Agnico Eagle Mines Ltd (AEM) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Agnico-Eagle Mines Third Quarter 2005 Financial Results Conference Call.

[Operator Instructions].

I would like to remind everyone that this conference call is being recorded on Thursday, October 25, 2005, at 11:30 AM Eastern Time. I will now turn the conference over to Mr. Sean Boyd, President and Chief Executive Officer. Please go ahead Mr. Boyd.

Thank you, operator and good morning, everyone and welcome to our third quarter conference call. For those of you who are following this presentation on the Internet, there are a series of slides which will require you to advance them. We can't advance them here. But I will help you along as we move through the slides.

You can move through the Safe Harbor statements. There are two of them. And move directly to corporate strategy. And what we would like to do is just review where we are. We set out a goal to transform the company from a mine company to a multi-mine growth company. And that transformation continues. We have a plan. We are on target with that plan and will provide detail on that about what we outlined in the release.

Essentially at a minimum, we are looking to triple our gold production and double our gold reserves from our existing projects. This strategy is anchored by a regional focus, as you know, which is centered on LaRonde and that regional focus benefits from operating synergies and tax synergies. And it's a very effective way to go. That will be our anchor. And then we have got a couple of exciting international projects that we will provide you with some details on.

One of our goals and our strategy is to minimize dilution to fund these existing projects, probably mineralized dilution. We have a relatively low number of shares outstanding so we have a tendency not to issue a lot of paper, and that is certainly our plan as we move forward. We want to keep that to a minimum. Another focus of this strategy is to maintain a very low political risk profile. Recently one of our analysts, the analyst -- Research Capital, Barry Allan, did a report ranking various gold companies on their political risk profile, and we ranked at the top end of that in terms of having the lowest political risk of any other gold companies.

We are looking at quality projects that will have low production costs, which will be similar to what we are used to having at LaRonde. Our balance sheet, we have got $124 million in cash. We need a conservative balance sheet because we have got aggressive growth (ph) plans. Exploration will be a focus of this company. In a sense, we have dramatically, over the last year or so, changed the exploration profile of this company away from the focus on LaRonde.

LaRonde had very good exploration results over many, many years, but those exploration results, as you know, were quite a distance from existing infrastructure. By bringing on projects like Suurikuusikko in Finland and our option of Pinos Altos, we have introduced a new and exciting element in this company. And that's upside exploration potential and we'll talk about that as we go forward. And always, as a company, we have never sold our gold forward, there is no plans to do so. And so, we'll give our investors full participation in rising precious metal prices.

Looking at the highlights of the quarter, steady performance at LaRonde and we have moved our growth projects forward. We have strong metal production at LaRonde and those -- that strong metal production and high byproduct prices resulted in very low cash cost of $33 an ounce, which resulted in good strong cash flows. Another big highlight of the quarter was our drilling on Pinos Altos, which continued to return high grade gold intercepts outside of the current resource.

We're also getting very good thicknesses in conjunction with those high grades. And we have possibly got three separate ore shoots developing, all within about a mile on this property. And we'll talk a little bit more about that as we good forward. And our bid for Riddarhyttan was successful in the quarter. We have received tenders including (inaudible) approximate about 97%.

There is one final extension takes the bid till November 4, so we should get a little more in terms of shares and then we will immediately begin the process to wrap up the rest of that property. That puts us in full control of the project, allows us to bring our expertise fully to the project and bring a more determined focus to the project that we believe will add value for Agnico-Eagle.

On the financial results for Q3, our earnings were 2.1 million, lower than we had anticipated. The main reason for that is we had roughly a $0.06 negative mark-to-market non-cash loss on a byproduct hedge. Predominantly that relates to a zinc forward position, totaling about 33 million pounds, which is over the next five quarters. So a little over 6 million pounds a quarter, which is about 15% of our overall exposure, but the accounting rule has changed at the beginning of this year.

And what those accounting rules did, is determine that this was not an effective hedge for accounting purposes, so that has resulted in some volatility in our earnings. Last year we had a win on the accounting, this year we -- this quarter we have a loss on the accounting, but still a very small position of our overall exposure to base metals.

In terms of the cash flow after working capital changes was 11 million. Our cash position rose slightly to 124 million, so still in a very strong financial position. For the nine months, LaRonde is still a very strong cash generator, generating for the company $58 million, potential for over 80 million, cash flow for the full year that contrast with about 60 million in capital expenditures for the full year, which includes now Goldex, which is under construction and Lapa, where a shaft is currently being sunk.

As we indicated, our cash position is 124 million. In addition to that our liquidity includes a bank loan. That bank loan is currently a $100 million facility. We have an agreement from a syndicate of banks for increase in that facility by 50 to 150 million. It's just subject to documentation at this time. We also have other financial flexibility in terms of our ability to raise flow through financing to fund both Lapa and Goldex. And that's a very efficient way to raise additional capital for investment purposes on projects in Canada. We were able to sell that stock at a significant premium, generally over 30%. And it does in a way that doesn't disturb the market.

So we have a lot of financial flexibility. We also have the financial capacity to move deeper in the multi-mine building phase and therefore there is no imminent need to raise new equity. In terms of operating results in Q3, this is a very profitable mine. We processed in mine 7,900 tons a day at $52 ton Canadian. We earned revenue on that ton, on each ton of approximately $96 Canadian, so a very solid profit margin. The gross profit in nine-months at this mine was over 75 million US dollars. So the metal diversification within the deposit and the strong commodity prices, they essentially act as a natural hedge against increasing input prices. So we are still at $52 a ton Canadian in the quarter, and $50 a ton for the nine months in terms of our operating costs in Canadian dollars at the mine.

And on a cash cost basis, because of a strong metal production in commodity prices, we are at $33 an ounce for the third quarter. On the nine months, on that side, we averaged over 8,000 tons a day again with strong metal production. Our overall costs of nine months on a cash basis per ton, $50, which is right on budget. And that gave us the cash cost of $66 an ounce, which is very low by any standard in the industry.

In terms of where we stand relative to our peers on cost, we have a slide in the presentation, which shows total production costs and total cash costs. We also demonstrate our average tonnage per day at LaRonde. And I think what this demonstrates is the consistency of operation. Over the last almost two years, we have averaged 8,000 tons a day. Our cash cost to produce an ounce of gold over that roughly last two year period was less than $100 an ounce. So LaRonde, again, a steady, strong performer, great cost structure at 8,000 tons a day, and that is the strong foundation that we will use to move the company forward and grow and build a multi-mine company.

For the full year forecast, 2005 had a tonnage rate of approximately 8,000 tons a day, we are looking for approximately 250 ounces of gold, 5 million ounces of silver, 17 million pound of copper and about 170 million pounds of zinc. Our mine site costs, we are projecting about $50, which is still in the range, we set at the beginning of the year and that's in Canadian dollars terms, and our cash cost will be below $100 an ounce. So again, solid metal production for the full year of 2005 with low operating cost and that will drive strong cash flows, which could be in the $80 million range for the full year 2005.

As we move forward and talk about the projects, we have extensive gold growth pipeline. Each of the projects, the regions have mining camp potential, that's what we have looked for as we carefully selected the opportunities that we will move forward and grow the company. These projects were also selected because they are very good match to our technical skill set that we have developed at LaRonde.

Their all near infrastructure. They area all very large property position. We extensive data bases in the region. They are all open for expansion. And just going back to one of the earlier points, is that, this company will have more of exploration going forward because of the potential of the new projects that we have acquired either by bid or through option, all projects such Lapa and Goldex, Lapa through discovering and Goldex through reactivating an older project. All of the projects are open for potential. So when we look at the whole picture, good solid growth pipeline, focused on gold, low political risk, so we have branched out very carefully smaller projects with lots of upside.

Looking at Goldex, there is an overhead chart of the how the Goldex site, the original head frame, just beyond that we started the site clearing, which is not apparent in this picture and the background is town of Aldour (ph), so you can see very near infrastructure and more importantly, right near a world class labor force that understands and knows underground mining and a world-class contracting group of companies in the region which helps us to move that regional strategy forward.

Looking at Goldex, we are already into the building phase. As you know we announced to go ahead on that at the end of July, we are underground because of the existing access. That is allowing us to accelerate the development prior to the installation of the new shaft. So we are doing level development and ventilation work now which gives an advantage and its essentially shortens up the preproduction period for an underground mine for three years.

The beauty of Goldex as we said before, is its simplicity both from a ore (ph) body geometry perspective and from the perspective of using existing infrastructure, but also from of metallurgical perspective where about from both 65% of the gold will come from gravity and the remainder will be in the form of a concentrate that will be shipped to LaRonde. So we are trying to use the operating synergies with LaRonde, which are -- these are critical and it allows us to keep our CapEx and OpEx down. Where the trend in the industry is these things are rising in a very high rate.

We also have the advantage of having an experienced team already in place at Goldex, and the nucleus of that team is essentially from LaRonde, where there is a lot of bench strength and it has been a seamless transition as we've extracted some key people at LaRonde and move from the Goldex. So, it's often running very well.

Just some of the parameters of Goldex. Its got 1.6 million ounces of reserve on 22 million tones are still open. Our base case was done at 400 gold an exchange rate of 1.3. That base case gives us a rate of return of 15% after-tax. Even at $300 gold, this project makes money. Our capital cost was $135 million, US. Our Minesite operating costs are estimated to be $17 Canadian. That is against an average ore value of about $35 Canadian. So, there's a solid operating margin on this project, and that's why it can make money even at lower gold prices.

We're looking at start up in the second half of 2008. What I should mention for those of you on the Internet, if you want to look at an animation, click on the download video notation on the slide and you will see an animation of Goldex. We are estimating average annual production of about 170,000 ounces at a cash cost of about $200 an ounce. Our CapEx, to build it which will include all of the development, because it will be fully developed in this phase is $85 an ounce. So all in $285 an ounce. We own it 100%. There is no royalties on it. So very low by industry standards in terms of total cost.

Moving to Lapa. Lapa is very close to LaRonde, seven miles east of LaRonde also benefiting from the synergies at LaRonde because we envision shipping the ore from Lapa to LaRonde. It's got a reserve of 1.2 million ounces, a combined reserves of about 400,000 ounces its still open. The shaft is now down to 1,600 feet, so we're averaging now about 10 feet per day, so we're getting extremely good performance in the shaft.

Over the last month or so we cut out a drill station, this will allow us to start definition drilling of this deposit in December, so we will be able to provide some drilling updates as we going into the New Year, which I think will be important here. And if we decide that we can build a mine here we'll have our feasibility done, and that will give us the indication by the end of 2006.

And we will make a decision to proceed to Phase II which would contemplate about an additional $80 million to put it into production at a rate of about 15,00 tons a day. A 125,000 ounces at a cost of $200 an ounce and start up in the later part of 2008 as well. Similar to Goldex.

LaRonde II, very long life gold reserves with good NSR values below the bottom of the existing infrastructure. As you know, we've spent a lot of time working on the best way to go after this material, so that we can extend the mine life of LaRonde generate a good way to return for our shareholders. We decided that the best approach is to use as much of the existing infrastructures we can. That means that the best option is a winze.

We selected winze, we've outlined roughly the location. The winze will also include a -- that program also includes a decline ramp to get into the ore zone. We're envisioning an operation of about 5,000 to 6000 tons a day using the existing infrastructure. What that allows us to do is, give us a much shorter lead time lowers the risk because we are using basically proven technology at the deposit.

And because of the gold grades that we're encountering in the deeper part of 20 North LaRonde mineralization, LaRonde II has the potential for steady state gold production of over 300,000 ounces per year. Moving on to Pinos Altos, where we have had some very good drill results. What attracted us here in the first place was its location. Northern Mexico was a place we looked at for three or four years and looked at various opportunities, good place to be building mines.

Some of our peer companies have had success there recently, have done a good job building mines. Pinos Altos property is very near infrastructure. It has an existing resource, which was attracted to us not only of gold but of silver. The combined gold resource of 1.2 million ounces, in the silver resource over 25 million ounces.

But more than that we were intrigued and impressed by the geological potential at this deposit. Our geologist were very high on this project and the ability to find more gold and outline more gold, and that is why we structured it as an option agreement and set the price before getting on the property and putting our drill program to work. As you know its under option with Penoles.

The option expire (ph) is mid February, we had an ability to extend that by two months, which we did. We agreed mutually to do that, what that allows us to do is complete our deep drilling. We've had technical difficulties getting some of our deep holes in on Santo Niño zone for that two month extension will allow us to get those holes in. What is new is, we are in the process of doing the scoping study here on the back of all of the drilling, which will include a new resource estimate in the New Year.

What is very encouraging about this project is the fact that we are identifying mineralization we continue to identify mineralization outside of the existing resource outline. The latest polls are showing some high grade precious metal values over good thicknesses. There are still six drills and operation at the properties, so we have got a very active drill program going. But what we appear to have here is essentially three separate ore shoots that have been identified at this stage is still early. As we said we are seeing good grades and thicknesses.

The distance from one end to the other on the three structures is about a mile, but what the reason drilling has done is given us more information on the outside of the resource area, outside of the Santo Niño zone in both Cerro Colorado, and the Oberon de Weber area. Most importantly on Cerro Colorado 1200 feet below surface in whole 05 - 52 which is on the longitudinal in the slide presentation. We got a drill result of 0.47 gold and 9 ounces of silver over a true thickness of 46 feet. And that is -- that area was not in the resource outline. Other drilling suggests that mineralization may exist between Cerro Colorado and Santo Nino.

So, part of the program that's going out until early -- very early in the year is designed to see whether those two structures are in fact join out -- join up. We're also drilling to extend the Santo Nino mineralization at debt. We had some recent drilling that indicates that it's happening, but more holes will be put in over the next couple of months and Oberon de Weber, which is another satellite zone. It's early, but recent drilling indicates that there is the potential for a possible second open pit there. So, there is more news to come here, and it's a project that our geologists are very excited about.

In Finland, as we indicated, our bid was successful acquiring the Suurikuusikko property through the acquisition of Riddarhyttan. We are very close. Once the November the 4th final bid period extension is terminated, we will move quickly to delist the shares of Riddarhyttan, and roll in the rest of the company. We're expecting to get that done in the first half of 2006. But now, we have full control over the project and we're actively drilling it.

There is a longitudinal slide presentation. As you know, there's a geological resource combined of over 3 million ounces. We're in the process of upgrading that and bringing it up to 43-101 standards. We also continue to drill it, so the program has continued during the bid process. And what we like about it is that it hasn't been well drilled. There is about a 15-kilometer strike length, they've drilled about 4 kilometers. There is still a lot of open ended intersections within that four kilometer area that have not been followed up. So, that's a major part of the program going forward. We do have a feasibility study underway.

Our objective is to continue to convert the gold resource to reserve is part of that feasibility work. The feasibility contemplates about a million ton per year treatment plant. We selected the pressure oxidation process, so that's part of our work is a pilot testing of that, which is ongoing right now. We are recalculating our reserves as we set to 43-101 standards.

This bankable feasibility is expected in the first quarter of 2006. And it does have the potential to have production in the first half of 2008. So, we'll be providing more news in the next two or three months on that project. But, again, it's one where we got into the situation at an attractive purchase price.

We feel we can build a mine there, but it's also a got an awful lot of exploration potential. And it positions ourselves in what we consider to be a very good part of the world for mining and for exploration. What we wanted to do is provide you now with a timeline and itemized upcoming news for the company, just to give you a sense where we are headed with these projects.

And the Company -- in December, we will approve our 2006 operating budget. That's the same time when we generally review our dividend. We have paid a dividend for 25 years or so. So our expectation is that that will continue. In January, we will have with six drills going at Pinos Altos and five drills going at Suurikuusikko, we expect to have an exploration update on both of those projects in January.

In February, we have our year-end results as well as a project update on Pinos and a purchase decision prior to mid-February. And at that time, we will also have by third week in February a full update on all of our reserve and resources for the projects. In March, we will have completed a third party review of a LaRonde II feasibility. That feasibility will be completed internally here by end of this year, and we'll have one quarter to have a third party review it.

In April of '06, we'll have our first quarter results and a Lapa exploration update based on the drilling, which starts in December. And in May, we'll have our Suurikuusikko bankable feasibility study, reviewed also by a third party. So, we'll have the results of that available to the market.

Just summarizing, when we look at our story, we feel we are in the very early stages of our growth story. As a result, we feel there is good potential in here to increase our valuation multiple as we move the story forward. This story will be -- a foundation of this story as we move forward will be LaRonde, which will generate solid annual earnings and cash flows. Our five growth projects are expected to significantly increase our gold production. As we said, we've got a minimum goal of 750,000 ounces from our existing projects.

We feel that we can double our reserves, which I think is an important indicator in this market because that would put us effectively at the top of the mid-tier range in terms of reserves and good quality reserves in low political risk regions in the world. And also, we have the fewest number of shares outstanding -- among the fewest number of shares outstanding, as we build this. As we move it forward and build our mines, I think what will sustain the story and fuel the growth story is our low operating cost at LaRonde, our strong cash flow and earnings, and also the new element we talked about with the exploration focus and exploration news on projects like Pinos Altos and Suurikuusikko.

So operator, that's our presentation, and we'll be happy to take calls.

Thank you.

[Operator Instructions].

Your first question comes from David Stein from Sprott Securities. Please go ahead with your question.

Hi, good morning guys. First question, I guess, is -- it was a good presentation, first of all, on all the assets. So, my first question is kind of philosophical one. You guys had a pretty good operating quarter, and that's -- that hedge marked-to-market thing took your earnings down quite a lot, on what amounts to not a whole lot of your byproducts being hedged over the longer term.

So I am wondering what's you -- given the accounting rule changes, what is your philosophy on that going forward? Do you think it's worth it to hedge, given the tremendous volatility that this is putting in their earnings?

Yes, you should never really let accounting drive sort of your business and how you run your business. But this sort of came out of left field because we put these hedges as a hedge of our byproduct, a very modest amount. And then, the rules changed. And what's interesting is we have currency hedges that are well in the money. And we are not allowed to book those.

But unfortunately, we're required to adjust to sort of marked-to-market on a quarterly basis on a very, very small fraction. So, we are much less inclined now to create earnings volatility by putting on these types of hedges. In order to get a byproduct metal hedges considered an effective hedge, we have to hedge every element of the concentrate, which would mean hedging the gold, which we won't do.

So, I think it's an issue for people selling these products because they don't do what they're supposed to do now, which is have consistent earnings and provide a bit of a backstop. They create volatility, which we don't like. So, we would be less inclined going forward to do this.

Okay. Good. Now a question on your gold guidance for Q4. You basically maintained your 250 for the year, that implies a pretty good Q4 in terms of gold production of about 70,000 ounces. Do you see an increase in gold production for the remainder of the year?

Well, let Ebe answer that.

Good morning, David. We are basically maintaining the guidance and all we have to do is repeat September. September was a good month for us in the quarter. We are getting into a high grade cycle on our two mining horizons, level 215 and level 194. So, that's why we are maintaining our guidance.

Okay. Great. In terms of the drilling that's going on at Suurikuusikko, you said that it's ongoing. It's going to take whatever take six months or whatever to sort of finalize the acquisition. Can you report drilling in that time frame, and I guess if so do you know when you're going to have some exploration results from the project?

Yes. We can report drilling. Essentially it is a tidy up issue right now. Part of the process, post November 4, so in a couple of weeks we will move to have the company delisted and essentially work running the company's existing management there. We've kept the program going during that period, because we were confident of the results. The company has done a good job getting the financing to keep that program going during the bid process, which went on a little bit longer than we had hoped. So that momentum is still there, and in our timeline we show that we will be able to update that drilling in January is our expectation, and maybe sooner. We'll just see how it goes.

Okay. Great. That's all my questions for now. Thanks.

Thank you.

Your next question comes from Chantal Gosselin from Haywood Securities. Please go ahead with your question.

Good afternoon. Just a quick question regarding LaRonde II. Just looking at the slide here, I'm trying to figure out what's the length of the winze that you are planning, what depth you're going?

The winze will be going down to a depth of about 9700 feet, Chantal. So it will be winze (inaudible) tentatively on level 206 (ph). So we are looking at about 2700, 2800 foot winze.

And that would access all the reserves that you have on LaRonde II?

Yes. You can also see on that slide there is a ramp that goes down from the winze to the lower levels of LaRonde II.

Okay. And would it be reasonable to assume that the excavation of the winze would not impact your LaRonde 1 operation, which means that you would go on with that 8,000 tons (inaudible-technical difficulty)?

That is correct, Chantal. And I think part of the positive nature of this type of approach is that we will not be generating a significant amount of waste. And whatever waste we do have, we will be dumping into existing stopes. And also, as the mine matures there will be less development generated underground.

Okay. So the winze would come in, play, I guess at the end of LaRonde 1 mine life which is about 2012, okay?

We haven't finalized that, but current thinking is that if this project goes ahead there could be some overlap in the latter years of LaRonde 1. That's another plus of this approach.

Okay. But the winze itself would run about 5,000 to 6,000 tons a day?

That is correct.

That's it. Thank you.

The next question comes from Steve Butler, Canaccord Capital. Please go ahead with your question.

Good morning, guys.

Good morning.

In terms of the Lapa reserve grade, Sea, if you could just remind us what the cut and uncut reserve grade is for Lapa? And as well I wanted to ask a question, related status to what the earliest point next year in 2006 would be that we would get results of -- for sampling efforts underground at Lapa that may allow you to restate the cut grade higher?

Just in terms of the reserve grade, its a quarter ounce; its 0.25. And the undercut grade is about 0.32, 0.33. We've got some different thoughts on Lapa over the last month or so on getting a sample that's more representative than what was contemplated in the earlier plan. Maybe I'll let Ebe get his recent thoughts on Lapa.

Part of the new approach on Lapa was based on Goldex. Our experience at Goldex with the three raises, versus extracting a bulk sample from one location. So, we have modified that approach rather than extracting one test stope as we had originally envisioned. We will be driving on two levels along the strike of the ore body and crosscutting across the ore body on several horizons. So we expect to have that completed by the end of the year of 2006. And that will be incorporated into our reserve estimate -- a revised reserved estimate and the feasibility study.

Okay. And Ebe, could you maybe just clarify -- I just wondered, see if you can reconcile for us the fact that 70% of tons were from the lowest levels, but you'd of course good zinc despite that in the quarter. I think you alluded to some discussion about better zinc grades in the foot walls which leads to lower gold grades.

That is correct, Steve. On the eastern part of our level 215 mining horizon or pyramid, we have a significant zinc mineralization in the hanging wall. And as we even move further east on level 215, most of those stopes actually turn into almost 100% zinc stopes with gold credits. So, during the past quarter about 30% of our stopes from level 215 were from the eastern part of that pyramid. And with the zinc prices being what they are, we're getting grades of anywhere between 4% to 6% zinc in the hanging wall.

And what would be the related gold that comes from that --

Sorry?

What would be the related gold grades that comes with that 46% zinc?

That would typically average about 0.02 to 0.03 ounces of gold per ton. Yet on the fourth wall we have grades in the neighborhood of 0.14 to 0.16 ounces of gold per ton.

Okay. Thanks very much.

Your next question comes from Don McLean from Paradigm Capital. Please go ahead with your question.

Good morning, guys. I would just add further to Steve's question. Could you give a sense of what kind of dilution you are experiencing? There was some mention about higher costs from ground support in the deeper levels.

That ground support was ongoing, just below level 194 in the sill pillar horizon. That's just a fact of life. So, that's nothing different from what we had expected in the earlier part of the year. In terms of overall mind dilution on the lower levels, that includes level 194 horizon and level 215, we average the same as the last quarter, about 20% of level 215 that would work out to about 8% to 12% and above level 194, we would be looking at anywhere between 20% to 30% depending on the stope.

Great. Okay. And maybe if Sean -- is there any way you can give us a little bit more color on your thoughts on Surrey. I know you are -- you've decide to go for a full bankable feasibility study. But I guess having spent quite a bit of money now on issued shares. I guess we are all kind of anxious to get some sense of your vision for the property. You talked about the exploration upside, but I think a lot of us are quite curious to get some gauge of two things, what operating costs might be even within a broad band and maybe your capital cost estimate.

I'll answer that Don. I think what has probably changed at Surrey, there are two main things. One is the process. We are now proceeding with pressure oxidation. We believe we can have equivalent or even slightly lower operating costs. We also believe that we can have improvements in the recovery and we also believe that it's environmentally, more friendly than previous by oxidation process. Also if you look at the growth in resources that has predominantly been from underground. So, we have now changed our focus to it resource conversion into reserve.

We've only drilled 2.6 miles of the property so there could be other open pit potential which we are presently not aware of, but we have a whole resource inventory underground. And so, our plans going forward will definitely incorporate an underground component to be able to access some of this resource to be able to further convert it and then also to bring it on stream to complement the open pit.

Also what as Sean mentioned, we are looking at higher throughput because we have a larger reserve resource base. Previous studies were in the neighborhood of 700,000 tons to 750,000 tons per year. We believe with a large deposit the economies of scale can come into play that's why we're looking at scenario of million tons per year. With respect to operating costs, we are working on that right now. With respect to the capital cost, we are obtaining bids from various engineering groups, suppliers, contractors. So, I'm not really ready to venture any members at this point.

What we're doing Don is we are fine-tuning our numbers, but the nature the depositor has changed in the last few months with the growth in the resource, and as Ebe said it's growing underground. But the general concept is to get a starter open pit going, probably accessed the underground, via ramp, sort of we can do what an (inaudible) traditionally does, and go and be very aggressive within an underground program.

We think that's important now to be able to determine where an ultimate -- where eventually a shaft will go. So, it's too premature to say the shaft. We don't really know where the best part of this deposit is. But we're working in finalizing an internal sort of pre-feasibility study through the balance of this year. And maybe we can be a little bit clearer in February and give you a little bit more information prior to ultimately completing the full feasibility.

Yes. So, we would all encourage you to give us some sense of that sooner rather than later. Is the nature of the deposit such that you can -- that you do have a sweet spot that you can start with, with significantly lower than average operating costs?

Well, obviously the open pit would fall into that bracket, Don. We but find it further, so and we have done studies on it and it would definitely past that is what Sean referred to as the starter pits, the starter operation for the first five or six years of the mine life.

When we look at the overall strategy, Don and we look at building an underground mine at Goldex, building potentially underground mine at Lapa possibly LaRonde II, when we look at the international projects, given everything we have on the table it would be nice to be able t start open pits on both of them, lower the amount of capital, get a mine going and do much more exploration from an underground access point. So, those of the things we're trying to sort of put together right now.

Okay. Thank you.

Your next question comes from Thomas Robert Peterson as Shareholder. Please go ahead with your question.

Yes. I'm wondering about the loans and a loan agreement. Are any of those non recourse in the sense that they require a short -- against a falling metal prices?

No. There are no hedge requirements, if that's what you're referring to. The only subtlety to it is that they are secured against the LaRonde and Goldex projects, but there are no hedging requirements, if that's your question.

Thank you.

Your next question comes from Barry Cooper from CIBC World markets. Please go ahead with you question.

Ebe answered most of them with respect to Surrey (inaudible). But, Ebe I was wondering if you could follow-up last quarter, one of the issues taking place in LaRonde was the issue with respect to skin of relatively high grade mineralization that is being left, as you tried to master the amount of pollution there and minimize it. What is the status? Have you kind of come to period now where you are comfortable period now where you are comfortable that you can get that without the extra dilution?

That is almost a job on a daily basis, I think what complicate some of the stopes of the mining blocks is the at sericite shifts (ph) and it's very subtle task of how close of how close you places your holes to the hanging wall. We have had some recent results, where we have had stopes that have come up with zero dilution, and we've carved it out like with a knife. And yet we have had other stopes where we thought we were being maybe too conservative, and we went a bit closer to the hanging wall then we should have, and we were back to historical levels of dilution.

So I think, to answer your question there will always be some fine tuning, but I think the lion's share of the work has been done. We are looking more at things like materials handling, how quickly can we get the order out before the hanging wall has change to collapse. So, these are some things with respect to productivity fragmentation that we are working on. And we are also looking a bit at our ground support, but I think on a whole we have now found our recipe, and it is only tweaking that we are working on.

Ebe, is that scopes specific or is that potentially miner specific?

Scope specific, not mine specific.

No. I didn't mean mine, but, miner. In another words, the guy that's in the stope, some guys are able to do this consistently and other teams aren't -- given the experience level that probably the industry is facing with respect to getting good talent into the areas.

Well, I think, it's definitely not miner specific, because where we have one of the, probably, what we consider one of the best work forces is in the business. A lot of our long-haul drillers, etcetera, have been with us for almost 15 years, and so are very familiar. They have mined everything, from shaft number 1, shaft number 2, and millions of tones at Pinos shaft. So, also with respect to developing the stopes in great control the people, the miners that we have on site under supervision, are very aware of the issues surrounding that.

So, it is definitely not miner or employee related, it would be geology, where we have complexities in the hanging wall and that is mostly in the area of our 49 stopes, where we had our fall of ground, two years ago. That particular area appears to have a chimney with a very weak hanging wall, so it is stope specific.

Okay. Thanks a lot.

Your next question is a follow-up question from Don McLean from Paradigm Capital. Please go ahead with your question.

I just wanted to touch on the Pinos Altos, a bit. Sean, you mentioned that you are quite excited and the geologists are exited, but yet you have delayed by a couple of months your decision. So, I guess one question is what you need to see with this additional underground drilling to make a positive decision? And then, I would certainly find it helpful, if maybe Mark or Ebe to go through in a little bit more detail, what you've added beyond, what's Penolos work had indicated to you, what you have added since?

Just before we turn it over Mark and Ebe. This process is not just drilling at this point. It also involves, during a scoping study on what we feel can be built here. So, that's why it's taking some time. We also need to know the depth extent of Santo Nino. And as we said, we had difficulty -- technical difficulty getting holes down at depth, and that is one of the important aspects of this project. So, that was also already built into that contract.

So, we didn't have to do anything that wasn't contemplated when we entered into the agreement, that was something that was agreed upon that if we didn't get the drilling performance -- because, we weren't sure, we signed this contract, whether we can get the drills, as quickly as, we could in place like Mexico. So, drills are hard to come back. So, it was all driven around our ability to get the data, and then take a two month period to access all data. So, it's just part of the data collection process. I will turn over to Mark and Ebe.

We had three objectives, when we started the Pinos Altos. One was to confirm the Pinos resource estimates. Secondly, we have the idea that there was upward close to surface potential, open pitiable potential. And then, we wanted to have a feeling for the blue-sky potential. So, I think, we were able to prove the first two. And as Sean mentioned, we had the technical difficulties with some of the drill rigs to get some of the deeper drill rigs down, so that is why we had the extension. So, but Mark was looking after the project can shed more color on that.

That's exactly it. We had a programmed outlined -- the open pit drilling is the easiest drilling that you can do, it turned out to be like that. And we had very good success at depth, even though we drilled whole lot of a -- drilled the meters that we thought we needed to drill. It was in a few cases -- in few cases near critical, because they occurred just in of late August and in mid September. We lost a couple of key holes that we felt that would have given us much more comfort to the depth potential.

Although, the meters were all drilled, and that's essentially it the fact we couldn't -- we did not have enough time to restart the whole and give us the peace of mind that we needed that we exercised and mutually agreed to in the program. That's essentially it -- we have a target for that, and these drill holes now, we will be able to proceed and put more emphasis, which will cost us a little bit more money. But, it's a small investment we think to be able to give us a comfort level to the deep potential, and to be able to better structure things of that we have a stope (inaudible) we can actually see whether the asset were, and that's what it comes down to.

Could you quantify a little bit for us, when you say, you have added surface open to that material that are you talking ,sort of, one year or two years type of production? Or is it something more than that? And I guess, for the deep, what if you don't see the deposit extent to the dept you are drilling? Maybe, what depth are you drilling and what happens if you don't find that it extends down there? Do you call it all off?

To answer the last part of your question. I don't think we will call it all off. I told on, I think we're very satisfied with the results that we currently have. But, I think in any scoping study what we would like to do is get a feel for the -- there will be an underground operation. With the terrain on site, we'd like to have a feel for how we approach an underground operation, and we feel that based on the potential, we'll be successful at depth.

With respect to an open pitable operation, now that is being worked on right now, we're conducting metallurgical tests. We have an idea on various recoveries. I think, one of the issues -- when we looked at our original model, one of the problems that we do have, and this is a good problem, we initially looked at potential of heap leach operation from the open pit, but the grades that we encountered on the basis of the results that we have released, they are significantly higher than what we had envisioned.

So we're now looking at a processing plant, which was not expected or not anticipated originally, when we got into this. So that's why we don't really want to mention any tonnages or life of mine or how much is open pitable, because, we're still drilling the open pitable material, like the most recent results have been from Oberon de Weber, and we have been pleasantly surprised. So, before we can finalize anything we would like to see what the drilling tells us.

So, materially positive obviously.

Obviously.

Okay. Thank you.

Your next question comes from Michael Van from CIBC World Markets. Please go ahead with your question.

Yes, hi. Just a question on LaRonde, again. I just wanted to know about the mine plan. Is the mine plan changing now that link prices have gone up, meaning that are some scopes that have a higher zinc displacing previous stopes or are they just getting bigger?

No. they are not displacing. We are not -- we haven't made a conscious decision to mine more zinc stopes from the upper part of the mine. What we are doing is at the lower part of the mine level 215, where some of the material was below our cut off grade previously based on metal prices. And therefore it was not considered in our mine plan, so we were only mining the copper rich, gold copper rich part of the deposit.

But now with improving zinc and silver prices, all we are doing is increasing the thicknesses of some of these stopes, especially on level 215, rather than a stope being 30 to 50 feet wide we will take the additional mineralization and it may be 40 to 60 feet thick. So, that is the only difference.

Okay. So you basically spend a little bit more time on each stope?

That's correct.

Okay. Thanks.

Your next question comes from Mark Smith from Dundee Securities. Please go ahead with your question.

Yes. Hi guys. Just a really quick question, I just wonder if you have a feeling with the winze option, how much capital we might be looking at for LaRonde II, just in generality?

We hope to get bids right now, Mark and that's why we are not going to come up with a number now.

Okay. But it's going to be presumably significantly less than the 325, the new shaft option, right?

Yes.

Okay. All right. Thanks, Ebe.

[Operator Instructions].

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

Thank you, operator. And just want to thank everybody for their time and attention to our third quarter conference call. And we will keep you updated as we move forward on our growth plans. Thank you, very much.

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