Agnico Eagle Mines Ltd (AEM) 2009 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 2009 Results Webcast Conference Call. 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. (Operator Instructions)

I would like to remind everyone that this conference call is being recorded today, July 30, 2009 at 11AM Eastern Time. I will now turn the conference over to Sean Boyd, Vice Chairman and CEO. Please go ahead.

Thank you, Operator; and good morning everyone and welcome to our second quarter conference call. We're here in Toronto with our full team all ready to answer your questions in the questions-and-answer session.

What I'd like to do is go through a series of slides, provide a bit of an overview. Some of them I'll go through quite quickly. I know it's a busy morning for everyone. So we'd like to move through these and get to the question-and-answer session.

But just to sort of summarize where we are and where we're going over the next several quarters; I think as you know, we're in the midst of ramping up a couple of our projects. We're in the midst of completing construction on a couple more and that was a program we began several years ago to transform the Company.

And what we've done as a result is we've put ourselves in the position to move into an industry leadership position in things like cash flow per share, production per share, certainly on the cost side given the quality of these mines we'll be in the top range of good cost-control performance.

But what we also have done is we've neared the completion of building five mines at once. We've also started that next phase. We also announced yesterday two of the four internal expansion opportunities have been given a go ahead. We're still working on studies of the remaining two.

But the first two, as you'll see in the presentation, has allowed us to show steady growth going forward all the way through to 2014. So we've still got good growth ahead of us with the first of the four-- two of the four expansion opportunities given the go ahead yesterday. They're high rates of return, low risk ways that we can optimize our asset base.

And I think going forward what we anticipate is further exploration success, particularly in places like Pinos Altos, which will allow us to continue building satellite operations there and allowing us to add value from that asset base.

But I'll move through the slides now and we'll get to the question-and-answer session so that we can delve into each of the operations. But just as far as an overview, we're still in that growing production mode. We had record production the second quarter. We see continuing record production going through the next several quarters as we commission new mines and complete construction on Pinos Altos and Meadowbank. And again, as we said at the start, we've moved forward on two of the four internal expansion opportunities.

Our reserves, we expect to continue to grow. We're on target to meet our objectives as outlined to the market in terms of growing those reserves from the existing property position.

Our acquisition strategy will not change. We are still looking for smaller opportunities that have the potential to get bigger. And really with the internal expansion opportunities, as we said, we can grow this Company over the next five years and do it on a per share basis.

So things that we would be focused on would be things that would be coming and adding value beyond 2014. So we'd like to take a long-term view of things, get assets that we think have upside and get our team in place on those assets and let them go to work on building the deposit and doing the engineering and laying out a plan to build mines and extract value; just like we've done over the last few years.

Our costs continue to remain below industry averages in the first half of the year. We were around $320 an ounce and we've also-- Dave and his team has been busy expanding the credit facilities and that's given us very good liquidity as we start to get into a period of strong cash flow. And that's one of the things, as we're nearing the end of the construction phase, our capital expenditures drop dramatically. So we are in a position next year to generate net free cash flow which we'll use to fund the internal expansion opportunities.

In terms of the production profile; again we had record production in the quarter. We had very good cash costs in the quarter at $326 an ounce, anchored by LaRonde which has again, a consistently strong quarter going forward. Our full-year estimates of 550,000 to 575,000 do not change based on the results that we experienced in the first half of 2009.

In terms of cash flow generation, we had some moving parts there as we completed construction; we had paid down some payables, we had built up some gold inventory on some of the projects that have been commissioned. So after working capital, which is the number that's on the slide; we posted a lower number. But before working capital changes, the number in Q2 '09 was double the number that's posted there, which was after working capital changes. So we're still generating strong cash flow from the operation.

In terms of the financial position; as we also indicated, we've improved our liquidity position with expanded credit facilities. So we closed the month of June with $173 million in cash and available credit facilities of almost $400 million. And left to spend going forward is about $240 million in the second half of '09 on CapEx. And as we move into 2010, we're looking for a little over $200 million based on the expansion opportunities announced yesterday. So we're in a very strong position; in a position to generate net free cash flow and continue that steady growth going forward.

In terms of the reserve base; we touched on that. We're still targeting the end of 2010 at 20 million to 21 million ounces. We continue to be focused on per share growth in reserves and that's why we're focused on an acquisition strategy that's based on buying things that have potential, buying them early and allowing our exploration team and our mine-building group to work those projects and build value that way. And that's still the main focus there, as we move forward.

And I think we're looking to have an exploration update in September and that will give you a better sense of what we've been doing in places like Pinos Altos and our success in finding satellite deposits. We'll also update Meadowbank, where we've had some success as well. And we've been very active at Kittila and we'll provide an update on that in September.

In terms of production, on the slide on production, you can see the steady growth out to 2014 with the addition of the Goldex expansion and the addition of the Creston Mascota at Pinos Altos. So we're looking at production exceeding 1.4 million ounces as we enter 2012 through to 2014.

This is the industry leadership position we've talked about on the next several slides, on gold production per share. We move up close to Barrick and Newmont who have always consistently been at the top of the charts. If you look at their trend though, they're trending either down or flat and our trend, based on the construction success and the mine-building success, has trended up sharply to put us up in the top position in the industry.

On cash cost in the second quarter; we were among the best in the industry, averaging about $312 an ounce. And on cash flow generation, using analyst estimates which are as recent as July 14, we're showing very strong cash flow growth next year in 2010; putting us among the leaders again in the gold business, in terms of cash flow per share generation. Which is important; that's really what it's all about from our perspective; per share generation of cash flow. That's going to allow us to reinvest proceeds into solid opportunities that we have internally or that we choose to bring into the fold and into the pipeline, and also allow us to not only continue the 27-year track record of paying a dividend, but increasing that dividend as we move forward.

On capital expenditures, we can see a significant drop from '08 to '09. We've spent more than half of the '09 allotment. We've got $240 million left to spend with a little over $200 million in 2010, in a period when we're generating a lot of cash flow. So we're finally in a position, after that heavy construction phase, to begin generating net free cash flow.

We'll move through the operations quickly. We'll stop at LaRonde. It continues to be the star performer; excellent performance continues there. We averaged 7200 tonnes a day. Our cost per tonne was a little over CAD [70] per tonne; cost per ounce around $100. Not only have they done a great job in terms of output and costs, but they're also doing a tremendous job on the construction side. Everything remains on schedule with the extension and the shaft sinking. We expect to be completed with the shaft sinking in the fourth quarter of this year and start change-over and begin underground development. And we're on track to start pulling initial tonnes from the LaRonde extension in 2011.

Goldex; again steady performance, we've achieve d our design capacity and operated in the quarter at almost 6900 tonnes a day. Cost per tonne right on target there at CAD 24 a tonne. So first half production of 71,000 ounces at about $350 an ounce; so a very good performance out of Goldex, to the point where we feel comfortable announcing an expansion there. High rates of return; 76% rate of return IRR on an investment of $10 million; to basically increase the crushing capacity and we expect to be at a rate of about 8,000 tonnes a day in 2011.

So again, further optimization at Goldex with this expansion, but we're also looking at increasing the mine life there. We've got a zone that we've known for several decades there that we feel we can develop and bring it into production profile and that contains about 250,000 ounces. So while we're increasing the throughput, we're also extending the reserves there by developing a zone that we've known for several years.

There's a little bit more detail on the expansion at Goldex on one of those slides. We'll move through to Lapa. We're still in the ramp-up phase in Lapa and the tune-up phase. Our tonnage in June averaged almost 1300 tonnes a day, so we're moving towards our goal of getting to about 1500 tonnes a day. So we're still fine-tuning, we're still optimizing there.

What we're seeing early is a bit more dilution than we had anticipated. So we've got the technical group that's done a lot of work at LaRonde, looking at ways that we can minimize that dilution going forward. We're not concerned about it because of the skill set of the technical team there. But it's something we've seen in the second quarter.

Finland; we've made some good progress on the metallurgy and we've got Jean Robitaille here so we can field any questions on that when we get into the question-and-answer session. We've processed about 2,000 tonnes a day in the quarter, so we're ramping up to the eventual target on this part of the mine-building of 3,000 tonnes a day. In June, we processed about 2300 tonnes a day. Our mill recoveries in June were 65%, so we've made some significant improvements there through our test work, through changes; and as we'll see on the next slide, we're ahead of target.

And this is a slide that we put out on the Analyst Day in late May and we're ahead on target a bit on our gold output in June and slightly ahead of our target for expected recovery. So we're making good progress on that issue in Finland.

There is an additional expansion opportunity in Finland. We're still working through that study. The orebody continues to grow. We've got eleven drills drilling there right now. We will really be able to open up that deposit later this year when we get access with our drills from the underground. So this is still wide open, below 1100 meters; it's open under the central Roura area. It will be a project that we can expand and add further value and as we said, we've got about six months to go to complete that study.

Pinos Altos in Mexico; on track, it started to pour gold from the heap leach. The mill should start up in September, which is according to plan. So things are going well from a construction perspective there. We also announced the [building] of Creston Mascota which was not unexpected, given the solid nature of that project. But I think the newer news there is the fact that we're still getting good exploration success within that large land package in Mexico and we feel that's going to present us with further opportunity to grow output by building satellite deposits.

And we're also; based on the expansion of the reserve base since the original feasibility; looking at different scenarios where we can increase the tonnage rate at the main Santo Nino area from 4,000 to 6,000 tonnes a day. So that's something we're looking at now as well. So there's certainly lots of upside present at Pinos Altos and there's a detailed slide there on the expansion and I think you've seen that. I won't really get into a lot of detail.

At Meadowbank, we're on track to begin production there in the first quarter of 2010. We're having a very good construction season. We started the shipping season. We've got barges in Baker Lake that are bringing in the equipment that's needed to meet our production target there. So good progress on dike construction, good progress on de-watering, and good progress on infrastructure construction there as well; so we're all on track to meet our target of starting that mine in the first quarter of 2010.

In terms of expansion studies; we're working on an expansion study at Meadowbank. We're providing an exploration update in the third quarter which is focused on Pinos Altos and Meadowbank, but we'll also have exploration information from the other projects. We're working hard on an extensive study at Kittila, which would involve a shaft. And as we indicated and we don't have a timeline yet; but we're also working on an expansion study at Pinos Altos along the main mine horizon, given the expansion of the reserve base in that area since the original feasibility.

So it's a good position to be in. We've done a lot of hard work in the last four years. We're coming to the end of this massive construction phase. It hasn't been perfect, but on balance, it's put us in a strong position to generate net free cash flow. It's transformed the Company. It's strengthened our skill set. It's put us in a position where we're just opening up some of these deposits that we've been building for the last little while. We think the exploration upside is extremely good there and we're focused on early stage acquisitions that have good potential to add to our production base beyond 2014.

And that's the focus and that's a good update of where we are. And Operator, we'd like to open it up for questions.

Thank you. (Operator Instructions). Our first question come from [John Finnegan] with [Fundamental Equity]. Please go ahead.

Mr. Boyd, earlier you were having some problems in Finland with the buildup toward production. Could you give us an update on where you stand on that?

Well, the issue you're referring to is in the process facility and it was an issue with recoveries. When we talked about this in the last quarter, our recoveries were in the range of about 30%. Our recoveries in June were up to more than double that earlier rate and are now about 65%. We see continued improvements ahead of us. But I'll turn it over to our technical team and they can get you and the people on the line an update of where we are.

Okay. In quarter two, we updated the curve, as Sean mentioned. Presently, we expect to have for the next coming two months, a kind of stability at around 65% recovery with the profile of gold. We are doing some minor modification and its delivery on some equipment. As mentioned recently, the sump pump we have to change. Presently, it's following exactly the pattern that we had last during the test work in the pre-feasibility, in the feasibility study.

So presently we are quite happy. We just try to oxidize the ore [gentle], and that was quite successful. So it's just limitation that we have presently that we will fix. And it's not costly what we have to do.

Will the eventual production cost be about what you expected when you started the project?

Yes, we do; we have about another 700 tonnes per day to ramp up. We are currently at 2200 to 2300 tonnes average and once we do get to our design rate of 3,000 tonnes per day, the unit cost on a per tonne basis and on a per ounce basis will decline.

Thank you.

Your next question comes from John Bridges with JPMorgan. Please go ahead.

Good morning, Sean, everybody. Congratulations on the results. You must be really beavering away with all these projects. Just on LaRonde; that's a sizeable increase in the cost per tonne we've seen over the last 12 months. Given the refuted deflation that we're seeing in some areas, any chance of that coming back in the 12 months?

There might be a bit of softening, John, but when you compare it year over year, the first half of last year we had very limited increases and a lot of the increases that we experienced in inputs were in the second half of the year. Currently, that number also contains some stockpile adjustments, but on the mine level, we are right on budget or below what we forecasted, including those additional input costs that we experienced late in the year.

Okay. And any stabs at what you think costs might be next year?

It's a bit early, but my guess right now would be that they would remain flat; maybe slightly lower, but I would say flat.

Okay, that's great. Ebe, just following on, that 16% recovery of silver at Creston; I just wondered how flexible that was; is the stuff [tight] in there or if you could give a bit more sight; could you increase that?

Well, I would turn that over to (inaudible).

Okay. I'll take that one. 16% for silver at Creston Mascota; based on test work that's a conservative number and over a long, long lead cycle over the period of a couple of years, probably it will be higher than that. Silver to gold at Creston Mascota; the ratio is lower than in is at Pinos Altos and it's not very significant for the revenue.

Okay, that's helpful. Thanks a lot. Thanks guys, good luck.

Our next question comes from Anita Soni with Credit Suisse. Please go ahead.

Hi, congratulations on a good quarter. My question is with regards to (inaudible) commercial production at Kittila. I was just wondering what test do use in order to get to that declaration for May 1.

There are two main criteria. One is you have to achieve somewhere in the 60% to 70% range of (inaudible) in the mine operation of the mill. And then you also have to cover your operating costs. And that's it essentially. And that criteria was met as of May 1.

Okay, so it's only on the throughput that you've got the criteria and not--

Well it's actually the mine operation as a whole. You have to be operating at 60% to 70% capacity across the mine operation-- over 30 days--

I guess I'm not really seeing-- oh, I think it's the recovery rates that I'm just wondering about. Did you achieve that on the recovery rate?

Well, the recovery rates aren't the issue. It's whether you cover your operating costs or not. And so if you're producing enough revenue to cover your operating costs, regardless of what the recovery rate is, then you've achieved commercial production, along with the other criteria.

Okay. And then just in terms of the improvements post two months. Could you go over that again in terms of where you expect to see-- I guess the next leg up in improving in recovery rates I guess from the chart I'm looking at sometime in September, as you kind of move from the mid 60s range to 80%

I just want to make sure we have the question right before we turn it over Jean Robitaille to answer. You just want an update on what we have done so far and what we propose to do in the next quarter to be able to continue along that path; is that correct?

Exactly, yes.

Okay, essentially since the beginning, we just push more in (inaudible) the issue of the way that the air condition was done. It was not according to the concept. The design was slightly different. So we took out the recirculation; which was probably something like a gain of between 20% and 30% recovery. And now what we did, we put the oxygen at the back end of the autoclave end variable to raise the global recovery at 65%.

Presently we have some limitation with the amount of oxygen we can have at the end and at the front and this is on what we are working. And in excess of that, we have to push a bit more, concentrate inside of the autoclave we have excess capacity. So we'll reduce the quality of the concentrate, but we have some limitation in the (inaudible). So we are looking to change some pipes and pumps presently and that we confer that will be completed in September. After that, we will be able to raise gradually by the end of the year, at 83% recovery.

Okay, you've got to switch out some of the pumps and pipes in order to push more concentrate through in September onward?

Yes. As soon as we'll have that done, we'll be able to push more and that will reduce the retention time in the autoclave. That will be beneficial and we will-- we may be able to push a little bit more on the production. So we are more than confident to achieve what we have put on (inaudible).

Okay, thank you very much.

Our next question comes from Victor Flores with HSBC. Please go ahead.

Yes, thank you. I have two questions; a very quick one and then perhaps a bit more complicated one. When do you expect to achieve commercial production at Pinos Altos or is it too soon to ask that question?

(Inaudible)

Well, I think it will be October or November. We're planning on ramping up starting in September and we'll just see how it goes.

Okay, fair enough; thanks. The second question is back at the autoclave in Finland. I had a very good chat a few months ago with Ebe regarding the very specific issues with respect to the gold chlorides that were being formed and how they were binding with some of that carbonaceous material. And just going back to the last question that Anita asked; I'm trying to understand how the changes that you talked about with respect to recirculation and oxygen levels at the autoclave address those specific issues that came up?

Okay, I will try to be short. And if it's not enough, we can have a discussion after that-- the conference call. Essentially, when you over-oxidize what we see is that we-- in the ore you have some chloride. If you do a proper oxidation without any excess, you will not separate that excess of chloride. I'll try to simplify that.

If you re-circulate the solids, you just expose to just liberate more free chloride-- that will dissolve gold and after that you are in trouble. So by cutting that recirculation, we avoid that issue. And now by moving the oxidation just more at the end of the autoclave, we avoid that over-oxidation (inaudible).

And this is why we are seeing that result. Now we have some physical limitation and it's not a big deal to resolve it. It just takes a bit of time.

Okay. And with respect to the issue of the carbonaceous material?

Carbonaceous material; under certain conditions you will activate more of the organic portion and this is linked with the same issues. So by not over-oxidizing, we expect to have better results and now we are working to load that part and during that study we saw that not more than 3% to 5% as a potential impact. And we have also the organic floatation circuit. That was introduced in the concept and presently we raised the organic from 10% to 25% of the organic portion; what is normally the most affected one.

Okay, I'll leave it at that. And maybe I'll come back to you with a couple more questions. Thank you.

Our next question comes from Haytham Hodaly with Salman Partners. Please go ahead.

Thanks, Operator. Good morning, Sean and everybody else. Just a couple of quick questions; maybe I'll just follow up on a question earlier on Creston Mascota. You talked about-- you gave some economic numbers in there, talked about the internal rate of return of 17%. The first question I want to ask is--has that feasibility study actually posted on SEDAR or is that an internal one?

It's internal.

Okay, and so a question; I ran the numbers-- or the parameters that you outlined and the only way I can get a 17% IRR based on your commodity price assumption is if I'm assuming taxes, no sustaining capital and no reclamation. Can you give me an indication of just what you assume for each of those three?

Well on taxes, we're using the statutory rate in Mexico which is 28%. And you really don't pay any taxes until recover all of your capital. So it might be a time value issue there, Haytham. I'm not sure how your model is run, but we don't pay any cash taxes until the capital is recovered.

Okay. And in terms of sustaining capital annually and reclamation; what are your assumptions in there?

Well, including salvage value, the capital over the life of the mine is $65 million, give or take.

I'm sorry, so that was including sustaining capital and salvage value?

Yes-- the salvage value and the sustaining capital more or less offset.

Okay. Fair enough; that makes sense. Another question I guess with regards to you debt; we saw that you drew down another $70 million in debt this last quarter. Curious; where do you think you'll be in terms of debt draw downs by the end of the year?

Well, it's discretionary. It really depends on how much cash we want to carry. But assuming we keep our cash balances in more or less the same level, we'll probably draw another couple hundred million dollars.

(Inaudible) and then with regards to expense interest estimates for the year; where do you think that will end up?

Expense interest will be more or less double what you saw in the first six months, but a lot of it is still capitalized because we still have construction expenditures.

So it will just double-- if I take the number now and double it, it's probably not an unreasonable--

Yes.

And then you give a $550 million CapEx in 2009; I know it was given before. Can you just give us the breakdown of that again?

The CapEx breakdown?

Yes, by asset?

Yes. Just bear with me for one second; I'll just pull up the page. We're looking at sustaining capital of around about $25 million, $10 million at Goldex, $20 million at Lapa, LaRonde's [depth] extension is $40 million, Lapa is $22 million of construction capital.

Can you slow down a little bit? Let's go back to LaRonde $25 million, Goldex $10 million, Lapa $5 million was it?

Sorry. Sustained capital $25 million at LaRonde, $10 million at Goldex, $20 million at Lapa, $40 million on a depth extension at LaRonde, construction capital at Lapa at $22 million which is now spent, Goldex construction capital of about $10 million which is now spent, Meadowbank about $200 million, sustained capital at Kittila of about $50 million and construction capital of about $35 million and Pinos Altos about $140 million. That should roughly come to $550 million. I was giving round numbers there.

No, that's perfect. I think that answers all my questions. Thank you.

Our next question comes from Steve Butler with Canaccord Adams. Please go ahead.

Hello, guys. Good afternoon-- or morning I guess it still is. Ebe; a couple of questions for you on Lapa; I mean respecting that it's declared May 1 and your poured your first gold May 7, so it's very early days still at Lapa. But you alluded to 40% greater reconciliation on the first three stopes of course. So how is that-- did that reconciliation pan out through the mill on those particular stopes? (Inaudible) is not yet processed. And then secondly, how is the dilution? I think obviously you implied or you showed us 34% dilution assumption in the Analyst Day, May 29. And I assume it's therefore higher than that. So how are you managing?

Okay, with respect to the overall grade we had processed; our reconciliation has been based on 80,000 tonnes. This is very early. 80,000 tonnes of which 60,000 tonnes of the material has been development ore; so it's a bit premature. We only have about the stopes that actually went through; so two stopes out of 750 that are planned over the life of the mine. So we still have some work to do. We're going to do that in August and we're going to be running strictly on production stopes rather than commissioning development ore.

With respect to dilution, we are seeing about 20% more than we had projected in the model. Yet despite that, our grades so far to the mill are reasonably close; they're slightly lower, despite having 20% ore dilution. But we went underground and we looked at the situation and it was a situation that we had previously experienced at LaRonde and there are remedial plans currently in progress to address that.

And Ebe or Jean; you had shown a recovery curve for Lapa I think as well, and at least a recovery ramp up through May-- since May 1 or May 7 I guess it was, and you showed improvement from 55% up towards 75%, so implied May around 65%; and if you did 70% in the quarter I suppose-- is June therefore closer to 75% or are you getting better on recoveries at Lapa as well?

Okay, the recovery is-- I don't have the number in front of me, but near 72%. What we just investigated more is when we did this study and we have 14 composites of the different ore zones and presently, we started with-- as you Lapa is slightly refractory and we started with the most hard refractory. So presently we're doing better than the composite we processed. We are near 72% and the process was between 66% and 68%.

So on the curve we provided was the average curve, so as soon as we'll be in another zone, you can expect an improvement-- a significant improvement.

Okay guys; thanks very much.

Our next question comes from Gijsbert Groenewegen from Silver Arrow Capital Market. Please go ahead.

Hi, good morning. Sean, I would like to know you're going to do with all the free cash flow you're going to generate. If we look at a gold price of say- $1000 next year, which is probably very conservative, and then $1200 for 2011 and $1400 for 2012; we're looking at cash flow generation of between $500 million and $1.4 billion. What are you going to do with all that money?

Well, we've got two more external expansion studies underway; one at Meadowbank and one at Kittila. And the Kittila expansion would involve a fair amount of capital because it's an internal shaft. We've also now begun a study at Pinos Altos to increase the main horizon throughput from 4,000 to 6,000 tonnes a day. So we're certainly going to reinvest some of that back to that existing asset base to optimize and maximize those assets.

We will also look to increase the dividend. That's certainly an objective of ours, given the track record of paying one for 27 years. And then we'll look at opportunities to increase our production beyond 2014 through acquisition. So we're certainly looking at smaller, earlier stage, development potential assets with a resource on it that we think can be quickly put into a reserve base and then eventually built into a mine over a three to five-year horizon. So that's where we're focused right now.

Okay. And could you tell me what your cash cost would be ex- the byproducts?

I think I've seen some co-product calculations out that by some analysts that would put LaRonde in the low 400s per ounce, but we don't do that calculation, so I'm quoting somebody else's.

$400 you said for the whole company?

Low 400s if you co-product accounting. That's what I saw on one analyst report his morning.

But I think one way to look at it is the byproducts component of revenue becomes very small as we move forward and with that small component, using assumptions on silver at $11 and zinc in the mid 50s; we look at that and our costs are still in the low 300s overall, incorporating that small component. So it's becoming less and less of a factor moving forward.

Alright; thank you very much.

Our next question comes from Steve [Kinsey] with [Casa de Vil]. Please go ahead.

Hello, gentlemen; it's Steven Kinsey. I was just wondering; you do have a lot of focus on growth right now and just following on from the last question where assumption of the gold price staying where it is or actually going a bit higher; that you would have expansion and growth, increase dividends and that. My question is regarding more risk management. Your debt position has grown. Agnico traditionally never had a lot of debt. Granted, the ratio on net debt is probably somewhere below 15%; but I'm just wondering in terms of risk management and in terms of your strategy of debt versus growth.

If we look historically from the 1980s to 1990s, gold did go from $800 to $300. And I'm just wondering if you stress test your strategy if gold was to fall from where it is now to around the $500 level; and I know that sounds extreme-- how would you manage the debt versus growth scenario? If you are going to have good cash flow going forward, are you going to use some of that to pay down the debt or are you comfortable with having a higher debt level going forward?

I'll just start and then I'll turn it over to Dave. But I think what you've seen yesterday with the announcement of the two expansions, combined additional investment there is about $75 million, of which roughly $10 million is spent this year and the balance spent next year when we're generating net free cash flow. And if we look at a potential expansion at Kittila, those funds would be spent over a sort of three-to-five year time horizon.

And then if you look at the strategy and tie it into what we're looking for in terms of acquisition, as we stated over the last several quarters, anything that we'd be looking at in terms of bringing it, we would undertake a 12 to 24 month exploration and feasibility study phase before we committed any further capital. So this is the go-slow approach that we've been referring to for the last couple of quarters. But certainly, part of that net free cash flow will be used to reduce the drawings under the line of credit and I'll turn it over to Dave.

Yes, the net debt to cap this past quarter is just over 10% and I think that's pretty conservative. We might get it up to about 15% by the end of the year, but I think that's still a relatively low level, given the size of the company and the cash flow we're generating.

And we're also constraining ourselves to no more than 3.5 time net debt to EBITDA; that's both a covenant within our existing facility and it's a policy we have internally in terms of maintaining a conservative debt position. And on top of that, the existing facility has no amortization; it's a three-year unsecured facility-- a revolver. As Sean said, as we generate more cash, we'll just revolve some of that debt back in and keep it available for other opportunities that might come up.

But I think we're quite conservatively capitalized right now and we feel comfortable with the debt we're carrying.

Thank you.

Our next question comes from Barry Cooper with CIBC. Please go ahead.

Yes, good day. Congratulations on turning Kittila around. What was the recovery at Kittila for July?

For July, the month end is not completed and we need to complete inventory so it will be in the 60s, but I cannot give a nominal digit. But it was 65.3% for June.

Right. And Jean is that kind of lumpy week to week or day to day or does it kind of get stabilized?

It's stabilized. We're still doing some validation so for sure in the three month period that-- I'm saying that will be at that level. We are planning some tests to be honest. We have some days that we are over the 65% and some weeks, but we have some cushion to do some validation.

Right; okay. And then for Dave-- this is the first time we've got to see some depreciation per ounce costs for-- obviously for Lapa and Kittila. How relevant are those for a go-forward basis?

Well I think I'd rather look at it on an aggregate basis across all the operations. Our acquisition and discovery costs have averaged about $50 an ounce. Our build-out cost averages over $100. So I would say our depreciation over time will average about $150 across all the operations. It might be a little lumpy between operations, but an average is about $150.

Right, but I guess Lapa was close to-- I guess it's in that ballpark. How was Lapa able to meet the commercial hurdle, given that its op costs were higher than the gold price?

It was close enough. And I'm not trying to be flip. Actually, the (inaudible) is on us to prove that we don't have commercial production according to SEC; they assume we're in commercial production when we start pouring gold and we have to prove that we're not. And so when we're close enough to covering our operating costs and we're actually at 70% of throughput, the SEC says well close enough; you're at commercial production, you're not allowed to capitalize cost anymore.

Right, okay. Good enough then. Thanks, that's all my questions.

Your next question comes from John Tumazos with John Tumazos Independent Research. Please go ahead.

Two questions, if I may; I'm very intrigued at the 146 kilometers you're drilling at Kittila and Meadowbank. And in Mexico, I guess you don't go to the gym to lift weights or sleep at night; you just squint and look at drill core boxes. You expect to drill the same 146 kilometers in the second half of the year and should we view that volume of drilling as indicative of 5 million-10 million-15million or 20 million ounce potential resource magnitudes?

What we know is Meadowbank; the season is very short and we drill during the winter season and the spring season. Presently we drill over a 47 kilometer and the rest of the year we do not drill a lot; probably my guess would be around 8 kilometers of drilling. And we expect to receive all the asset probably at the end of August and we put all the information together to know what we have in hand.

And does the drilling continue at the same rates at Kittila in Mexico through the second half?

Kittila, yes and in Mexico as well.

Should we assume that this drill will convert into resources and could you give us any ideas as to the magnitudes; it would seem like that magnitude of drilling would be worth more than a million ounces of indicated or inferred resource at each location and possibly much more.

Well, we think the breakdown would be about 25% exploration, 75% conversion, John. That's just a very rough figure; and as Sean mentioned at the outset of his presentation, that we are on track to be able to convert the resource into reserve, to be able to get closer to attain the 20-million ounce level. We're monitoring this very closely and we always update our internal progress mid-year and we're just in the process of doing that as we speak.

One part of that John is in terms of actual drill core. I think the industry is challenged in terms of getting assays processed and we're certainly no different. So we've got a backlog and we're working through that backlog and that's why we're saying that we anticipate having an exploration update in September based on clearing up that assay backlog. So as Alain just mentioned, we expect to have a lot of assays in and a lot of this drilling done in the first half of the year in August and we'll be compiling that.

But again, we've had some success in Mexico. It's a large property position. We're really just, from our view, scratching the surface there. Meadowbank is also large; 40,000 hectares so we've seen some encouragement there. So it's really targeted on taking deposits that we felt had a lot of potential and drilling them very aggressively and that's the focus.

And I would also-- in answer to one of the earlier questions-- where do we spend the increasing cash flow? Well, certainly some of that is going to go back to increasing the exploration budget because as you know, this team on the exploration side like the operating team has been together for 20 years. They've had a great track record. They're excited about the prospects of some of the properties, so we're going to support their recommendation to continue with a very healthy drill program and look to increase it next year.

If I could ask a specific accounting question; there was $50 million of cost involving concentrates and at Lapa and Kittila those concentrates I guess had not yet changed title at quarter end or some of them if I understand the note. Do you use the June actual month recovery rate in estimating production from those concentrates and could you just give slightly more color on the accounting process?

Well, for revenue recognition, the title would have to pass for revenue to be recognized, otherwise concentrates are carried at cost on the balance sheet for quarter end. I don't know if that answers your question, John, or not. So all we're doing-- is we're not really estimating the market value of those unproduced cons or unsold cons; we just carry them at cost at quarter end.

For production purposes, they're recognized in terms of what's produced from the circuit. I don't know Jean, if you want to give some insight into how you estimate gold production within the circuit and quarter end.

The estimations are according-- we have different kinds of inventory-- when is the concentrate produced? When is it-- is it now in a form that we can sell; so copper cons, zinc cons, lead cons or fine carbon? Then the payable is really a result of the type.

So the footnote-- small i and small 3--in that cash cost details in the second half of the release; those footnotes are cons for production and footnotes i and iii-- it's--

What that refers to is we have-- we calculate our cash costs on a production basis. So we have to reconcile that back to the P&L. So we have to take our cost of sales and adjust it to bring it up to a production basis in order to calculate the cash cost per ounce of production. So that's what that inventory adjustment refers to.

So it's only related to the cash cost and not the (inaudible) and not the P&L as accounted.

Yes, that's right. The cash cost we report on a production basis, whereas the P&L is obviously on a revenue or sales basis. And that's part of the adjustment process.

Thank you.

You're welcome.

(Operator Instructions) There are no further questions at this time. Please continue.

Okay; thank you, Operator. And thank you, everyone; and we're not just excited about completing another quarter, but we've been told that summer is going to start this weekend up here in Toronto, so we're excited about that. Thanks for your attention and we'll talk to you at the next quarter. Thanks.

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