Alamos Gold Inc (AGI) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Gammon Lake Resources Inc. first quarter results for 2007. At this time all participants are in a listen only mode. Following the presentation we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, note that this conference is being recorded today May 11, 2007. It is now my pleasure to introduce your host, Mr. Fred George. Please go ahead.

Good morning, everyone. Today Gammon Lake is very glad to report to you this is one of the best quarters in the Company's history we ever achieved with a production 36,801 gold ounces and almost 1.6 million ounces of silver, equal to 70,000 almost ounces of gold equivalent. We also reported the revenue was from the mining operation $43 million. We are glad to report we also hired Mr. Russell Barwick as a new CEO, and we also announced drill results from the yearly exploration drill program at El Cubo mine in January 2007. And we also reported the high grade discovery in a new area at the Ocampo underground mine. And we declared commercial production at the Ocampo mine in January '07.

It was a very busy quarter. Let me tell you, ladies and gentlemen, as you all know Gammon Lake, we went from zero ounces in the ground to 400 million ounces of silver in all categories, and with 8 million ounces of gold in the all category. And then when the world said we couldn't finish the feasibility study we completed that feasibility study. And when the world doubted Gammon Lake could not build it, we proved again to the world Gammon Lake was able and capable to build the largest gold and silver producer, actually the largest gold producer in Mexico.

And now we turn it into an operation company because we are today one of the biggest in the metals producer in the world. So what we realized we needed now the operation team. So once again we've proven ourselves to the world by hiring Mr. Russell Barwick as a new CEO; he will lead the company now, fine tune it and make sure the operation runs smooth with his team. And then we hired Glenn Hynes as our new CFO. And let me assure you all we always make the right decision. We believe Mr. Hynes is the right candidate for the job because we believe our sale and purchase equal between $400 and $500 million a year where Mr. Hynes was able, and he did for ten years, CFO Sobeys Canada where the purchase and sale over $12 billion.

So right now we also achieved, and you all know and I want to bring to your attention Brad Langille. Brad Langille is still with us full-time, and Brad, he was always known in the exploration, finding ounces and he demonstrates for you with his team he did find one of the largest mines in Mexico. And right now under Russell Barwick's leadership he is going to put Mr. Langille full-time on that third underground mine at the Ocampo, which is beneath the open pit.

So I believe, ladies and gentlemen, with the right deposit in the right country with the right operation team in place this company can only go forward and upward from here on. Thank you very much, and I'll pass it now to our new CEO, Russell Barwick.

Thank you, Fred. And thank you for the kind comments. Firstly I'd like to make a special comment about Fred and Brad and the team and what they have achieved. I have obviously been there on the site, and I was really quite surprised at what I found down there as part of my own due diligence process, that these guys have put together two impressive operations in short order and the operation is up and running. We've got a few wrinkles to sort out but effectively all the infrastructure is there and it is just a matter of making it going forward like a Swiss watch. But I would like to congratulate them on what they've achieved for the shareholders over the last 10 years, and that they have done it in Mexico and in particular the relationship that Gammon has developed with the community and the Mexican government and the State government is almost second to none. And having worked in Mexico myself I can assure you that that is a big positive for the Company.

As Fred said, I want to welcome Glenn Hynes to the group. Glenn doesn't come to us with a mining background. But I just want to emphasize Glenn and I have been doing just about everything together except in the same hotel room for the last few days. And Glenn certainly has all the skills and more that Gammon needs to go forward and to provide the discipline we need to get us up there and running like a very well oiled and highly disciplined machine.

I won't go over the highlights again that Fred outlined except to say that in any company's history having your first quarter of commercial production ever is really quite substantial, and this is a real milestone in the evolution of Gammon Lake. And again, everyone should be congratulated on that. However, we now enter a very serious phase of getting the assets up to full capacity, some steady-state production. And what I believe is possible is that there's a lot of optimization and organic growth opportunities that are possible and I will talk about those a little later today.

I also want to just mention the Gammon Lake strategy -- because I am the new boy on the block I want people to be very, very clear as to where we are taking the Company going forward. And no one should be under any illusions that we're going to be disorientated in what we're going to do. And one of the things that I should emphasize right now that drew me to Gammon in the first place is that number one, I've got very, very strong support from both Fred and Brad. Number two, the assets are world-class. And I believe the exploration opportunities in Gammon Lake's properties are amongst the best at least in the Americas. They are all old mining camps; they have all had very little exploration. One exploration was done with very low capital and no modern techniques and these guys have proven in spades already that they have been able to turn on the ounces and I think there is still a huge amount of potential that hasn't been realized because you got to remember they've been constructing a mine at the same time while continuing a drill program.

Without further ado, I will just move on to some of the highlights of the quarter. I will talk about it from an operating sense and then I'll ask Colin Sutherland to talk about the financials, and then we will go back and mention some of the strategy.

Of course as Fred said, we had a great month. We sold nearly 36,000 ounces and 1.4 million ounces of silver. Revenues of $43 million. We did have production costs that were an anomaly to what we expected and what we expect in the future. We had some issues with crushing on the heap leach pad and we had some weather-related issues and that had the impact of adding about $160 an ounce to the operating cost for Ocampo, and I will ask Colin to speak to that in more detail going forward.

Of course, and again I don't want to say too much about it but obviously I just joined Gammon in April; just following the first quarter and I am very, very rapidly coming up to speed. But many of you I believe know me or know of me. I've seen some of the names that are on the list of callers; I am hoping to get to see you as soon as possible. Some know me from my old Rio Tinto days, some from my sixteen years with Placer. I ran new Newcrest for a couple of years where I certainly was doing a lot of marketing in New York and Europe. And more so in particular a number of you know me from the Wheaton-Goldcorp story where I just spent four years there working closely with Ian Telfer and generating the story you see there today as well.

In April of course we filed a short form prospectus where we generated total gross proceeds of about $200 million. Those proceeds have been used to largely pay down debt. But more particularly, and I certainly encouraged Fred and Brad to do this because the decision was made just before I came on board, we want the flexibility to be able to apply those funds to the organic growth on our properties, to continue to push the exploration, to continue to optimize the operation, to get the tons up and to generate more ounces so we can get that depreciation load down. The Company has been incredibly successful so far with its exploration programs, and I just don't think we're finished at that point by any means.

Turning to the individual mines, again I don't want to go over the numbers because many of you have them in front of you, but we put the 700,000 tons of ore on the heap leach pad. The heap leach physically is running fairly well. In the second quarter we're preparing to start prestripping on two of the pits which will allow them to join up, which will allow us better grade control to feed to the heap leach pad. And we are also about to start a big pre-strip on the Picacho pit, which has higher grade and a lower strip ratio. For what it's worth we don't know the full impact but we are about to get into some benches on the existing pits that certainly show higher than average grade.

The really pleasing thing that has come out of the first quarter is, and I did listen to the fourth quarter report, as a listener on the phone. But of course there was a lot of focus on the gold and silver recoveries in the heap leach pad. And in the first quarter we have seen both gold and silver recoveries increase substantially. So that we now believe that we are currently estimated about 90% of the amount predicted on gold and about 85% on silver; and it looks like it is more a time-based issue rather than a total recovery issue. And we just completed some column tests which further confirm that we should achieve a feasibility study recovery rate. So we're very hopeful that that is the case going forward.

As Colin will explain with the operating cost, one of the reasons was that we had some crusher issues in the heap leach crushing facility. The Company very, very quickly reacted to that situation, and we've revamped the crusher, and we're putting in a fourth crusher to bring the capacity up by 1500 ton a day to a nameplate 13,000 tons a day. During the period of course we got no shortage of ore, and in fact we stockpiled almost 2.8 million tons of low-grade. But we will be looking at opportunities of what we can do with this ore and any future load growth that we pull out in the future. We've got some ideas of possibilities there but we have to do a lot more study work to determine what is possible.

In the underground operations we've got in excess of 28 kilometers of underground tunneling complete, 44 stokes in various stages of development. When you gentlemen consider how long this operation has been going, that is quite an achievement. We have produced 88,000 tons of ore. We put more than that through the mill because of stockpiles that were on the surface. And we are also -- we've also started the procurement of some extra equipment for the underground which will allow us to start some long-hole stoping. We've got a number of specialist long-hole stopers on the site, and we now believe that there are significant areas where we can apply long-holing and we will be very careful with our recovery and dilution, but it will reduce our costs underground. And we've already learned certain stoping methods don't work as well as we thought and we're moving some to cut and fill. So there is a whole bunch of optimization that is presently going on there.

The mill, as I said produced, processed about 116,000 tons at a little over, about 7.5 grams. The availability was down a little bit due to adverse weather conditions, but given it only started up in January, that availability is quite good. And I believe we will certainly do a lot better.

The really pleasing result with the mill is it is delivering on feasibility study recovery rates. This is a very amenable ore, very simple metallurgy. There aren't too many challenges there, and that is one risk that comes out of the equation. We do have some issues that we have to deal with, and these are things that will actually prove the operation. We've got some power distribution optimization that we have to do; we're just waiting on some consultants' reports. I don't think we are getting the best performance out of our power station. We've got some reagents to change over, which will reduce our costs. We're very close to getting the shaft finished which will eliminate some high cost haulage from the underground.

And of course many of you know that we've probably got some -- that the filter press are out, have bottleneck in the mill and we've ordered the third press. It will be installed later in the year for a modest amount of capital and that will allow our mill rate to get up over 2000 tons per day.

The big story that I want people to understand, the big opportunity is that when these guys built this mill they certainly didn't hang back on the major components. The significant components in the mill are probably good for about 3000 tons per day. And it won't take much if we can generate the ore capacity from the mines to add a limited number of components front-end and back-end. What I would like to think we can do that over time -- over the next year or two we can slowly build up towards that 3000 ton a day rate. What we've got to do is get some economies of scale into this operation and let's make more ounces and reduce those fixed costs on a per ounce basis.

Turning to El Cubo, during the first quarter it produced nearly 8000 ounces and 390,000 ounces of silver, generated revenues of about $10 million. The long-term focus at El Cubo is getting rolling on finding and developing high-growth mineralization. We just completed quite an exploration program there -- we are absorbing the results of that program at the moment. We did announce some results as Fred said earlier which are very, very encouraging. One in particular I noticed of 72 grams of gold and 700 grams of silver over 2.5 meters, which is really exciting stuff. And then to find a new offshoot of one of the main veins and that's going to be a primary focus of our attention going forward.

We are looking at the economic -- we've looked at the economic viability of processing a lot of old stopes (inaudible) and as part of the agreement with our neighbor were we've got their mill which was on care and maintenance, we have cranked that second mill up, and we're now processing stope fill from the mine. That volume of stope fill is still being fully evaluated but any production we get out of the stope fill further enhances the economics of El Cubo and reduces the fixed costs on the property. So I am quite excited about the fact that we have a huge amount of mill capacity there. We've got lots of exploration potential. The name of the game is to find more ounces to put through it.

Again, further turning to project development specific stuff, I've mentioned the fourth crusher in the heap leach circuit, where we're expanding the heap leach pad by doubling it to 5 million tons capacity for a relatively modest amount of capital and that will be done over the rest of the year. We've already completed the design plans to double that again up to 10 million tons which will be done at a further point in time. We are starting a pushback on the Picacho pit, and the tailings filter I also mentioned. But we've got some more news that we will be talking to the market about very, very soon and that is our primary focus on the development of the potential second underground under the open cuts.

In the open cuts, we already have a good handle on the ore shoots and what they look like as we've uncovered those pits and it is quite obvious from our open pit geological mapping process and our underground drilling that those shoots continue at depth. We've got a drill program that has taken holes as deep as 300 meters below the pit; we've got results down that far that reflect the sort of thing we're finding in the pit. And it is my aim that we should push that ramp as fast as possible; we're already 80 meters in off the portal. We're probably 500 meters or less away from the first veins to get a close look at them. But all looks fairly rosy at the moment and we are making that a real priority because if we can generate a second high-grade source for that mill and we can lift the mill capacity a little bit that makes for a great story going forward.

In addition, we're not trying to lose the plot on exploration generally. We've got $8 million applied to exploration this year, $5 million at Ocampo and $3 million at El Cubo. A number of those dollars have already been spent at El Cubo but I can assure you as shareholders that if we get onto some really good results that show even more continuity we will have no hesitation in lifting those dollars and pushing it a lot harder.

The other thing at Ocampo that should be mentioned where it reduces the risk on the long-term operation is, when I visited the site I couldn't believe the substantial nature of the water supply dam that has been built at Ocampo, and that is within literally weeks of being completed. We are just in time for the wet season. The timing is absolutely perfect. We've got wells that we'll take care of the next few weeks. But that eliminates a big concern in a country that can wax and wane in terms of water availability. So Ocampo is going to have a very solid supply going forward.

On a project development basis El Cubo also is looking at increasing the capacity of its existing mill from 1300 ton a day to 1800 ton a day. We haven't made an absolute decision on that but that is something that we will be looking at in the near future and that can be completed by the end of the year if we go forward and it is a modest capital cost.

And finally at Guadalupe which frankly I don't have a good handle on yet, it is our advanced exploration project on another major mining camp that produced an enormous amount of gold. We're just developing a new drill program for 2007 based on the excellent results from the previous 37 holes. And hopefully we'll have some news on what we intend to do there in the near future.

I've probably spoken too long, but I just thought it was useful to show that I've got -- I'm getting a handle very quickly on the operation and understanding the issues. And I want you people to understand that that is the process. I will now hand it over to Colin Sutherland to walk you through the financials.

Thanks, Russell. Important to note is that the Company did change its functional reporting currency for the first quarter and effective January first, the Company determined that its functional currency is the U.S. dollar. And therefore we did change our reporting currency to the U.S. dollar from the Canadian dollar.

I believe the obvious question is the production costs and as Russell mentioned we do believe it is nominally going forward. It's important to understand how we allocate our costs. Gammon Lake allocates its current mining costs which include depreciation, depletion and amortization related to the mining operations through its inventory.

At December 31 the Company was carrying ore in process at a higher weighted average carrying cost due to precommercial production costs that were included in the inventory. As we produce our ounces we do transfer those costs from ore in process to production costs, which did result in a higher reported cash cost per ounce for the quarter. The reality is there is a lower weighted average cost that is being applied to the inventory through Q1 and this will lower the carrying costs of the inventory over time. And through Q1 we did apply $402 per gold equivalent ounce to that inventory. And during the quarter as Russell did mention we did take a writedown of $8.1 million related to the inventory and allocating overhead to the P&L directly because of the reduced output from the crushers. And this did inflate the reported non-GAAP cash cost per ounce by $162 per gold equivalent ounce.

It is also important to note that approximately 50% of our costs are fixed on-site, and therefore if we do have reduced output it will impair the reported results. But vice versa if we do have an increased output it will have a fairly positive impact on the operations. It is also important to note that with recoveries on the heap leach pad nearing the expected recoveries, the Company believes it will be able to apply a higher weighted average cost more on ounces quarter after quarter.

Moving over to financing as Russell mentioned, in April we did file a short-form prospectus related to the public offering of C$200 million, which does strengthen the balance sheet and also subsequent to the quarter and we did pay out our $120 million debt facility. We believe this will allow our balance sheet to be comparable to other midtier companies. And our internal model indicates that the financing is breakeven on a net asset value per share and it also has very little impact on earnings per share and cash flow per share. And as Russell mentioned it allows the Company to immediately focus on its organic growth opportunities on its assets.

I will pass it back to Russell now who can talk about the strategy going forward.

Okay. Thank you very much, Colin. I just want to talk about our strategy very, very briefly because I just want shareholders to be very clear -- potential and present shareholders -- as to what our priorities are in the short to medium-term. And we know what -- I believe I know what the shareholders want in the short-term, and that is they want performance. And we've got to -- the rubber has got to hit the road now, and we've got to deliver on the promises that we've given to the market. And so the main thing is to ensure that Ocampo is up and running and is in steady-state production. There will be an enormous focus on that in the next two quarters.

As I mentioned before, I think there is tremendous opportunity for project optimization and expansion opportunities. They will be reviewed in parallel with that process of getting to steady-state. That also includes not backing off from the camp exploration where organic growth is going to be incredibly important and we've probably got more opportunities than a lot of our competitors. We will certainly pursue our low-cost producer status. I can't overestimate that it is a personal belief that low costs are the thing that encourage our shareholders to buy our stock and it's something that I want to pursue in earnest. Our present focus will remain on Mexico; we've got the team there. They know the country. There is no point in wandering off elsewhere for the time being. And we're just not going to get distracted from what our prime focus is at the moment.

The guys have done a tremendous job to get the mines up to their present status. But we do need to strengthen the management team and I'll be looking to bring additional people in, and I am talking clearly individuals, not just numbers, to carry out some very, very specific tasks. And with my background and network I'm sure we will be able to get the right people on the job. And that is going to be a big focus, as well.

I just want to mention that over the next two weeks Brad and I will be getting out; we're going to try and meet as many shareholders as possible both in North America and Europe or particularly London, and I want you to hear it from me what our intentions are and to maybe talk about a few things in a little bit more detail. But that is number one. And the moment I get back both Glenn and I will be back down to Mexico and you will find us pretty much as hands-on executive management. And as soon as we see the operations running the way it should, then we'll back off and let the local guys get on with it and keep doing it.

And while I've got the shareholders on the line, many of you shareholders, I would just like to say that what my intention is, is to rebrand the Company a little bit. Gammon Lake Resources has had a wonderful history, and Fred and Brad have brought it from a grass-roots organization up to what you see today. But I think we have to sort of state what we are about in the future, and we're going to ask shareholders at the AGM to change the name to Gammon Gold. Gammon, because we want that history to be there, Gold because that is the business we are in and we want everyone to understand what that business is.

So without further ado that's all I've got at the moment. I will pass it over to questions. Thank you.

(OPERATOR INSTRUCTIONS) Grant Tharby, Parrot Capital.

I've got some questions. I hear your enthusiasm about this report. I am not very pleased with these costs from the mine. They seem to be significantly higher even once you've taken out the 162. I want to know what is your plan to get these things down to 200 as you forecast. Is that still attainable? I also want to know what is the status of your cash flow? How you guys are going to get cash flow positive, what timeframe we're looking at? When you are going to get to commercial production levels which you forecast. If you're below in the first quarter when you expect to get to full levels. And also I'm hearing some report, I haven't been to the mine. You've been down there. What is the status with the local protesters? Any problems there? And finally, also regarding investor information, your website always seems to be lacking in terms of up-to-date stuff. There is very little information being passed through to the investors and I just wonder if there is any program to improve that aspect of things.

Thank you very much for the questions. They are all certainly very valid points that you've made. As you can see I've only just come on the scene but I believe that we can attain the feasibility type rates, and we will be working very, very hard over the next two quarters to do that. You've got to remember that this mill just started up in the first quarter. The heap leach is only just started. They are notoriously slow to get rolling, and we've got part of a construction team still on the site finishing up a few things so you've got operations and construction people together and we've got to get that discipline in that comes with running an operation. So I feel sure that with the application of discipline and the strengthening of the team down there that we will be able to deliver in the long run.

You mentioned issues with ejidos generally in Mexico at the moment. Gammon has an excellent relationship with the local community, strong support from the state government and so far there has been next to no impact on Gammon per se. We are in some discussions with the ejido at the moment but because our relationship is so strong with them, we believe that it won't have too much impact on us.

In regard to the website you've caught me on the hook there at the moment, but one of my smaller issues is certainly not on the major strategic issue list, is to go and look at the website and to determine whether it is telling our shareholders what they need to know on a timely basis. And I think you will find that we will be revamping that completely. For those of you who know me from the past I have a very strong focus on sustainable development issues. That is community and environmental issues. So you will start to see a lot more information going on to the website about what we're doing with the community so that everyone should be comfortable with the fact that we're going to have the people and our stakeholders around us fully supporting the mining operation going forward.

Okay, just a little bit of follow-up there. So you are looking at two quarters before you are going to be up to full production of the 100,000 gold ounce equivalent, and also I just want to readdress the -- when is the positive cash flow scenario estimated?

I can't give you an exact time, but I think it will be a couple, one, maybe two quarters to get things rolling, Grant. And if we can do it earlier than that, we will do it. But I've just got to build the team up a little bit, and we've got to finish off some of the construction projects. And I feel, I genuinely feel that this place has the capability. And I, as I've said today, I've talked about issues where I think we can even possibly start to look going beyond the feasibility numbers. But time will tell. With regard to the cash flow, I will flick that across to Colin if you don't mind.

If you do look at the statement of cash flows for the quarter we do show negative $9.2 million. However, the bulk of the change in that relates to balance sheet items. So we did reduce some of our payables. We did have an increase in our trade receivables. So if you exclude that you would be in a situation where the quarter was positive cash flow.

I see those numbers but those are hardly sort of excessive numbers in terms of getting -- they are marginally positive. I am talking about significant cash flow because if you're planning to develop other parts of the mine or even look at developing other [rigs] in there you're going to need more cash flow pouring in. And plus or minus $2 million is not going to do it for us.

That was the reason for the raising, Grant. We've got the -- we went out and issued equity. We've got cash in the bank. And this is a brand-new mine, and we've got to optimize the assets that are there and I believe we can get the economies of scale that are necessary.

In any new mine there is going to be a timeframe to get the thing settled down and get it rolling. And we've got a brand-new management team that is coming in, and we are aggressively going to chase those things down. I've been in the industry for 30 years. I've built mines. I've operated mines. I've planned mines. I know what needs to be done. Glenn Hynes is getting right on top of the funding issues that we've got and not that we have any funding, but just getting some discipline on how we're spending our money. And we will be making a big difference to this operation going forward.

Grant, your point on cash flow is a very strong one. Obviously with 70,000 ounces in the quarter, which is not where we're going to be going forward, that is the key driver obviously of operating cash flow. We've talked about the cash cost per ounce, needing to come back into line once we get out of this construction phase and get into smooth operation. Those two key realities are going to drive operating cash flow. The other piece is of course we still have some hangnail CapEx. We spent $11 million in total investing activities in the quarter; once we get these projects cleaned up we will be then focused on the exploration and CapEx that is going to add further value and add more ounces and/or reduce costs going forward. So your point is good, and we will be driving cash flow going forward, beginning to see improvements in the next couple of quarters, for sure.

We will wait for the next quarter's numbers then.

Trevor Turnbull, Scotia Capital.

I just wanted to get a sense, I heard Colin mention earlier about the cost supply to the ore that has been in process and how we roll that forward as it actually begins to produce. But it makes forecasting a bit difficult to say the least. I was wondering if you could give us a sense maybe quarter by quarter or even first half versus second half, of exactly what the production profile we should be expecting and maybe update us on what type of costs we should be anticipating to apply to those.

Trevor, what I would like to say there is one thing that Glenn and I want to do is immediately we're going to relook at the mining schedule for the rest of the year. It has been laid out based on the feasibility study, but I just want to come to grips with just what it looks like in an immediate sense and what opportunities are there based on some of the expert ore definition that is being done and how the pits are performing. And it is not a number that we really readily have to hand, and I think it is something that we will be able to talk about in the not too distant future. But until we get that done I really don't want to go out on a limb and start predicting quarter by quarter what exactly it is going to be.

And I think from the production cost standpoint, Trevor, what is really happening is we've got a significant amount of precommercial costs that are inherent in that inventory value. And as you go quarter to quarter it is going to be easier to smooth it out. So as you apply a lower weighted average cost to the inventory quarter after quarter, once you're achieving your optimal levels, then it is easier to predict. And at this point because it is inflated and it is hitting our production costs right away, it will flush out. So a lot of those hangover costs from 2006 will flush out, probably over this quarter and the next. And then once you've got a sustainable operation, and you've got a smooth operating cost scenario, then it becomes easier to normalize and predict what those costs are going to be.

I can appreciate that. Let me just change gears, then and ask one other question on the operations. You mentioned that in the MD&A the shaft was looking for commissioning sometime in Q3. And I didn't get a lot of color as to what is left to do and exactly why the shaft will be Q3 as opposed to maybe sometime in Q2. If you could just speak to that, that would be my last question. Thanks.

I might just flick that one to Brad because he has been very close to it.

Yes, there is not much left there, Trevor. We are getting ready to put in the cabling. They have -- all the power connections are in place, and hooking up the final power supply to the shaft. The latest estimate we have from our contractor is by the end of July they figure they should have the commissioning done; July and August we should be using the shaft.

Thank you very much.

Manish Vora, Monness.

A little bit of clarification on the cash costs. This issue of the ore in process, this would have affected the previous quarters, as well, correct?

Yes, it would have. Effectively what you were doing is if you look at the bulk of the costs, they occurred late -- in the later part of 2006, so what you are effectively doing is you are adding cost to your ore in process, and because the recoveries weren't at what we were expecting you're not necessarily producing the [dory] that you are expecting either. So what ends up happening is while you are in commissioning and your recoveries aren't where they optimally should be, you're not able to transfer those costs out. So as the recoveries have come up and you are nearing feasibility study levels you are now into a situation where you're able to flush out the ounces from the heap leach pad, and subsequently transfer those costs associated with them, as well. The issue then becomes once you've got the heap leach near its capacity as far as times and recoveries, you can flush out all the hangover costs. And as you apply your lower weighted average costs it will assist you going forward.

So when you reduce, when you talk about the $162 impact, that gets you to a kind of north of $400 cash cost. How then do we get kind of comfortable from $400 ramping down to the $200 level?

Yes, you get comfort from the fact that as you produce and your production increases, then those will come down quite substantially. And the biggest point to emphasize there is that where you've got 50% of our costs on sites that are fixed, regardless of whether we're going to produce or not, we are going to incur some costs. And so while we increase our production the costs will come down substantially once the ounces are applied to your production costs.

If you look we had the crusher issues during the quarter so we didn't get the tons on the pad. That was one thing and we are fixing that problem with the fourth crusher. The mill availability for its very first quarter was about 86%. I would be expecting more like 94% in the long-term. They are all issues that will reduce that variable cost per ounce basis as we go forward.

And another question for Colin. It looks like the G&A costs were a little bit this quarter, significantly higher. Is that the right number going forward, the $12 million range?

Yes, in previous calls we had budgeted about $12 million. What you typically find in the first quarter is you do have some additional fees. We did have some fees associated with us completing our Sarbanes-Oxley compliance. So they were slightly higher than what was expected. They will smooth out from quarter to quarter. And it's safe to say that they will stabilize at around $3 million U.S. per quarter.

That is on the G&A?

Correct.

And finally for Russell, it looks like in the release that you guys are still kind of talking about a near 600,000 ounce production in 2009. And I just want to have you talk about your comfort level with the long-term production at this point.

Well, that is how long is a piece of string in that that's just based on the ore reserves as we know them today. If we have an aggressive exploration program over the next three years that number could be anywhere in the future, but I don't expect it to be less than what that number is at the moment.

Okay. Thank you very much.

Craig Miller, BMO Capital Markets.

First thing, Colin, would you be able to break down the operation costs at Ocampo between the open pit and the underground? If it is broken down in the MD&A, I missed it. But are you able to do that?

I am able to do it on a per ton basis, Craig.

That's fine.

If we look at the operating costs for the open pit, they were $1.03 per ton. In the underground it is $21.70 per ton. The crusher was $2.09 per ton. The heap leach $2.06 per ton and the mill is $40.60. We have seen some increases, obviously. And again, a lot of it relates to reduced output. One positive note is that the mill cost has come down from year end of about $7. And again, that is as a result of some increased output in the mill. And what we will see going forward with some of the power distribution studies that we are doing right now that will come down quite significantly, as well.

Also the table on your mill operations implies that your recovery rate was above 110% for both gold and silver so I'm assuming you've had some inventory buildup in the mill -- I guess 2006 from the various shutdowns. Is that --

That's right, yes.

And finally, I am still a little confused on heap leach crushing. On my last site visit I had thought that the mill crushing plant had been capable of 13,000 tons a day and that this fourth crusher being moved over that used to be at the mill, was going to add this 1500 tons a day additional to get you up to 14,500 tons a day. And now I'm hearing that the fourth crusher is only going to get you to 13,000 tons a day. And then I am a little confused as to what were the issues that you only end up placing on the pad less than half of what you mined. What was -- what broke I guess in the quarter?

The issue, Craig -- it is Brad Langille here -- was in the first quarter one of the Telsmith in the high-grade end of the crushing facility, it was a commissioning issue that we found as we went forward that wasn't set right. And we did a major overhaul on that crusher. That impacted crushing during the first quarter. The crushers are on the high-grade line 6000 tons a day, 7000 tons a day on the low-grade line. And that is based on 20 hour days of 350 day years. The feasibility study used a nominal amount of 11,400. With this new crusher it is actually 1500 tons a day. So using those rates we should be able to go over 13,000 tons a day. In fact, Colin, it was almost up to 14,000 by 2008. I think we had 14.

That's right, yes.

We were there the last time, I think you were even claiming there were days you [put] 18,000.

We have had days that we have stacked 18,000 tons; it is just trying to get the consistency.

Craig, when you look at our daily rates they bounced around a lot over the first quarter, and we've been really encouraged. Some of the daily mill rates have gotten way above (technical difficulty), and particularly through the filter plant even with just the two filters in the crushing plant on the heap leach it has been exactly the same. What we've got to do is really focus on getting the consistency there, and this fourth crusher will give us that. It is a brand new crusher. It will be far more reliable, and you got to remember we are still shaking down this mine and getting the maintenance right up to scratch and getting the operators coordinated. And it is all about getting consistency. I have commissioned about four or five mines, and what we are seeing is no different than what we see at most places. And heap leach is quite frankly the ones that always seem to take the longer time to settle down.

We've had on the mill -- we've had close to 1800 ton days, and on the heap leach stacking we had an 18,000 ton day. So like Russell mentioned, it is consistency and Russell and his team are going to really help out with that.

Very good. That's all the questions -- sorry, I do have another question. Grades in the pit seemed to be a lot lower than I was certainly expecting. Was that part of the mine plan, or is there something else to the lower grades coming from the pit? I guess other than having your high-grade lines shut down, maybe that was it.

Well, having the high-grade line shut down, or it wasn't completely shut down but not being at full capacity impacted the grade going out to the heap because we ended up sending weighted wise, a lot more through the low-grade end of the crusher. So that definitely impacted. In the mine plan we did mine some lower grade in Q1 in the pit. We are catching up in some stripping where we are going to open up as Russell mentioned some areas for example in Picacho, and in Plaza de Gallos. We are just a couple of benches away from some very high-grade. In fact some high-grade that we will want to direct to the mill. So we will get into some higher grades here going forward in Q2, Q3.

That's all I have, and I look forward to meeting you, Russ.

Thanks, Craig.

Steven Green, TD Newcrest.

A couple of questions, kind of following up on Craig's question on grade. He was talking about underground -- what about the -- he was talking about open pit. What about the underground? You did come in below what I was expecting in the quarter. Can you give us some kind of guidance on grades going forward through the mill?

On the underground we came in a bit below reserve grade; reserve grade is about 8.2 head grade for the life of mine. And we see some variation stope to stope. There are some very high-grade stopes that from quarter to quarter will impact that grade. But it is -- you know, we're not overly concerned about the grade being where it was the first quarter. Also we're doing some optimization underground, and we're doing better and better underground. We will see the grades come up and the reconciliation so far looks good.

So you're expecting something closer to reserve grade going forward?

Reserve grade is not going to be a problem. Our geos are telling us on reconciliation that overall they are seeing that the reserve grades look good.

Reconciliation looks good, and you've got to remember that this is one of these typical Mexican underground vein lines where the veins come and go. They flick in and out and the grades go up and down and we are actually going to see quarter by quarter differences other than the average. It's just a matter of process. Plus I believe there is some stockpile material booked through the first quarter as well that was left over from earlier development.

Right. Did you put any open pit material through the mill at all, in the quarter?

In the first quarter we had some open pit material, some 7 and 8 gram material from the open pit did go to the mill.

Okay.

Probably around 10,000 tons.

It was only a modest amount.

And another question on the costs. I realize that there is the carry through from inventory, but obviously those costs are real costs that occurred. Is the overrun a result of the lower recoveries and lower throughput that you had previously, or is it more a function of higher unit costs than you were expecting?

I think your first comment on the recoveries, what is effectively happening is you are applying a higher cost through commissioning because again you are still not getting the output that you are expecting. So as you apply those higher costs what ends up happening is we've got a bucket of cost that is inherent on the balance sheet. And then once we start to produce those ounces we can flush those costs out. But as we get into and Russell and his team getting in there and normalizing those costs, the weighted average that we're going to apply going forward is going to be significantly less than what was there during the commissioning period. So again with a lot of overhang from contractors on-site and a mix of commissioning and construction and so on and so forth, 2006 we just incurred a significant amount of costs that were being plugged into the inventory value. So once the operation is stabilized again those costs will flush out at a more reasonable level.

To be more specific you're down about 10% on your availability on the mill for the quarter, so that impacts your fixed costs. You are down an amount on the ounces stacked on the pad because of the crusher being down. And the grades were down a little bit on both to the pad and to the mill. They all have exactly the same effect at the end of the day, and we aim to deal with that going forward. And that is where optimization and productivity and grade control becomes so important and fiscal discipline on the site as well.

Colin, if you could just -- I got most of the unit costs. If you could repeat the milling unit cost.

$40.60.

Okay. Thanks. And one other quick question in regards to guidance. Is it safe to assume that in 2007 you won't reach the 400,000 ounce mark then that you previously guided to?

What we are aiming for in 2007 is to get up to that rate but we probably won't make the 400,000 ounces for the year. Now we are entering areas of the pit where we have quite dramatic grades, and we just don't know what that positive impact might be. But I am not going to go out on a limb right now only having just started to say that we will actually correct their shortfall.

Do you have an approximate number for '07?

No, not at this point in time.

Okay. Great. Thanks.

Ladies and gentlemen this concludes our question and answer period. I will return the call back to Mr. George.

Thank you very much, everyone. Thank you for tuning in today. Now as you heard from each and every one, Russell Barwick and Brad Langille they will be marketing, they are starting as of Monday in New York and they will be meeting most of the investors and the people [who are booked] in a meeting, and then after next week they will be flying to London (technical difficulty)

I am sorry, Mr. George. We can no longer hear you. We can hear you now, sir.

Can you hear me now?

Yes, sir.

How much did you miss?

About 20 seconds, 25 seconds, sir.

Okay. I just was saying that Russell Barwick and Brad Langille will be marketing in New York next week and the week after they will be marketing in London and Europe. And we look forward to be talking to you in the next quarter, and we are looking for a better quarter, and we see the company now have the right team in place and only can get better from here. Thank you so much, and we will talk to you soon.

Thank you Mr. George. Ladies and gentlemen, this does conclude your conference call for today. Once again, thank you for participating and we ask that you please disconnect your lines.