSKE property that ties onto LaRonde ground to the west and to the south, the deep drilling of LaRonde in the quarter. The previously announced hole of Point 29 over 65 feet in the heart of the resource tends to confirm better grades and thicker mineralization as we go deeper and onto the west. And the Lapa property as announced in the quarter seven miles east of LaRonde with a gold resource that exceeds a million ounces.

Lets start with the operating results for the second quarter. With gold production of 60,000 ounces, that's still obviously not at satisfactory levels for us. Unit costs to produce an ounce of gold before royalties of $208 dollars an ounce were higher than anticipated due to lower gold production and the rising Canadian dollar versus U.S. dollar, which Canadian based companies are faced with these days. As a result of this, we recorded a net loss in the quarter of $3.8 million or 5 cents per share, which clearly is not satisfactory and we need to do better. We will do better, and despite these poor operating results in the first half, we do continue to make good progress in meeting both our development and construction objectives, which we'll talk about, and that's obviously the type of groundwork that will open up the lower portion of the ORE body which will lead to better performance and operating results as we move into the second half.

On an operating cost per ton basis, we average $48 Canadian in the second quarter, which compares to the $52 in the same quarter last year. We processed over 7100 tons of ORE per day in the second quarter. Of the total, 43% came from the lower half of the mine which met the revised targets.

As we talked about earlier, the development objectives exceeded plan during the quarter. All of the mining blocks that are scheduled to be extracted in the third quarter are already developed. We can talk in the question and answer session about that. In July, a couple of the mining blocks on the leading edge of the pyramid we did experience some difficulties in drilling those. It took about twice as long as expected. We brought in a couple of extra drilling units and expanded our fleet. We are now blasting those blocks and extracting the ore from the blocks.

The mine dilution in the second quarter on the lower levels has met expectations, particularly on the narrower mining blocks on the 12 meter wide blocks, the dilution has been about 5%. On the crushing and loading side the infrastructure, which was commissioned in June is operating well. That has significantly improved the ore flow in the lower part of the mine.

As far as our regional growth strategy, we are moving forward with this strategy, which is obviously centered on LaRonde. We are in the process now of separating the operating and project development functions in the region. This will allow our project development team to focus on moving our regional development opportunities, LaRonde, to Lapa and Goldex moving them forward without the added responsibilities of worrying about the daily operations of LaRonde.

This is a first for the company as we now split the operating function and the development and building function of the company. This will involve moving different individuals into different responsibilities and we're in the process of doing that now.

In our view, the development of Lapa, LaRonde 2 and Goldex given its low risk nature, the tax effective benefits of that type of strategy, the ability to combine overheads with LaRonde, we still are very positive on the potential of this strategy to add significant value to our company and we're focused on doing that. In particular on Lapa, we summarized the status of Lapa in June. As we announced we closed the transaction that allowed us to acquire 100% of Lapa, which is as we said, seven miles from LaRonde. The purchase price of $9 million which included a $1 million advance royalty amounts to about $9 per ounce of resource, based on the updated resource of 1 million ounces at Lapa, which is essentially four million tons at a cut grade of a quarter ounce per ton. We continue to aggressively drill this property after a short summer break in July. There were five drills going. The budget remains at $2.5 million U.S. in 2003. In recent drill results have extended the deposit at depth. We continue with the metallurgical testing, which is expected to be completed by the end of the third quarter.

On the Lapa side, we also closed on an additional property acquisition called CHIBEK south, which is a long strike of Lapa and CHIBEK's north so it extends the coverage of the southern gold bearing trend. We expect to complete a pre-feasibility study on Lapa in the fourth quarter. On Goldex, we are going to undertake a third party review and optimization of the June '03 feasibility study. The new mine development team will be focused on incorporating synergies with LaRonde and also focused on reducing construction capital at Goldex.

On LaRonde-2, the major focus of that team will be on the feasibility study, with an expected completion date of the third quarter of 2004. A key component of that study will obviously be drilling results at depth. So, we're currently reviewing the drilling program, particularly in light of the recent acquisition of the BUSKE property. We're looking to accelerate and expand the drilling program as the southern and western flank of the LaRonde property are now open with the acquisition.

Like to talk about the acquisition of the bear properties now. The purchase price was Canadian $7 million, $5 million of that cash. $2 million Canadian in Agnico-Eagle shares. We acquired the BUSKE property, including exploration ground west and south of LaRonde. We also acquired 50% of the Bruce property that we did not already own. We also acquired a large claim block immediately west of cam by orange DORION mine extending that trend. We purchased the underground and surface mining equipment on the BUSKE property some of which can be used at LaRonde and possibly we can use some along the belt on some of our other regional development projects. As far as the implications for exploration, particularly at LaRonde, the primary focus now is at LaRonde is to transfer resource to reserves at depth and outlying the potential for higher grade core of gold mineralization. That would have obvious significance for the LaRonde-2 program with higher grades. We're excited about the recent hole that was announced in June where we had 0.29 ounces of gold per ton over 65 feet in the heart of the deposit.

So, we will be aggressively moving off to the west to look for that continued trend of better gold grades and thicker mineralization and use that information and incorporate into the study of LaRonde-2. In terms of actual specifics related to the Bousquet acquisition and the implication for exploration, one of the other things that we need to do at LaRonde is the eastern limit of the 20 north zone has been defined, but the western limit has not been defined at depth. It's wide open. There's no geological region why the mineralization of 20-North cannot extend further than the present outline as we move to the west and as we continue with our level 215 drilling program.

And what we can do now is the exploration can really follow the geology and follow the structure without being restricted by property boundaries. Currently, the current resource outline at LaRonde is about 500 or so feet from the Bousquet property. The acquisition of Berrick ground also opens up exploration to the south of LaRonde and we have ideas and geological theories that obviously need to be tested, so we're currently reviewing all of our exploration plans at LaRonde to incorporate the acquisition of this ground and incorporate all of the data and history of those properties into our database so we can determine the most effective way to proceed from an exploration standpoint.

On the outlook for the rest of the year for full year, our 2003 production guidance remains unchanged at 300,000 ounces. Our previous cost per ounce guidance for the full year was $180 per ounce. We were using an exchange rate of 1.47 U.S./Canadian. We were using byproduct revenue assumptions of $4.60 silver, 75 cents copper and 36 cents per pound zinc. If we leave the byproduct assumptions unchanged and the assumptions appear conservative based on current silver, copper and zinc prices, but if we take a much more conservative view on the exchange rate and use an exchange rate of 1.37. It's currently 1.40, but if we use a 1.37, we would get a full year cash cost of $200 an ounce. What that says for the second half is about $185,000 ounces of production at a cash cost of $180 per ounce. We anticipate daily throughput of 7900 tons a day at an average grade of 0.14 and we look for operating costs on a per ton basis slightly lower than what we posted in the first half. We're looking for costs per ton of $46 a ton Canadian.

In closing before we take questions, we are obviously not happy with the first half results. The bottom line is we have to deliver and demonstrate that LaRonde can live up to its potential. But as we said, all know not apparent in these result, we have and continue to make good progress in recent months with respect to development and construction and we feel that this bodes well for certainly the second half of '03 and going forward with this mine, so that we can post the results that we have expected to get from this mine. What I'd like to do is turn the call over for questions now. We'd like to apologize for the early start time. We made a change in the start time to insure that we had all of our team available for the call. We would certainly extend the apologies to our west coast audience and west coast shareholders because we know this makes it awfully early for them, but we thought its would more important to make sure that we had everybody available on the call to answer any questions that you have. So, operator, I'd like to turn the call over to you to set it up for questions.

Thank you. One moment, please. Ladies and Gentlemen, we will now conduct the question and answer session. If you have a question, please press the "*" followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. Your questions will be pooled in the order they are received. If would you like to decline from the polling process, press "*" followed by 2. Please insure that you lift the handset if you are using a speakerphone before press anything keys. One moment, please, for the first question.

The first question comes from Victor Flores from HSBC. Please go ahead.

Thank you. Good morning.

Good morning.

A clarification point on the press release. It says that the purchase and sale agreement also contemplates the purchase of certain of Barrick's regional exploration properties. Are those properties included in this deal, or is this something that will be negotiated later?

No. They're included in this deal.

This is the whole package.

This is the package, which extends from west of DOYENNE through BUSKE and also it includes the 50% of Bruce, which is east of LaRonde.

So, it's the whole shooting match?

Yeah they have some that did not interest us. So, these are the ones that had specific interest to us, and we are not anticipating asking for, negotiating for any of their additional properties that they have kept.

Okay. Second question, in terms of some of the reclamation obligations that you might have to take or that you are taking on, can you put a number on those for us?

Yes. Yes, we can. As you know, this property did not have a processing facility on it. The estimated reclamation obligations, which are part of a filed plan with the Quebec government are about $2 million to $3 million Canadian.

Pretty minimal.

Yeah.

Great. Thank you.

Thank you.

Your next question comes from the line of George Topping from Sprott Securities, Inc. Please go ahead.

Good morning, everyone.

George.

Sean or Ebe, could you give us an idea of how production --could you take us through July's production results and then give us an idea of how you're expecting the next two quarters to break out?

Well, just to give you just a quick overview, Sean mentioned our crusher works. We have had the productivity from the lower levels as expected. Our development is ahead of plan. We have had little lost time due to heat this summer compared to last summer. Going to 12 meters stops, we have been able to control our dilution significantly. We have had our pace back fill system in. The big question now is that the stops for the third quarter are ready, unlike last year when we were behind the eight ball. So, all of the mining blocks that we currently have to mine to make the targets in the third quarter are ready to start production drilling. As Sean mentioned, we have had some issues with production drilling, a combination of equipment failures, and we're also drilling on some of the mining blocks right on the leading edges of the eastern edge and western edge of the pyramid, as we re-established that pyramid sequence. So, that's where our main challenge will be right now, George, if we are able to drill and restore some of our productivity, then all of those mining blocks will be able to come out quite easily during the third quarter and even the fourth quarter. As we move forward because we definitely know all of the infrastructure is functional and meets our expectations.

Okay. So, for the back half of the year, we need 175,000 ounces or so at cash costs of maybe $165. Could you break that into the two quarters?

Well, I would say the two quarters are -- it's obviously back-ended because most of the production will come or a large portion of it will come in the fourth quarter. That is namely due because we will start mining secondary stops in the fourth quarter and very little secondary stops in the third quarter. So, there will be a continual camp-up of increasing production from the lower levels as more mining blocks become available. So, I would say that breakdown would probably be something like 55, 60% in the fourth quarter, of 45%, 40% in the third quarter.

All right. And on -- in July, could you tell us how production is going there?

I would say July because of our drilling problems, we have had some issues, and we'll be a bit short, but I have the revised forecast in front of me, and some of the blocks that we didn't get in July, we will be getting in September. In August, rather.

Okay. Lastly, maybe one for David. Does the cash cost forecast for the year, if you have -- if you put in the current base metal prices and the current Canadian dollar.

It would probably be below $200 sort of 195-ish, I would guess.

Okay. Good. Thank you.

Your next question comes from the line of Brian Christie from Canaccord Capital. Please go ahead.

Good morning, guys. Sean, any thoughts on the exploration budget moving ahead? You obviously have a good land package here to work with. Just are you going to speed things up in the exploration front.

That's the expectation. What we're going to do is sit down over the next four weeks or so as we restructure some of the personnel and look at the database. As we said, in the call, there's obviously -- we have some theories, certainly Alain Blackburn who worked for LAC for seven years and has been with us for 15 years and spent a lot of time at LaRonde and is working Lapa has thoughts and ideas that we need to follow up. I think our sense is we'll President Bush the drift over to the property boundary, but we have already started that ramp up and exploration. We have two drills on the level 215 drift now probing the resource at depth. So, we're going to look at how we can speed that process up. In terms of quantum per numbers, we don't really have a new revised number yet, but you could see another sort of million-and-a-half dollars spent on a yearly basis.

Great. Thanks.

Your next question comes from Don McLean (ph) from Paradigm Capital. Please go ahead.

Good morning Guys. As you said, Sean, when you look at the cost per ounce, you really don't get the sense of how much your cost per ton is improved. We seem to run into problems figuring out what was happening to the byproduct revenue. Can you explain or David, maybe can you explain how the by byproduct revenue is recognized in terms of timing. If you go back to the first principles and run the numbers based on pounds produced, the prices received, and at least the quarterly price, you wouldn't have had a large a discrepancy between the revenues as you had in the first and second quarter of this year? First quarter you had about I think $11.5 million of byproduct revenue. In the second quarter, you had about 9.5, yet it doesn't look like it's that big.

Well, some of the byproduct revenue is affected by foreign exchange gains in the first quarter. So, the first quarter is higher by a couple of million dollars because of the FX gains we recognized. We had a fairly large foreign exchange head position that we liquidated in the first quarter we recognized that as part of the byproduct revenues and credits in terms of the cash cost calculation. So, that $2 million was non-recurring as we cashed in the hedges and recognized the gain. Just because of the time I thought that the Canadian dollars was toppish. It was in the 133 range. We decided to crystalize the values of the current year hedge hedges. That was the difference between the first quarter and second quarter.

That was a big help. The second question was just, Ebe, if could you carry on and talk more about the dilution. Sean touched on it, but the dilution that you are experiencing in the various stops in the lower levels.

Don, as you were aware, when you last came up on may 22nd, there was the dilution from an east-west point as some of the ore invade into the secondary stops, but more critically, we also had dilution on the weak hanging wall. That was probably a function of it took so long to mine out some of these stops. So, as we mentioned during your visit, the analysts' visit and with the work that we had done with the Itaska (ph) by changing the development of these stops and going to 12 meter, our anticipation was that these stops would dilute to 50 meters any ways. We modified our blasting and as a result of that, the last three stops that we mined in the 215, 209 horizon came out very clean. Some came out with zero dilution and the highest one that we had of the three 12 meter stops was 8% for an overall average of 5%. We did not even get the additional three meters that we thought we would get. So, we will be able to get that with the secondary stops. So, back to George Topping's original question, we were also pleasantly surprised that some of the ore actually stayed in place. So, on a long term basis, we now know that the adjustment in this mining sequence and mining method works, and that we are significantly reducing our dilution, so that would have a positive impact going forward.

Very good. Yeah. At 48. That's a nice step forward for you.

In addition, one of our better results, we blasted a stop within 50 feet of the caved out area, so further indication that things are getting back to order.

Very good. And lastly, Ebe, could you give us a sense of the dimensions of Lapa outline to date now?

The overall Lapa outline?

Yes, please.

Maybe Lane alane is better versed with the most recent drill results. Alain?

Yeah. When you see the press release, we released a new hole. One hole to the west proved the thickness of 40 feet. We proved the west limit at this elevation. One hole, the hole 25 proved extension again with the hole issue. Currently, we continue to drill with five rigs until the end of this year. We won't [ Inaudible ]. We want to prove. We want to change the category of the resource. This hole will continue with metallurgical tests. The length of the whole body is [Inaudible ] The land is 500 meters and [ Inaudible ] is 800 meters.

A typical width?

Between 10 feet to 99 feet. The east part of the [ Inaudible ] Is so to 12 feet. The west part of [ Inaudible ] Is 10 feet to 49 feet.

Thank you thank you.

Your next question comes from Mike Pallonia (ph) from Merrill Lynch. Please go ahead.

That's a new version. I have a couple of questions. Yes. Keep everybody busy. It seems to me that the BUSKE deal hasn't really been touched on. The shaft there, how deep is that shaft? I forgot, Sean, and could you use that for the deep expansion program?

It's 4400 feet, Mike. I think with respect to the expansion program, no. It would not be part of an expansion. We have said that before because it's too far away from the ore body and also from a ventilation point of view, the diameter is too small. So, that would then require an additional event race. If you look at the capital cost of the event race, plus deepening the BUSKE shaft and changing the surface structure, it becomes more cost effective to have a continuous, new larger shaft to be able to go down to depth.

I guess this is more for the land rather than shaft?

I would say that the only way that the shaft could be used is if there was an eventual new discovery on the BUSKE property itself. And down to say depths of 7,000 feet because it is a clone of the PENNA shaft. So, that could be possible, but until that happens, there's a lot of work to be done.

Okay. I guess Sean mentioned the operating numbers for the second half of the year, he spoke so fast, even faster than me, I couldn't catch them. Maybe you could rehash those, please.

It was $46 a ton for the operating costs per ton in the second half. About 185,000 ounces. 7900 tons a day at a grade of .14.

I was just doing quick math, does that equate to $140 cash costs, Dave?

It's closer to 180.

For the second half of the year.

For the second half, it would be for the full year 200 weighted average.

180 cash costs?

Roughly.

George mentioned 165 earlier. George Topping.

I think that might have been George's estimate, but I -- my estimate is about 180. Don't forget that production is weighted to the back end. So, that 180 carries more weight than the 250 that we realized 250 that we realized in the first fix months.

Okay. I guess just one other question, back to eve, with the strong fourth quarter, you're saying will that translate in 2004 and keep carrying on?

That's right.

Okay. Thank you.

Your next question comes from the line of Barry Cooper from CIBC. Please go ahead.

Just a bit of a follow up there. You mentioned grades in the second half, (inaudible). What would they be in Q3 versus Q4?

Sorry, I didn't catch all of that, Barry, please.

Ebe, you mentioned the grades for the second half of the year, .14. What would they be Q3 versus Q4?

I would say they probably would be around 1-5, Q4, 1-2 Q3, roughly. Like I mentioned, to get the split of 65, 60-40.

Okay. Good enough.

In terms of ounces.

Yeah. Okay. Good enough. That clarifies that. Dave, I was wondering could you could kind of give us a rundown on the NPI from Al Coco and when that looks like it will be done in terms of, you know, we should take that out of the equation.

It's -- in the second half of the year, we're probably looking at $2.5 million to $3 million is going to hit our bottom line. It's going to equate to rough by 15 bucks an ounce. I would say that's it this year.

From a reserve point of view, that will be depleted in the fourth quarter. That's hardly any tons left on 20 south Al Coco and the grades are declining.

Certainly after this year, we don't need to contend with it. Looking at the $50 per ounce overall contribution of the NPI, what was the split between Al Coco production and other production for say the first half of the year, roughly?

I would say that the first half production from 20 north and our part of 20 south, that split would probably be 65-35, Barry, but I would go over the production figures and give you a more accurate figure, but that would be roughly that.

65 your grounds and 35.

Maybe even higher, 70/30 in favor of our ground.

I guess that would suggest that your ground -- there's very little profits there, only because the $50 an ounce is spread over all of your production. Suggesting that the costs of Al Coco are significantly lower than anywhere else?

I would also say that AlCoco benefits from the economies of scale of 20 north to get those unit costs, because if we were only going to mine AlCoco, the unit mining cost would be significantly higher.

Sure. Agreed. Maybe you should charge (inaudible) for that company.

We tried. Didn't work.

Okay. Thanks. That's all I had.

Your next question comes from Mark Smith from Dundee's Securities. Please go ahead.

Yeah. Hi. A couple of quick questions. I wondered if you could give me a breakdown for the base metal production for the rest of the year. We're looking at -

We're looking at roughly $35 million ---35 million pounds of zinc and 18 million pounds of comer and another 2 million ounces of silver.

Okay. And maybe, Ebe, the grades we're looking at there, too?

Ebe, did you want me to -

If you have them in front of you?

I have a rough estimate. Silver you're looking roughly two ounces a time for the second half. Zinc you're looking more like 2% and copper, you're looking at .6.

In between .6 and .7.

Okay. That's great. Then the only other question I have is just -- is there any carrying costs that you're picking up with keeping the BUSKE shaft in water?

Yes, there are carrying costs mark, so those costs would be in the neighborhood we're estimating them at about 750,000 to a million Canadian. So, the reason we will accelerate the compilation, we would like to know what the exploration potential of the property is, so if there is exploration costs, then we will maintain some of those car rig costs. If there isn't significant exploration potential or at least potential that we could use the BUSKE infrastructure, then we will proceed with (inaudible) file exploration plan.

What do you think that the value is for you guys, the stock that's in the mine that you could use. Is there much that you can use underground?

Well, just to give you a feel we knew that this deal was imminent, and with some of the drilling problems, two of their production drills are already in operation underground at LaRonde.

Good.

And there are also other pieces of the equipment like they're a very modern, efficient mine as well. There's a lot of equipment that is compatible with us.

They have jumbos and stops.

They have jumbos and eight yard scoop trams, scissor lifts and service tractor and another interesting feature. There's a lot of inventory like daily operating inventory, parts for mining equipment, consumables, pipe, fitting, et cetera, that we hope to use at LaRonde.

So, how much of the $7 million that you spent can we sart of back out for actually stuff that you got?

David, what was -- I would say a couple of million or so Canadian.

$2 million Canadian?

Give or take. Maybe a bit above that.

That's savings you to. You realize that in the next year-and-a-half or so, right?

Yes.

Over time.

Yes.

In Ebe also maybe you didn't mention there's a cement plant we may use.

There is a surface cement plant, like ours is not automated. We are looking at integrating that into our operations as well so increasing our efficiencies of backfill. There's things like that that we could use.

Is that plant mobile at all? Could you get it down to Lapa?

I think it could be. However, I think it would be more useful at LaRonde, because we join together at LaRonde on number one shaft and BUSKE two, so it would be very easy to increase that network into the PENNA shaft.

All right. That sounds good, guys. That's great acquisition. Thanks very much.

Thank you.

Your next question comes from John Bridges from J.P. Morgan, please go ahead.

Good morning, everybody.

Good morning.

Sorry, I may have missed it, but the cost of reclamation at (inaudible) and-a that you are committed to now.

$2 million to $3 million Canadian.

What do your mechanics' people say about the drilling problems that you had?

They were expected, because we -- they were expected, and as a result we have -- we have increased our drilling production complete. And also in passing, we will be posting the most recent version of ITASKA's report on our web. You will be able to see that is expected about tu might be a medium to short term thing. We will always expect to have some problems along the leading edges, of the lead stops as we mine. So, we'll -- we expect that. But now we will be entering the secondary phase where we will be extracting secondaries within the pyramid. Our first stop is scheduled for next month. It will be interesting to see how that develops.

Okay. And then can you sort of give us some quantification as to the rate or the time taken to take the rock out and to fit in with this improvement in dilution.

Well, I would say right now, we're twice as efficient, if not more, or last quarter and last year, we had trouble getting the ore out to the shaft, but on the basis of the last month of July and early June, we are getting the productivities that we had expected, so, on level 215, et cetera, we are getting in excess of 3,000 to almost 4,000 tons a day. We are capable of doing that. We have done it. Also another key feature is the ore pass system all the way from the second mining area, 194 all the day down to the crusher is now commissioned as well. All of the ore above 194 is no longer being trucked to the shaft as well. That's going straight down to the crusher as well. And we have noted significant productivity gains up on 194. So, basically, the system works and can meet our tonnage requirements.

So, broadly, how many weeks do you have to keep the stop open for -

I would say right now, we are probably under a week-and-a-half John, very little compared to previously.

Okay.

Okay. Excellent. Good luck, guys.

Also the 12 meter stops, so they're smaller, so, we're a emptying them out too quickly.

Okay. Thanks a lot.

You have a follow-up question from George Topping from Sprott Securities. Please go ahead.

Hello again. Could you update me on the current position on the hedge book for the Canadian currency out of 2004. And on any other hedges you might have on silver?

Yeah. We don't have any other hedges on any other products other than foreign exchange.

Okay.

And the gold puts are still there that were there at the beginning of the year. That hasn't changed. In terms of the FX position we crystallized the gains in the current year. We have nothing left in the current year. I think the numbers that I gave previously, which was roughly 15% to 20% of the exposure in '03 -- sorry, '04, '05, and '06, we protected anywhere from 150 to 159 in those years. The positions are laid out in the annual report in those years. So, I -- I haven't changed other than I have taken out some of the lower value puts there, and I'm sorry, I don't have it in front of me, but if you want to call me back later. I may have gone through this with you previously, George. It hasn't changed from the last time we talked.

On cap ex, can you give us the back half for cap ex and 2004?

Yeah. For 2003 or 2004?

Cap ex of 2003. Back half of 2003.

2003 we're looking at the back half of cap ex to be approximately $20 million, I think. Let me just pull up the schedule here. It's -- yeah, roughly $20 million U.S. in terms of cap ex in the second half. And in terms of next year, we're looking to start of sustaining level, which would be in the $10 million or so range.

Good. Thank you.

Your next question comes from David Mallalieu from Scotia Capital.

Good morning. Regarding the drilling problems that you mentioned, I know it's going to be posted on the website, can you qualitatively say what the drilling problem is.

The drilling problem is like we have always said. We are not rock burst prone, we are plastic rather than elastic by plastic I mean whenever we drill production drill hole, the drill holes are four-and-a-half inches in diameter, and the massive PIRITE tends to flow or there's jointing in there, so there tends to be offsets. So, we end up losing production drills. Production drill holes. The holes close on us, so what we have done is we have started inserting cases and some of those -- in some of those production drill holes. We have done this in the past at shaft number one at higher elevations. The second thing that we have done, and that seems to work well, is we have started to blast some of the initial drill holes to distress the block, and we load them as we drill them, and then once the block or the -- is distressed, then we continue with the final full phase of production drill, and that seems to be working. We envision only seeing --having this type of problems like I mentioned along the eastern and western leading edge of the pyramids. Anything inside the pyramid should be distressed and should not present those types of problems.

All right.

Also in the case of 215, we're just starting off the pyramid. On 194, we're had very little problems of this sort.

All right. Excellent. It was mentioned with regards to the costs to keep BUSKE going, is that going to be an expense or capital item?

We're accruing that as part of the purchase price. The purchase price is not just going to be the Canadian $7 million. We're going to accrue the Ultimate reclamation obligation of $2 million to $3 million, plus the costs of keeping the head frame up to three years to maintain access to the bulkhead.

That goes down in -

It will be liability that we set up, and potentially as we spend the money, we'll offset it so we'll not hit the P & L.

It will not.

That's right. It will not.

Just a very, very general question with regards to the impact, which has been assembled. Let's say there are more massive sulfides on this and let's say they are down at the 5,000 foot level, something like that, going back to LaRonde, and 20 north zone, now, that was not detected with geo physics, I think, that was your pure geology. What you can make for interpretations going forward for exploration?

I would think in hindsight, David, it was detected by a geo physics. I think that seems to be the case with a lot of discoveries. When we go back and look back at our geo physical studies, there were indications of 20 north at depth and we even tried a deep drill hole from surface, and we ended up intersecting graphite, but the massive sulfide of 20 north started 200 feet below that particular drill hole. That was a hole that we drilled I believe in the early '90s. I think in terms of exploration, we will be able to use down the hole geo physics, but I think our real success has always been the exploration drives and a systematic grid pattern across the Stratographic sequence. This way, if it's there, we'll find it. If it's not there, then we'll condemn it.

Right. That gives you a search radius which goes from BUSKE through to the DOYENNE property.

It includes Ellisson, David, as well.

Right.

That puts a different spin on the Ellisson property as well, that hasn't been tested at depth and hasn't been tested to the south.

Ellisson just remind me, that's more -

That's between DOYELLE and BUSKE, too.

Geologically that's load gold isn't it?

It is similar to BUSKE one. As I mentioned, the massive sulfides have not been tested, which would be tend to be closer to the south.

To the south.

Yes. If you look at our Strat graphic sequence of the BUSKE one zones tend to be north, lie north and 20 south and 20 north tend to lie south of that sequence.

Okay. And BUSKE has to drift near to the Ellisson boundary, right?

That is correct.

You could be extending that one?

We will be discussing it.

Here's the bush. What might be the capital costs for doing some extensions?

We really haven't costed anything out, David, there. There are quite a few options that are open to us, but the first step is to compile over 25 years of lack baric day data, that gives us an unprecedented database on that belt. There will be deals that will come out of that. And also on the geological staff we were able to hire the former BUSKE production geologist, so I think we will be able to hit the ground running.

One of the things, David, we have obviously have more choices now. We have had an annual program of exploration drifting and drilling. The expectation was that we were going to return back to AlCoco and continue that drift off to the east. Now we have a chance. Do we do that or do we now drift off to the west. So, we have to weigh all of those options.

Right. And there's also a possibility that could you be drifting to the east from BUSKE?

Not really because there is an exploration drift, that is in place between BUSKE one and BUSKE two. We haven't looked at the data, but we believe that bar Rick has done a thorough job on that, but I think from our platform, our drill platform is 3,000 feet deeper than the BUSKE platform.

Yes.

That gives us certain -- you know, options that were not available to baric.

Okay. Perfect. The last question given that no one else has asked it, can I have the unit costs.

Here they are, David. Definitions, 16 cents. These are Canadian. Development, $5. Mining, 803. Milling, 1266. Underground services, rather, 1266. Milling, 1464. Surface services, 121. And admin 338.

I'd be pleased if someone else asked that question for a change. Thanks a lot.

You're welcome.

Bye.

Ladies and Gentlemen, if there are any additional questions at this time, please press the "*" followed by the one. As a reminder, if you are using a speakerphone, please lift the handset before pressing any other keys. We have a follow-up question from John Bridges from J.P. Morgan. Please go ahead.

Hi, Sean, again.

Good morning.

Your G & A costs for the quarter seem to be higher. Presumably, that was the deals. Is that the case?

Well, no. What that reflects is the seasonality of the G & A costs because most of that occurs in the annual report. Post the EGM and whatnot. What you need to do for the full year is take the first six months and double it.

Great. Thanks a lot.

Your next question comes from Michael Fowler from Desjardins Securities. Go ahead.

Yes. I missed the production of zinc and copper in the balance of the -

Yeah. The zinc we're looking at about 35 million pounds. The copper, we were looking at about 18 million pounds. Silver was about 2 million ounces.

So, a question here about your forecast, Sean, into the second part of the year. Your sort of suggesting that you're going to produce at 7,900 tons per day. Have you ever done that on a consistent basis, previously? I mean, what I'm looking for is some form of comfort that you can do this.

Let's just say in May, we have averaged in excess of that. We averaged for a period of about 20 day, we averaged 8,200 tons per day. The key thing, Michael, is that with our development, the position that it's currently in, we now have practically no more waste to hoist from the bottom part of the mines. All of the hoisting capacity is strictly ore. That was always a key constraint before to be able to get that development going. That ate into the hoisting capacity, but right now, we even have gone to the point where we have put waste pass through to be able to dump waste into the bottom part of the mine to be able to back fill some of the stops, that is a significant change from previous operating months.

Right. Okay. What were you doing in June and July?

The quarter we averaged 7100 tons. In June, I believe we averaged about 7200 tons, and then in July, I believe we're averaging under 7,000 tons. But those are -- there's other issues in there.

Yeah. Okay.

But we have been able to exceed the 7900 tons on a sustained basis and according to the forecast between now and the end of the year, we should even build up a stockpile.

Okay. So, all right. Between now and the end of the year, you have got to be averaging over 8,000 tons a day.

That's what our mining plan is. As I mentioned for that type of tonnage, all of those blocks are already developed, and ready for production drilling for the third quarter.

Okay. Those points are high grade stops I guess in the fourth quarter. Are they in the 215 level or -

Both.

All right.

The big difference, Michael, is that the transition to the lower part of the mine will continue, especially on 215. Right now, we're still operating roughly at I would say 50 to 60% capacity, because we only have primary stop, but as I mentioned in August, we'll have the first -- the first of our secondary stops, so once that process of secondary stops accelerates, then you will see a greater shift happening from the third quarter into the fourth quarter, more ore from 215.

Great. Just doing the recoveries, you anticipate them to be pretty well in line with what you have had in -

Yes. I think metallurgically there really haven't been issues. It's much the same as in previous quarters.

They should pick up in the second half by virtue of the higher gold grade.

Okay. So, what's kind of recovery rates would you expect then for gold?

We're budgeting. I have -- I have them here.

I have got them here.

Okay.

We're looking for the full year at about 93.5% for gold. Just under 81% for silver. About 79% for zinc and just over 81% for copper.

So, that means, David, that you are going to recover about 95% of the gold in the second half of the year.

That's again by virtue of the grade -- the grade is higher in the second half than it was in the first half. The tails are fairly constant. It's a function of the higher grade.

Any shutdowns of the mill expected?

That has been incorporated in our mining plan. We have -- we had some shutdowns in July where we have relined the sag. We have another one-day shutdown planned for August, but that's basically it in terms of major shutdowns.

Okay. Thanks a lot.

Mr. Boyd, there are no further questions at this time. Please continue.

Thank you, everyone. Thanks for taking the time this morning to participate in our second quarter conference call. That is it from here. We would just have a good rest of the day, and we'll keep you posted on our performance and our exploration plans for the belt after this acquisition. Thanks again.

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

Operator, we'd like a head count when you are done, please.

Excellent. Thank you.