Alamos Gold Inc (AGI) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Gammon Gold, Inc. second-quarter results for 2007 conference call. 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, this conference is being recorded today, August 10, 2007. It is now my pleasure to introduce your host, Mr. Russell Barwick, CEO of Gammon Gold. Please go ahead, sir.

Thank you, moderator. First of all, I'd like to welcome all ladies and gentlemen listening in on the call and thank you for making the time this morning. I'd just like to introduce some of the people around the table here that will be involved in the Q&A and some of the presentation is Mr. Glenn Hynes, our CFO, and Mr. Dave Keough, our COO, and myself, Russell Barwick, as the CEO.

Firstly, I'd like to just make a comment to remind listeners that there are cautionary notes and statements accompanying this MDNA which are the usual is sort of coverages. And firstly I want to walk through and mention the highlights of the last quarter which are aimed primarily at providing as much transparency as we can and particularly to emphasize the initiatives that the management team has taken on board.

First of all, our second-quarter sales were 58,000 ounces which was three times the same quarter in 2006. Our revenues from mining operations were also triple the level for the same quarter last year. The Ocampo mine is working through a number of startup, maintenance and productivity issues that we'll talk about in a lot of detail to provide background, and that's impacted some of our operations within the leach pad and crushing and milling operations.

However, the Ocampo open pit itself increased its production some 12% above that of Q1, so a number of our productivity improvements are already starting to bite. The Ocampo open pit also -- and this is an exciting aspect -- provided unbudgeted high-growth tonnage to the mill and we'll talk about that later.

Our El Cubo mine produced over 16% more ounces than Q1, a very pleasing result and we expect that to extend even further in Q3 and Q4. The disappointing part of course, which I think most people would recognize, that our adjusted cash cost was 474 an ounce and then it was increased to 614 based on two cash write-downs that Glenn will explain in more detail as we move through the presentation. We had a net loss per share of $0.23 compared to a $0.03 loss in the same quarter last year.

One of the big issues that I'd like to emphasize is that since the last call from the first quarter the management team has been strengthened tremendously and we've got a number of new executives on board. Glenn Hynes, the CFO, as I mentioned, is here; Dave Keough is the COO who just started in July, literally five or six weeks ago; Mr. Roberto Diaz, who is not present, is our President of Mexican Operations who started in mid-July; and Dr. Luis Chavez who is our Corporate Director for Mexican Operations and is a new Board member, but he'll be providing a lot of advice and assistance in regard to external issues in Mexico.

During the quarter we concluded a $200 million Canadian raising. We did take the view to write off a stockpile that was valued at $4.3 million, but I believe that's setting up the Company for a solid financial picture going forward. Within the mine itself we ordered open pit expansion equipment for the open pit which is equipment that was planned anyway but it was for late next year that we've bought well forward. And I can tell you the gear is arriving and is being commissioned as we speak and there's new underground equipment being purchased for Ocampo as well to improve productivities underground.

We've got some good update news on the Santa Eduviges decline; it's going down under the open pit that may provide us with a completely new underground source of ore. And with the wet season I'm particularly pleased to say that our 1.1 million cubic meter water supply dam is overflowing and that is great news. Mind you we can deal with a little less water in some other places, but it does mean that when the dry season comes along again water will not be a problem for the Ocampo operation. And the other exciting news is that we've really stepped up the pace on recommencing our exploration effort on the Guadalupe y Calvo property.

In summary, before I get into the detail of the operations themselves, I'd like to make the statement that Q2 -- our expectations were never that high. Frankly the strength of the management team arrived somewhat well into Q2. We took immediate action to rectify some things that we thought should be changed and redirected. And with David and Roberto coming on board, just literally in the last two, three, four weeks, they've got their teeth into a number of things.

Quarter two was a foundation building quarter. Our El Cubo operation made solid progress, as I mentioned, 16% over Q1 and we believe it will go higher in Q3 and Q4. We had our problems at Ocampo with mechanical availability and we'll talk about that, but we're certainly delighted that the new team is getting stuck into a number of the optimization processes and their experience is directly related to start-up operation and optimizing projects generally. And the operation will become more consistent in coming quarters as we improve those maintenance practices, optimize costs, strengthen mine management at lower levels and target capital investments in the right areas.

Just to set the scene -- I'm sorry, I should mention too that we did change the name of the Company during the quarter to Gammon Gold. It may seem a small item, but basically we're trying to set the scene for the Company moving forward as one of the significant gold producers, not just in Mexico but in North America. We're revamping our website over the next few months. The new banner name will be one that will carry the elements of corporate sustainability and provide a new era of social transparency that's so important in a place like Mexico.

Turning to our outlook and vision and where we're going before I get to the detail, it's certainly to increase our production profile and reserves, but the absolute priority is to get Ocampo up to steady-state production and we think we can do that in parallel with our adding expansion on the side. We've got a lot of residual construction activities on the site which we'd like to complete as soon as possible because it's added to our manning load and is competing for priorities on the site. But a lot of that is very, very beneficial project work that for small amounts of incremental capital will make a big difference to the operation later on.

We're pursuing the second underground at Ocampo and that's something that will evolve over time. Our vision and strategy is to expand that Ocampo open pit crushing facility by 1500 tons a day, increase the mill capacity at Ocampo from 1500 tons a day to 2000 tons a day. Certainly we believe we will add -- by adding focus at El Cubo we're going to grow the tonnage that we process there. We only 45% utilized the mill that's four times the size of our own mill in the second quarter and we're already taking action to generate more ore from certain areas to fill that mill in absolute terms by the end of the third quarter. We're advancing exploration at both Ocampo and El Cubo and of course, as I mentioned before, Guadalupe y Calvo as well.

In the second quarter, as I mentioned, we produced 59,000 ounces. I should mention that the 70,000 ounces that we produced in the first quarter was adjusted downwards by 5000 ounces to 64 and that was merely just an adjustment. Our production was counted in zinc precipitate last time and that's not a process that we'll utilize going forward, we'll only count gold dore. And I should add that this had no material impact on the Q1 GAAP numbers, it doesn't change any of our metrics that the market already has to hand.

During the second quarter we sold 58,000 ounces and that was at selling prices of $664 an ounce for gold and $13 an ounce for silver gave us revenues of $38 million. And it represented, as most people realize, just the second quarter of commercial production. So it's very early in the life of this project that we expect to go for 15 years and well beyond I'm sure once exploration really starts to bring in the rewards.

And I should add most importantly, given there's been a bit of news amongst other companies lately that the Company is entirely unhedged for its future production, and that enables us to fully participate should gold and silver go up as we as a company would believe it will in the long-term.

In order to increase production and reduce operating costs the new strengthened executive team is taking a number of steps at all the operations to better realize performance. The key drivers are to improve the open pit crushing and mill utilization that was quite low during the month mainly because of mechanical issues. The current open pit mining activities are temporarily limited to grades slightly below the mine life grade because we're widening the benches out to get better productivity and we're moving in more equipment to increase the stripping.

We unfortunately experienced a lightning strike late in June that impacted both mill motors to various degrees and we were on partial capacity for several weeks. We're back running at [fly out] capacity and we have two spare mill motors almost arriving on site as we speak to ensure that should it happen again we have redundant capacity.

We've certainly ha more downtime than we would've liked to have seen, that's partly to do with better maintenance procedures in processes that we're already embarking on changes. And our procurement process was probably less than perfect and these are processes and systems that can be very easily rectified over the next couple of quarters and won't be replicated going forward.

I mentioned before about site coordination challenges by having so many capital projects underway, but they're all beneficial; they're things that are going to bring tremendous benefits to the operation long-term. We have underground infrastructure that's not quite completed yet including the commissioning of the shaft and we have to replace some underground mobile equipment. Our business systems at Ocampo in particular are still being installed, there's training been started with the staff and that will start to provide us with far more timely cost and management information going forward.

So the absolute priority with Ocampo at the moment is continue to strengthen the on-site management. We have made some changes; there will be more changes being made as we bring in people that we believe will add tremendous value to the organization; to deal with the construction projects; to improve productivity which is already being seen in the pit to implement the preventative maintenance programs on a better basis; complete the heap leach crusher expansion to improve underground performance and that new equipment will help that process; to accelerate underground development which has lagged somewhat and that will assist us greatly in opening up more soaping faces to commission the shaft; and we've got to do more backfill underground too in some of the mined out areas.

In the mill to maximize the throughput with a coarser grind we've already done some test work on that and we're running with a courser grind at the moment, and when we have been running we're seeing higher throughput rates. We'll talk a little bit more about that. The third filter for the mill is -- it's still moving forward, the critical path is receiving the third filter from Japan and with the industry under huge demands at the moment for people and equipment there's been a little bit of slippage on that, but I think we'll see that commission early in the first quarter of next year. And we have to complete the heap leach crushing circuit expansion and I'll talk about that.

At El Cubo we're improving underground equipment performance and there is a number pieces of underground equipment that have just been ordered in the last few weeks that will start to arrive over the next two quarters and that will make a big difference. We've got some capital projects there at El Cubo that will make big differences to the project but nothing to the scale of Ocampo.

And most of all, and I can't emphasize this enough, we have this huge mill that we're leasing called Los Torres, it has a capacity of 2400 tons per day. It only started up or restarted up in Q2. We only utilize 45% of its capacity. We have made a number of changes in we're making more changes underground to absolutely have that mill full by the end of the third quarter, as I mentioned.

And there are a number of other mill rationalizations that we're looking at. In fact, we've just about shut one mill down; we may shut a second one down. Las Torres offers us tremendous economies of scale; much, much lower cost per ton mill rates. If we end up with too much ore ultimately then we'll restart our old mills, but there's a whole series of mill optimization processes that are going to be studied as we move forward.

I mentioned before about the newly strengthened management team, I particularly want to emphasize Glenn Hynes and his credentials. He's the former CFO and Chief Development Officer at Sobeys, which is a $10 billion turnover company. Dave Keough is our COO who was previously with Placer Dome, Xstrata, Goldcorp, and he speaks Spanish, comes with a funny accent like I do, but his experience is perfect for what we need in our organization as we go through this change process and improvement process.

And particularly, Roberto Diaz who comes with great experience from Penoles and Goldcorp in Mexico. He brings us the local network, and knowing who's who, and hopefully is attracting talented people, further talented people to the organization.

Last but not least and more recently, Dr. Luis Chavez who joined us as a Corporate Director. He is also a director of the Gammon Board. And Luis brings to us a tremendous and very distinguished career, both in government in the public arenas in Mexico and his own network and his relationships with people, whether it be state governments, national governments, communities. The gentleman has tremendous respect from a number of different areas in the country, and that will be a great help to us to insure a smoothly-running organization beyond the mining operations themselves.

This strengthened management team, as I mentioned, has had an immediate impact on some of the organizational restructuring, and there will be more rationalization as we move forward. And you would be surprised at some of the changes that we've made in literally just four or five weeks as we go forward.

In the MD&A we would normally go to the second-quarter financial results, and we will talk about those, but what I want to do is I want to talk a little bit more about the details of the operation. And after that I'll ask Glenn to speak to the financials and then at the end I'll make some closing remarks of where we think we're going in the future with a bit of an outlook. And then we'll open it up for Q&A.

Turning to the open pit and leach operations in particular at Ocampo, as I mentioned before, the one positive is that the open pit has produced 12% more tons moved in the quarter and that was through some modest productivity gains where even initially just sorting out some of the standards that needed to be applied to blasting has improved the shovel productivity and that's all been done with the existing fleet, there was no extra equipment required to do that.

You'll notice that the grade for the quarter was similar to the last quarter. But the big take away from this is that -- and this can't be underestimated -- we took 20,000 tons from the pit with almost 10 grams per ton and we put it through the mill. In the feasibility study there was no, not one ounce ever predicated that would go from the open pit to the mill.

So in other words, any good grade that we get in the open pit and goes to the mill we get the dore in 60 hours instead of six months and we get it at 15 to 20% higher recovery. And we believe that over time those tonnages are going to come up. I don't want to speculate on how much and when, but I do believe that it's one of those sleeping positives in the organization that we'll reap benefits from in the long run.

I mentioned before that the pit mine grades for the heap leach pad were low because of course with that high-grade that went from the mill the average grade was 1.28, but once that was extracted the heap leach delivery grade became 1.05 grams. So that's how much impact that small tonnage had. So Dave and his team in the pit are working to open up the benches because it will certainly enhance equipment productivity. We're looking to do hot seat changes on the equipment -- the sort of thing that you would expect to see in very professional mining operations and I believe we'll get a lot more productivity even out of our existing equipment let alone the additional equipment that we're adding.

That equipment I mentioned before is already starting to arrive and it will accelerate our Plaza de Gallos and Refugio pit stripping, we'll join those two pits up. We're going to get back into a bit of pit staging and more detailed mine planning scenarios to dry and balance out our grade in stripping as we move forward. But particularly it will accelerate access to the [Pacachio] pit where we do have higher grades and lower strip ratio in the medium-term -- and when I say medium I mean well into next year. But it is a pit that we're very, very keen to open up because with lower strip ratios it helps smooth out our total material movement.

The new mine plan is being done in a way that will incorporate these wider benches, give us access to that grade and those three extra trucks, two new drills and two replacement front-end loaders for $7 million will be of great benefit and that in theory will take us from 80,000 ton a day to about 100,000 ton a day, but I feel sure that we're going to reap productivity benefits that will go beyond that.

Most importantly, one of the big questions is, is the metal in the ground? It certainly is, it's broadly where we expected to find it. The second thing as can you get the medal out of the rock and, as I mentioned in the first-quarter call, there were concerns in the fourth quarter of last year that the heap leach recoveries were a little slow in coming up. The first quarter we did see good news that that had accelerated tremendously.

And I can assure you that in the second quarter we're seeing a similar process with both gold and silver recoveries increasing in the heap leach pad so that we're approximately about 96% of the level predicted in the feasibility study and about 85% with silver. We believe that the silver will take a little bit longer to come out, so leach times may have to be a bit longer. But we are setting up to actually leach the certain parts of the heap leach pad for greater than the 140 days in the feasibility study and I believe that we will reach the feasibility numbers without too many problems and we may in fact do a little better if we get lucky. And that's a process that we're doing some test work on at the moment.

The company will finish installing our fourth crusher in the heap leach circuit. It's actually sitting on the pad as we speak and has been for some time, but we've been waiting for the conveyor and screens to come in, again something else that's suffering from equipment ordering and manufacturing demand from the industry. But we had a great idea from one of our supervisors and we've put in a temporary chute from one of the existing bins. And I can tell you that on the 1st of August that chute started working and we're partially using the fourth crusher already.

The offset to that of course is that we are in the middle of the wet season and I believe some of you have listened to the call from another company in the same district and they've been drowned and we're getting our fair share of rain at the moment which does impact on our crushing operations to some degree.

But turning to the crusher availability, a lot of the problem was just maintenance procedures and some of it was parts availability for the crushers and in particular we've had a difficulty with one of the over land conveyors where, again, because of demands in the industry conveyor building hasn't arrived on site on a timely basis and we've broken the belt a couple of times and the guys have done Herculean efforts to keep it running, but it has caused us some availability issues.

The new belt will arrive late in August and once that's installed we would expect to see our availability pick up tremendously. The fourth crusher, when it's fully installed, will address some of the throughput issues as well. And we've just embarked on a plan to buy two secondhand crushers where we'll use them as redundant capacity to ensure that when we have rebuilds we can quickly change the crushers out to ensure that we can run with higher availability going forward.

Turning to the underground operation and its associated milling operation, you'll notice that the underground mine actually jumped its production up substantially in the second quarter which was very pleasing. But to explain that a number of those tons we shipped across to the heap leach pad. But what that shows is we have tremendous flexibility on this site. We've got two metallurgical processes where the ore is compatible to both, we have two mining, possibly a third mining area.

And so when we can mix and match and optimize these different mining sources with the different processing methods it means that in the long-term this operation will have a tremendous amount of opportunity and optimization to be brought to bare. The mill processed 103,000 tons for the quarter. The biggest problem there was mill availability. And while the mills themselves when they're operating.

We've been getting tremendous throughput, but the availability was impacted primarily by that lightning strike that we experienced. It impacted both mill motors and there were some of the -- some of the tailing tilter issues we had in the first quarter, they fell over into April and naturally have impacted the availability numbers in the second quarter.

I mentioned before about the 20,000 tons of feed from the pit at almost 10 grams; that certainly had a boost to the mill. And while we're getting the underground more and more up to speed, the open cut acts as an insurance polishing that should we have any shortfalls from time to time we've got another source of ore that we can send to the mill. But as I said before, we do believe that there is more of this high-grade we've got a clavo which is the local term for a high-grade chute that's probably two benches down in Plaza de Gallos. And we know that balloons out because the drilling spacing in the pit is 25 meters we notice there but we don't know exactly how big it is; I suspect it may be a little bigger than we think but we'll see when we get there.

The mill recoveries are very, very pleasing. We've been pushing the tonnage, as I mentioned before, and for example getting up to 15 or even higher percentage of throughput, it probably hits our recoveries by 1 or 2%. But the economic equation is that you're a long way ahead by going down that road. And I think that we've got some great equipment there that could be pushed a lot harder if people were just using their feasibility study as their guideline.

And so we've embarked on some -- let's see what the system will do and let's push it as hard as we can. In the underground we've -- the development despite some of the -- we'd like to see more development the development rate picked up, the meters developed in the second quarter where 500 meters higher than the first quarter so that development rate is coming up despite some of the equipment problems we have hand. We've already acquired some new equipment that was delivered in the second quarter and we've got the bulk of the new stuff coming in the fourth quarter. And we've been quite pleased with the deliveries we're getting compared to some of our competitors.

We're bringing in some third party contractors and that's helping us to accelerate development activities so that we're not just waiting for our own equipment to come along. And I should emphasize we've got operating underground something like 53 different working areas. Now they're in various stages of development, some advanced, some just early stage -- but we are pushing the underground as fast as we can with the equipment that we've got.

In Mexico at the moment the demand for miners is quite high. Each of the companies is seeing quite a bit of turnover. So with Dave and Roberto on the job they're focusing on a program of recruitment and particularly a program of retention to ensure that people that come and work for us want to stay working for us for the longer-term.

I mentioned at the underground shaft, we expect to commission that in the third quarter. That will save us several dollars a ton and eliminate through the local village which will hopefully eliminate some social impact that we've been having on the community.

I mentioned before about the costing of the grind. Higher daily tonnages was immediately recognize from that process and I can tell you that one day we even got up to 1800 tons and nameplates 1500 tons. I mentioned too about the third filter which take us from 1500 tons a day nameplate up to 2000 tons a day given that we think we can push tons I believe that that 2000 tons a day rate is relatively conservative when we get our maintenance procedures into better shape.

In terms of the construction activity on the site, just to give you an idea of the things that have been happening. The permanent mine offices were just finished the other day, but that's been a distraction; the warehouse is almost finished; the racking is going up and we're consolidating three warehouses back into one. So there will be some rationalization of people and effort and administration there.

The pit workshop, we're just starting to use it to some degree, the last of the equipment is going in right now. The shaft I mentioned and the surface handling ore facilities are still being completed; the compressor house for the underground; the crushing plant and the mill and, of course, there's still some electrical work being done in the shaft and the electrical ring main underground.

But the new office -- for the first time the whole management team on the property has been brought to one location instead of being spread over 7 kilometers which wasn't very good for communication, as you can imagine, and with the new pit workshop and the new [Panex] diesel station for mine equipment we'll get a lot better productivity particularly with shift changes and hot seat changing and refueling and that sort of thing. It doesn't sound much, but David has got a laundry list of small things that when you accumulate them will have a big productivity improvement.

Turning to the sleeping giant here, El Cubo, this is the one that we've been very, very pleased with. The management team with some encouragement and creating higher expectations for them have really jumped on the bandwagon and have started to push tons through the mill. You can see there in the -- for those of you that have got the operational tables quarter-by-quarter -- literally in the last 12 months we've ramped up the tonnage processed and mined by double.

The grade has consequently come down, the high-grade is still there and is still coming out, but that lower grade material, it represents the stope fill that we're getting out of the old underground. A lot of that stope fill is coming out at about -- some of it as high as 2.5 grams so it's been very pleasing. You've seen that the grade has dropped by about -- I guess it's about 30% since the same time last year, but we're basically realized a 33% drop in cost per ton mill grade. So we're already getting tremendous economies of scale despite even partially running this new mill.

The El Cubo management is primarily focused on getting that underground performance up even higher to get more stope fill through that mill to get Las Torres running at full bore and advancing -- what Roberto Diaz has brought to the project is a completely different focus on how to explore around these high-grade sheeted vein systems. And we'll probably back off on our drilling at El Cubo because we've got a lot of development that's literally adjacent to areas that just haven't been driven through.

And we fully expect that with a modest amount of development we will uncover other stoping areas that's close to our existing infrastructure whether it be electrical, ventilation, shaft haulage, rail, whatever. And I think there's a lot of upside there going forward.

El Cubo has been doing a great job with very, very old equipment underground and Dave and I have taken sympathy on them and we're buying new equipment there to enhance that operation. There are some things we can do with the power system coming into the site that will give us a lot more reliability and a modest amount of capital maybe spend on that. But as I say, the big push will be on getting that very large mill full to realize the economies of scale that it offers.

Just very quickly and just putting a different -- not spin, but a different perspective on things as we turn to mine expansion and capital plans and if I just touch on them lightly. We're talking about not just getting our mines up to nameplate capacity, but a fourth crusher in the heap leach at Ocampo is an expansion. The third filter in the mill will expand our mill capacity in theory by 33%. As soon as the wet season is over we'll be expanding our existing heap leach pad capacity in terms of long-term storage and we've already started the design and engineering work on the next heap leach expansion beyond that.

The pushback on the Pacachio pit will give us higher grade and lower strip ratios in '08 at some stage. We've got the prospect for a second underground mine under the open pit at Ocampo which may provide a third ore source. And what I can tell you is that we're only 150 meters off what we believe to be the first major vein system under it. So it's only going to be a matter of a couple months before we start to get a handle on what we've got. And I don't want people to get ahead of themselves; this is an advanced exploration decline at this stage. But should we start to see substantial volumes of ore can immediately be turned into a production heading and a production development [group].

The shaft will add capacity and reduce costs underground. We've already been allocated an extra 5 megawatts of power at Ocampo from the grid. We just haven't got it hooked up yet. That will save us a lot of money in terms of cost per kilowatt-hour. And we're actually looking at another study. We're bringing in a much higher voltage line over about 20 or 30 kilometers and if we get that that will even reduce our power costs again and that's another study that's underway that we'll probably be working on very soon.

Exploration will continue; we're not going to forget about trying to expand our reserves and resources, particularly at El Cubo and Ocampo. At El Cubo in particular we think that there's a lot of old mines that were started and stopped for the wrong reasons and one in particular we're going to step back into because we've got some channel sampling there that suggests that we've got a tremendous potential to open these things up again and even get more diversity of ore feed as we move forward. But we'll push on with exploration underground -- both underground and open pit at Ocampo.

And I can tell you that we're drilling adjacent to Pacachio over the next two months and we expect that we'll get some positive results out of that. And one thing that had been neglected a little bit is by the end of the year we expect to have four underground diamond drills working at Ocampo which will certainly allow us to do catch up there.

I mentioned briefly some of the things at El Cubo -- new mining equipment, mill rationalization, extending the powerline just to give us better reliability, extending underground development. We're only utilizing 10% of our current mining tenements for exploration at the moment and we've got a couple of the old undergrounds that we want to go in and open up where we've had channel samples of something up to 16 grams per ton.

And lastly but not least, David, when he came in particularly, was very excited about the potential of Guadalupe y Calvo. We did 37 holes some two years ago; it averaged 13 grams per ton of gold equivalent on an average intersection with the 2.1 grams -- at 2.1 meters I should say. And we were only going to spend a modest amount of money there this year and, while it's still not a large amount, we're going to ramp it up to 0.8 -- or $0.75 million before the end of the year and we would expect a drill to be operating there possibly the end of August, early September and a completely separate geological crew will be put on that job.

And I'm very sorry to be so long winded, but I think the number of initiatives that we've taken on the site, talking a little bit about our problems is well worth it because we are very, very keen for everyone to understand where our status is at. And what I'll do is I'll ask Glenn to speak in more detail on the financials.

Thank you, Russell, and good morning and good afternoon, everyone. I'm going to walk you through briefly the balance sheet and the income statement and the cash-flow statement and then just make some brief closing comments and then turn it back to Russell. On the balance sheet key highlights at the end of Q2 were the fact that we had cash and cash equivalents of $32.8 million. As Russell has mentioned, we completed the C$200 million or US$178.1 million equity issuance during the quarter and as well paid off US$120 million of long-term debt. So that cash is the residual after CapEx and our cash loss for Q2 which I'll speak about momentarily.

Another key item that has grown and now we're finally happy to report we're starting to see some abatement is our commodity tax receivable; it reached $18.6 million at the end of Q2 which was an increase of about $3.2 million over the $15.4 million at the end of the first quarter. We're happy to report that we've received $3.5 million from the government authorities in Mexico and should see a steady decline in that (inaudible) receivable going forward.

Turning now to our inventories, Russell mentioned the fact that we did take a write-down -- two write-downs in the quarter with respect to our inventories. We took a $6.9 million rate down with respect to a lower cost, the net realizable value on our ore inventory primarily related to leach pad and that had the effect of adding $97 per ounce to our cash cost. In addition, we took a $3.4 million production write-down, so the impact of adding $44 per ounce to our cash cost, thus the $474 to $614 cash cost reality for the quarter.

I also want to point out the long-term ore inventory and stockpile has been written off $4.3 million, so notice there's no value currently attributed to that item on our balance sheet. Also with respect to our liability section we see a substantial drop in long-term debt as we paid off the Scotia Societe Generale financing in the quarter. Currently all we have in debt is the [Sioka] loan which is noninterest bearing as well as some capital leases that are in place with respect to our acquisition of some equipment a few years ago. And the other highlight on the balance sheet of course is the increase in capital stock reflecting the share issuance that took place at the end of April.

Turning now to the income statement, and Russell focused on many of these highlights. Revenues for the quarter were $38.4 million and a loss per share for Q2 of $0.23. A couple of items of note -- the write-down of long-term inventory of $4.3 million directly impacted the quarter as well as our general administration costs were high at $9.7 million. That reflected a $3.8 million stock based compensation expense which is a non-cash item as well as $2.3 million of severance costs. So those two items are higher than normal in this quarter.

The high cash cost per ounce that we're currently experiencing is a temporary issue created by a number of factors. First of all, the fact that we're operating at less than 70% of our nameplate capacity at Ocampo where 40 to 45% of our cash costs are fixed. In other words, we have a significant portion of our costs that do not change irrespective of higher or lower productive output. So running below 70% productive capacity at Ocampo clearly hits us hard in terms of our cash cost per ounce in the quarter.

Secondly affecting our high costs currently is the current grade that we're temporarily experiencing is below our life of mine average, yet the material that we're moving is above our life of mine average. So essentially we're doing additional work and additional effort in moving additional tons to get the same ounces. So as we migrate to higher grade ore we'll also see an improvement in our cash cost per ounce.

Thirdly, a key element -- and we're focusing on this just early days with David and Roberto coming on site -- is just needed process improvements and renegotiation of supply and service contracts to achieve industry benchmark costs. We're identifying a number of areas where cost reduction opportunities are available and we're pursuing those already.

And lastly, higher general and administrative cost burdens during this transition from construction to commercial operation. I'm not sure if Russell mentioned this or not, but we currently have 2000 men on-site, men and women on-site at Ocampo and our expectation that once these construction projects and other transitional issues are behind us will be around 1000 employees. So clearly some of these costs are being capitalized mind you, but still the G&A impact of the current reality is very expensive.

I also wanted to mention, although it's a non-cash cost, is our amortization and depletion cost was $13.9 million for the quarter and $26.5 million year-to-date. Year-to-date it's $215 per ounce which is quite high, but when you exclude the portion of those inventory write-downs that is depreciation and depletion, it comes down to about $170 per ounce. We would expect that in steady-state mode to be more like $150 per ounce.

And the other element I'll mention that causes it to be a little higher than benchmark perhaps is the fact that Mexgold was an acquired asset and a significant portion of purchase price was attributable to the mineral deposit. Therefore on an ongoing basis we will have a higher depletion rate at the El Cubo asset.

Turning now to the cash-flow statement, we used cash of $17 million in operations in Q2 and that essentially represents $7.6 million of utilization of working capital. Essentially that was we paid down accounts payable and we've come totally current with our supplier community and as well we had an increase in (inaudible) receivable.

So essentially we increased our utilization of working capital by $7.6 million in the quarter and, as mentioned, we've already seen a reduction in that (inaudible). We're going to see further reduction in that receivable quarter on quarter going forward.

So the other element of that $17 million of cash used in the quarter was a $9 million cash loss. Included in that $9 million dollar cash loss was $2.3 million severance that I noted, as well as $4.3 million of stockpiled write-off. To remove those two numbers from the $9 million cash loss, you're left with approximately $2.5 million of cash loss, and that essentially represents the fact that our operating reality of Q2 versus Q1 where we produced about 10% less assets -- less ounces -- that we had higher costs. Therefore, the balance of our cash loss is because our production was lower in Q2 than it was in Q1.

The other elements of our cash flow is we expended $18.4 million in CapEx during the quarter. That 18.4 is a combination of the underground capital development but also the beginning of the acquisition of assets that Russell mentioned to both improve the reliability of our asset plus allow capacity enhancements.

When you look at the Ocampo opportunity where we essentially have a $300 million asset, we've got the ability to spend $2.5 million on the open pit crusher to increase our capacity by 1500 tons per day or about a 10% increase in capacity, and to add for $4.5 million to the mill a third tailing filter of $4.5 million that increases our capacity by 33%, we essentially get to get a 20% enhancement in our overall capacity at Ocampo with a very incremental $7 million capital investment on an asset base of $300 million. Those are investment decisions that are too logical to ignore and ones that we will certainly be making aggressively.

In summary, we envision expending approximately $50 million in capital projects between now and early 2008. We believe those capital projects will both increase capacity and also improve the reliability of our operation. It is possible that we will dip into our operating line of credit in the short-term to fund those capital investments, and we're very pleased to do that because the investments we're making are both going to be plentiful and beneficial to the organization in both the short and near-term.

On that note, I'll turn it back over to Russell for closing comments.

Thank you very much, Glenn. I should just add that we've had some very positive discussions with the bank so far, and I think they see some of the upside or a lot of the upside that we do. What I would like to reflect on is looking ahead and where we are going, and I know there is a lot of people in the audience who would like us to be able to give you very firm numbers and very firm time frames. But as you can tell from the second quarter, there is a raft of different opportunities and aspects to this operation that we are working on, we are adding to, we are improving. And for me to give out a more detailed number at this stage wouldn't be appropriate because I don't want to have to come back and correct ourselves in future.

But I think the MD&A certainly reflects the challenges and the opportunities for future growth that we do, and for shareholder value creation. I certainly came to Gammon with the belief that this company and these projects can be wonderful, literally world-class assets going forward. Our target had been to achieve an annualized production rate of about 400,000 ounces and to try and do that by the end of '07. We've got in there and we have certainly -- we've seen a few things that need a little bit more work. We think we will get traction before the end of the year, but we don't believe that we will make that.

While we are still focused on achieving as high a number as possible, it is likely that that run rate won't be achieved until the end of the second quarter of '08 at this point in time. That outlook will be updated as we get more information, and I can assure you that the next most logical point is when David and Roberto finish the brand-new 2008 budget in a lot of detail very late in the year, and there will be a new life-of-mine plan, and that would be brought to the market at an appropriate point in time once the Board has approved it.

A number of initiatives and projects need to be completed to achieve those levels, including the strengthening of the senior management team and the management team on the site. That has already started, particularly at Ocampo and of course at the corporate level. Get those construction projects finished, improving productivity and maintenance performance generally, performance in the open pit, getting our maintenance practices sorted out, completing the heap leach crusher expansion, underground equipment performance and getting that new gear in there in both El Cubo and Ocampo; accelerating underground development at Ocampo, getting the throughput up with the course of grind. I think once we get our maintenance availability right, we will certainly be able to get some runs on the board there.

And particularly pleasing is the big jump that we think we can get at the end of the year when we commission that third tailing filter once the unit arrives from Japan. At El Cubo, getting that large Las Torres mill filled up I think will have a huge impact on the operation. And I believe there is a lot of other mill rationalization work that could be done there, because our existing mills, two of them in fact are very, very old. In fact, one would put one in a museum just about.

At Ocampo, significant improvement against these priorities probably won't, as I mentioned, won't get full traction until later in 2007 and into early 2008, but certainly we believe that we will show some improvements.

The third quarter, I think we will get some improvements, but please do not expect too much more than the second quarter. I just don't want to get ahead of ourselves, but I think we will certainly show some traction in the fourth quarter, even though we won't be getting up to that annualized run rate that we would have liked to have been at. The reason I am putting a caveat on the third quarter is we are in the middle of the wet season.

It has a big impact on the ore, particularly being fed to the open pit crushers, and I can tell you that other people in the region are equally under the gun at the moment. It was a problem last year and it will be a problem each year, and we will be part and parcel of the budgeting process going forward. But that is another reason why that fourth crusher is being added, to try and get greater capacity in those systems so that when we have wrinkles, we can do catch-up.

The planned capital expenditures and the introduction of stronger preventative maintenance practices and implementation of the above priorities will materially improve mill and crusher availability in the coming months, and improve production and lower costs.

Now I have spoken to a lot of people over the last few months. I've done roadshows and the big question that comes out each time is, does the project have a fatal flaw at Ocampo? The bottom line is we are seeing the gold in the pit where it is meant to be. We're seeing the gold in the underground where it is meant to be. We have even mined inferred resources, and they're where they are meant to be.

I am sure we will have some positives and there will be some negatives as we go forward as we discover more and more about this ore body, but this ore body will grow in the future. This mine is in its infancy at this point in time.

Secondly, from a fatal flaw perspective, can you get the middle out of the rock? The feasibility recoveries are almost being achieved in the heap leach and they are certainly being reflected in the mine -- in the mill, I should say. So after that, it is a matter of just making equipment work that has been used in the industry for the last 25 years. We just have to get maintenance practices that are at a higher standard, and you will see the availabilities coming up.

I should just add that we're not afraid of what we are doing. In fact, we are very proud of the efforts that are being made. The team on site have reacted positively to the new standards that are being applied across the site. We are taking -- I would love to take every listener to the site, but we are intending to have an institutional and analyst trip during September, and we're more than happy to show people where we've had some problems. And we will certainly be showing them where we are making major improvements to make it happen going forward.

So given that, the significant numerous cost reduction opportunities that are available at both mines, and they will reduce the cost per ounce going forward. For example, as management completes the above-described capital projects or the projects I've talked about over the next year, it will reduce the operating and construction headcount as Glenn mentioned from 2000 to 1000 people or probably less at Ocampo.

In summary, the optimization of the Ocampo crusher and mill from startup lows, enhancing nameplate capacity at both crushing and the mill -- the crusher and the mill, and steady focus on reducing costs both fixed and variable in line with targets will bring us the results. The strengthened management team has the skills and the proven experience to deliver on those opportunities going forward.

Now, I do apologize, ladies and gentlemen, that we've talked for a long time. We just really wanted to reinforce the fact that there was a lot of action going on and that no one is resting here in Halifax. We're spending a lot of time on the site. And what I would like to do now, operator, is to open it up for Q&A.

(OPERATOR INSTRUCTIONS) Craig Miller, BMO Capital Markets.

Good morning, everyone. I had a long list of questions going into this call, and with the degree of transparency and everything, you answered most of them. I just wonder about the rainy season on the crusher. It was a big event a year ago and some changes got made with the rubber screens and chutes or whatever. Has that been effective this rainy season or is it still an issue like one of your peers has been experiencing?

I guess a second question, you mentioned that as you continue to haul your ore from underground up through the town that there are some -- I guess you implied that there is some opposition or concern about that. Has your relationships continued to be good with the community and the town there?

I can obviously answer the question about the community relationships. We have tremendous support from the local community, and the actual (inaudible) is a very small part of the town, so there's only a few houses that are actually affected there.

As far as the wet season, having been on-site a month, and I honestly say I haven't seen the sun for a period of time, I think it has been a little bit abnormal. But certainly the retrofits last year with the change in the screens and that are helping.

Very good. Again, congratulations on the level of detail and transparency, and I will let someone else ask some questions.

Steven Green, TD Securities.

My first question regarding grades. They are quite a bit below what I guess we had previously been led to believe and what feasibility was expecting. For instance, in the underground, feasibility calls for 4.3 to 4.5 grams of gold. You're getting around 3.1. The open pit feasibility is calling for around 1.1 grams and you're getting around 0.6. Just wondering where the discrepancy is and if that is expected to gravitate toward feasibility level?

Yes, it is. With increasing stripping and increasing underground development, the grades will get back to more, if you like, feasibility life-of-mine averages grade. As the programs we've got in place now to beef up open pit production and provide flexibility in the open pit planning as well with the underground, and looking forward again, more development, more flexibility, the grades will return to sort of, if you like, life-of-mine averages.

Steve, we just happen to be in a section of the pit at the moment that has lower grades, and there is not a lot we can do about it from a scheduling perspective. And in the underground as I mentioned, some of the development needs to be accelerated so that we can better blend the high and low grades. At the moment, we are pretty much caught with having to take what is sitting in front of us. So there's not a lot we can do about it, but there is nothing there that would suggest that the long-term average grade won't be what was in the feasibility study.

As we develop at an open-pit stripping increase, there will be opportunities in all sorts of areas to give us flexibility in the mine planning and change grades, and also changing where the ore is going and getting higher recoveries. I think Russell touched on it before, the project offers tremendous flexibility with two plants, an open pit, an underground, and potentially another underground mine to optimize the life-of-mine schedule.

So is it primarily a sequencing issue or do you have more dilution right now than you were expecting?

If anything, it's just a sequencing issue, so it's nothing fundamental for us. Just we're in a period of low-grade portions of the mines. And as I said before, if the development stripping gets to where they should be then we'll have flexibility.

I would expect that at the beginning portions of the mine you'd be going after the highest grades first, that's why it's a bit of a surprise.

Well, I think that actually happened last year, Craig. And we're having to pay the piper now. Some of the ore roads didn't go in quite as fast, as I understand it, last year and that meant that the guys got a bit caught up in where they could get ore from. But look, if we want this pit to be a long-term success we have to open up the benches, it will improve productivity of the existing equipment tremendously and actually give us a lot better opportunity for grade control.

The other thing, for example, is we haven't been kriging our blast holes and we think by kriging it we're going to get far better ore definition in the pit and there actually are some quality programs that we want to instigate in the underground that are actually being used at El Cubo with great success that will have application at Ocampo and we've only just started to get that -- to embark on that program.

Okay. And a follow-up question on the grade. The 3.9 grams that's listed that went through the mill, does that include the material that came from the open pit?

Yes, it does.

Okay. And I wonder if you can give me a cost breakdown? You gave us an Ocampo overall cost; do you have a breakdown on cash costs between the open pit and the underground?

We do on a cost per ton basis, even the same basis as last quarter and I'll compare them for you -- $0.98 a ton in the open pit, that compared to $1.17 last quarter; crusher was $3.28, that compared to $3.49; $2.30 per ton on the heap leach versus $2.96, that comes out to $6.56 versus $7.62. The only comment I'll make, these are apples-to-apples numbers, Trevor (sic), is that we are thinking that we're looking at this probably a little bit more maintenance cost that was blended into these costs going forward.

But these are apples-to-apples quarter-on-quarter. And any underground mining costs were 2039 per quarter per ton compared to 4443. We did have more capitalized stripping -- capitalized underground development I should say in the underground in Q2 and about $39 compared to $34 at the mill in the underground.

Trevor (sic), that's a good example of just all we have in productivity and improvements. You can see quite a dramatic drop in the costs and as we roll out a lot of these programs in different areas both in the mill, underground and everything else, you'll start to see those trends happening.

You've got to take to heart to that this is something that's happened just in the last few weeks. It's not like we've been at this for five months or something. And we're only just starting to get some traction, but you'd be surprised at the changes we'll be making.

I'll just emphasize, there's opportunities abound everywhere, but to have these sorts of things though is quite exciting.

Excuse me, Steve, I called you Trevor.

That's okay.

My apologies.

No problem. And lastly, you put through a lot of materials through the mill at El Cubo. That was I guess basically stored material in the stopes and that's obviously a little bit lower grade which is why the grades are lower there. Do you have a kind of resource estimates on how much of that type of material there is?

Not really, but what I can tell you is there's 60 years of it and we took a conservative view. We think there you could have 15 years of production going through that Las Torres mill just on stopes fill. Now whether or not it all comes out the way it should, whether it's hung up in pillars or whatever, I mean we're talking about material that's gone in when records weren't necessarily kept well. But what we do have is the opportunity to be pulling this material out of a raft of draw points. And we're opening up as many as we can at the moment, in fact we're slashing two drives so we can get our newer bigger equipment into those old draw points.

And literally I've seen the material in the stopes, it's actually really well fragmented. It doesn't like getting wet on the way to the mill, that's one problem. But once we get it into the mill it doesn't take much crushing and grinding and we're getting reasonably good recoveries out of it. And as I said, we're getting grades up to 2.5 grams in places.

While it's low-grade it actually has a higher margin because there's no development or very, very little development to get it, etc., and it's right there.

No capitalized development, no drilling, no blasting.

So can you give any guidance as to where I guess grades and total production for that asset will be going in the future?

No, I'm sorry because the main reason is in fact when I was last onsite I was talking to the geologist and said, look, I think we'd better be getting up here and punching some holes into this stope fill. What they've gone around and done is gone into the drill points wherever they can get access to try and get some grab samples. But of course a grab sample does not make for an ore reserve. And it would be getting into dangerous ground if I started to get too predictive. But I think what David and Roberto are going to have to do is to get the guys to do some more research on it so we can give you guys in the market a lot better handle on where this may be taking us.

Okay, great. Thanks. I'll let someone else give it a try.

Trevor Turnbull, Scotia Capital.

I had a question about grades too at El Cubo, but it was more wondering that irrespective of the rezagas that you've been pulling out of there, the grades had been a bit lower than you had hoped for given that you were still doing quite a bit of development work. And I was wondering what the timing might be when you would be getting more back onto the veins and there wouldn't be as large a development work component. And if the grades from, again discounting what's in the stopes, but if the grades might be going up just as you complete some of this development stuff?

That's right. I can't give you a detailed number because Roberto is not here, but we're getting into the La Loca area which was that new discovery that the guys were defining last year. And as we get into more and more of La Loca the grades on average are higher than what the historical grades have been. So again I can't give you the exact timing, but we would expect those primary higher grade areas to improve over time.

Yes, but it's definitely something that's still in the works and it's just a ways out as development catches up?

That's right, exactly. And one thing I've been very impressed with is we're continuing to work on the quality control work at El Cubo. And we've got some great grades down there, but they come in very narrow veins at times. So there's a huge amount of work being done on dilution and recovery even with handheld [air leaks] and so on. And I think there are some further improvements that could be made there, but La Loca will make a big difference moving forward.

Okay. And then with the Las Torres mill, you've obviously been using the stope fill to get that up and keep that filled. If there is open pit opportunities around El Cubo, is any of that potentially available for milling or would that be something more for heap leaching and any milling would just be catch as catch can kind of the way it has been at Ocampo?

There is some miner -- I don't want to overplay this -- there is some miner potential for heap leach work. We do have some flat ground there, by the way which we don't have at Ocampo. But it will be a matter of economics as we move forward. If there's low-grade material that we think we can put on a small pad we'll do it, but there's absolutely nothing to stop us taking open cut material that's economic enough straight to one of the mills. And my own background is strongly open pit. There are a lot of areas on the surface where some of these veins crop out that hasn't had any detailed short hole type exploration.

The guys are fiddling around with a few cuts with bulldozers and creating dilution recovery issues just to add a few more tons, but both David and I with our strong open pit background, we think there can be a more concerted short hole program on these veins where they crop out and getting there with a far more sophisticated small backhoe, small hole truck type arrangement and get more control and that's where we could really make some money by getting higher grade out of small open pits and feeding it to the mill on a larger scale.

Okay. And then I guess my final question would be just for Glenn. Is it possible to break down on a per ton basis the El Cubo costs?

We don't have the El Cubo costs broken down at this point. If you want to call me first of the week we're happy to provide it to you.

Sure, sounds good. Thank you much.

[Easbru Sem], Equinox Partners.

I wanted to check with you just on the stepping back a bit -- I mean the CEO and CFO have been there for about half a year. Just the reporting that you have for this quarter is not substantially different from what you had last quarter or going back. When can we see an improvement in reporting of costs and sort of trying to make us understand better what's going on there?

Good point. First of all, I've only been here about three months, not half a year, and the same goes for Glenn Hynes, our CFO. We certainly recognize that our business systems at the mine sites need some improvement and there are active programs to get those business systems up to the standard that many of us have experienced before in the industry. And as soon as we've got those systems and we've got costs coming in that are more meaningful and that we can dissect what they look like we will be bringing even more transparency to the market.

But at the moment I just don't think that we have enough knowledge to be definitive about the numbers we could put in there. But I assure you and I assure every other listener that once we've got a better handle on it we will be bringing that information to the market like we've tried to in other aspects of this report.

Another comment I would make is that a 20 page MD&A for a quarterly is pretty good transparency and pretty good disclosure and I think we've provided pretty good insight into the direction we're heading and the current reality of both properties. So yes, we will augment the financial information, but we think there's pretty good information in what was released yesterday.

Not so much on the cost side, but definitely on the operating side, yes. Just going back on the reporting issue, in terms of the right down of the -- or in light of the write-down of the first-quarter production, how confident can we be that the 2006 production numbers are accurate as well?

They're absolutely accurate. The write-downs that we've taken are a function of lower-cost or net realizable value (technical difficulty) calculations on our inventory (technical difficulty) in fact we do have (technical difficulty) inventory at Ocampo alone. So the reality is that the write-down (technical difficulty) low capacity (technical difficulty) 40 to 45% of our total costs are fixed in nature. We're operating at sub 70%, so our costs are high. Potentially what the lower costs or net realizable write-downs are is acknowledging that given the current costs and also the current higher stripping ratio, that when we look at the process steps to finish that ore and turn it into gold equivalent ounces that we will in fact have costs essentially higher than the selling price.

We're reflecting that now as a current cost even though we actually would not incur the cost until later. So it's just good accounting, it's GAAP, but we're very comfortable with the valuation of prior inventory. And let's face it, Ocampo was only in commercial production since January of this year and there's never been a write down at El Cubo, it's been in business for decades. And so I have full confidence that all prior reporting is accurate and complete, no question.

And looking at the inventory write-downs that you did this quarter, again going forward we'd have to figure in a lower recovery rate and that would mean that you wouldn't have to have this inventory write-down going forward.

We will not need to have inventory write-downs once we get our capacity increase and are able to effectively spread those fixed costs over more ounces so that our go-forward costs are below selling price of the mineral obviously.

(multiple speakers) second quarter 2008 is when you'd stop doing that?

Certainly it's not a recovery issue, it's just a [viability] and capacity issue which (inaudible).

And obviously we will have a discontinuation of these inventory write-downs before the second quarter of next year. We will make steady progress through Q3 and Q4. Q3 given the wet season, as Russell has mentioned, not much progress to be expected. But you will see us make steady progress in advance of Q2 of next year.

I see. Just in terms of, again going back to the feasibility study, you sort of mentioned -- Russell mentioned feasibility is only a guidance and you can do more than that. But the operations have been substantially different from the feasibility numbers and you are not making projections for the next few quarters. Just as an investor we're making projections based on the feasibility, how soon can we expect you to make it clear to us how things are different from the feasibility on a quarterly or yearly basis?

Good question. The feasibility study is effectively a document that was done three years ago. And here we are with probably getting towards 18 months of experience in the pit and the heap leach and we've just started the mill in the underground. We're learning as we go how the ore body is reacting and so on. Now when I referred to the feasibility study it was particularly in reference to the recoveries, and I think that's the important point for note here.

David and Roberto will be the working with the mine management teams to produce accurate 2008 budgets and we will revise life of mine plans. And there is never any guarantee that just because the feasibility came up with a particular strategy three years ago that that's what it's going to look like in the new life of mine plans. Mines are evolutionary beasts depending on exploration, what you find and how you find to operate them. But the plan is to come back to the market and to give you better guidance very late this year or very, very first thing in January next year.

And I would just add that some of the key components of the feasibility are spot on things like metal recovery, the important -- the fundamentals of the thing were exactly spot on.

And the shaft should be in operation starting now?

Starting fourth quarter probably.

And we also actually -- you might not appreciate it -- using that shaft now for electrical services and helping with the ventilation and everything else. So even though it's not actually hauling ore we're still utilizing that development to help and achieve flexibility in the underground provision of services, etc.

Two more questions. On the El Cubo side, the cost per ton numbers here and I note that, but if you use the same numbers which, as last quarter, you're losing money here. Obviously the costs should come down because throughput has increased substantially. But can you give a sense of what the cost side at El Cubo is at higher throughput that you're currently doing it?

Well, we're not losing money. In fact, operating costs came down at El Cubo. On a cost per ton mill basis they dropped by 33%; on a cost per ounce basis they dropped $70 an ounce. So I'm not too sure what numbers you're looking at there.

So the cost per ton is down (inaudible).

Cost per ton milled. And the cost per ounce has dropped because of the better economies of scale we're getting.

Okay. And just in terms of the development that you had to do, you want to spend another $57 million to fix things up and you have $32 million on your balance sheet, is that right?

That sounds correct.

I wouldn't use the words "fix things up", that's just maintenance management and planning and that sort of thing. These are actually opportunities to take advantage of above nameplate capacity.

I mean, the expansions that your company had made that the Company had promised us before you guys took over I guess. But so just going back to the issue you have so much cash and you have to spend a lot more capital, how would you plan to fund that?

Well, we'd certainly plan to fund it out of operations, but temporarily if we need to utilize some short-term bank debt we will. We have a current facility in place for $20 million. The banks once we repaid the debt back in late April, have been looking to lend us additional money so we could certainly see putting in place new credit facilities of larger than $20 million obviously both core operations and also for any potential acquisition or future development opportunities going forward to liquidity is not an issue.

Would you have to hedge for that to get loans?

No, absolutely not. We've got a pretty strong balance sheet.

We're a company that has no debt at the moment and it would be only a relatively small amount of money that we'd be seeking.

Let's, by the way, talk a little bit about your comment about fixing things up. I mentioned that $7 million of direct CapEx that would allow us to increase our capacity at Ocampo by about 20%. If you take a step back, we're also spending $6.3 million in new underground equipment. Part of that of course is to bring additional throughput from the underground to feed the mill which will go from 1500 to 2000 tons a day.

Similarly we're spending $6.3 million -- actually $7 million for new open pit equipment, three 777 Caterpillar trucks having just arriving as we speak is going to allow us to bring the open pit for to go through the crusher at that higher capacity.

So you've got to take a step back from the process and even investments that we're making a new hotels and new office and other infrastructure is all part of building for a bigger business, a long-term sustainably bigger business. So this is not about spending money to fix things up.

Great, thank you.

Thank you for your questions.

Wendell Zerb, Canaccord Adams.

Good morning, everyone. I guess I'm going to follow-up a little bit on some of those previous comments. A lot of the discussion was management changes that are taking place, additional capital that is going to be put into the operation to drive better results, but is the current pore operating performance -- is it due to a combination of what previous operators in their lack of abilities and was it originally a core initial engineering plan?

There's going to be a lot of speculation about this. We have a new team that has a particular set of skills. You've got to remember that the other team were trying to get a new project rolling during the construction phase, mining was being done while the mill was still being built, there are a lot of competing activities on the site and you are in a pond with a bunch of alligators and it's pretty tough to get things rolling.

We've gone the pleasant task where the construction activity is getting down to a minimum and we can really concentrate on some of the issues. I mean, we'll continue to look at all the people on the site and continue to strengthen that team and I think there are a lot of good people down there and I think they've been terribly distracted by the construction process and we're giving them a lot more direction which is one thing and we're probably suggesting to them that there's a higher standard expected generally across the site based on our own personal experiences because both Dave and I have worked extensively in Latin America. We understand the psyche and we think that Mexicans make fantastic employees. There are some great people on the site, I just think they need a little bit better direction and the new goal setting that will go with them.

Maybe I'll just give you an example of the opportunities that abound there is that a mill that's in its first year of production should be getting about 90% availability and the crush and heap leaching circuit in its first year of operation should be achieving 85% availability and we are competing for a small (inaudible) of skilled mechanics and etc., etc., so a lot of programs for Roberto and I are just look, on beefing up our maintenance and our maintenance practices and more importantly keeping the good people we have there and putting a few more good people on to achieve, if you like, just normal industry benchmarks availability goes.

That's understandable, but what also comes into it is, yes, you are competing with the Alamos' and so on, but at the end of the day the actual results that are coming out of this initial startup have been quite frankly very poor. So again, it comes back to I guess the original sort of presentation on my part was was that initial mine plan flawed? Because you talked about putting this initial capital in to make it better, but it wasn't good to begin with.

Look, a lot of the capital that's being spent, quite frankly, was in the feasibility study to be spent some of it this year and some of it into '08. What I've done has been very aggressive in bringing some of the '08 expenditure forward into '07 to enhance the capacity, number one to get us up to nameplate -- to assist us to get us to nameplate, but I can see a lot more potential to take us beyond nameplate in the medium-term.

And this was a -- Gammon Lake was a very young company. They had come from square one, they found one of the world-class gold ore bodies. The two guys that ramrodded this have done a fabulous job to get the project to this stage and they just needed a bit more help to get it sorted out. There was probably a little bit of a -- there was a lot of pressure on the principles to deliver the mine on a certain time frame. In a more relaxed environment one may have waited a little longer before declaring commercial production, who knows.

But I think those competing pressures to get the thing built, to get it operating and to prove to the world that Gammon Lake was a real mine, that proved a little bit too much for some of the on-site operators. And now we're here to give them a hand and to give them more direction, to give them some capital because, quite frankly, capital was a little tight until we did the issuance for the $200 million and now we've got the money to spend a better quality gear.

The underground guys were, quite frankly, struggling with some of the old equipment that they had. And as soon as Dave and Roberto walked on the site they said these poor guys need new gear, this stuffs just got to go otherwise we're never going to get the availabilities we need. So there's that sort of process being applied and it's easy to be the Johnny come lately and say these things. I think it's a little unfair to pick on the guys as I was seeing things 12 months ago.

The other thing was (inaudible) you've got to appreciate this is how we spent six months in promotional production. And I've been involved in a number of projects around the world during the first year translating from construction to operation and there are very, very few projects, it's almost rare that they actually achieved a nameplate (inaudible) within the first year. Even the (inaudible) it took two years for that project to dig it (inaudible). So I think it's more an expectation, it's not the fact here that it takes a while to get a -- to bed down a project as far as its operation, its management and all that sort of stuff. So I think from where we are six months into commercial production I think compared to other projects is (multiple speakers).

And just to put a final stamp on it, this company has gone from being an exploration company to a brand-new mining company and they've built two mines in one here. We've got two -- an underground mine, an open cut mine, a heap leach, a mill as well as making sure it all -- all center mills down in Guadalupe state that El Cubo are operating correctly and they just ran themselves too thin and it needed -- the management team needed to be boosted and that's why we're here. We're to help the principles out and the Board and get this show on the road.

Let me move on to just a couple other questions because we could discuss this for a long time. The mechanical availability issues, you did describe a little bit of this, but can you just expand a little bit on what were some of the equipment issues over the quarter? Is it crusher downtime, is there truck availability, what were the issue in the last quarter?

Good question. In a nutshell I'll hit the high points. The filter problem in the first quarter, it flowed over in -- the (inaudible) flowed over into the second a little bit and we were starting to get Iraq together and then we have that lightning strike which impacted the two mill motors. The mill's themselves were fine and so on. We've got them running again and we're making sure that we've backup on the mill motors for the future. So that did impact on our mill throughput.

With the crushing circuit the two [Teledynes] have given us some problems in terms of maintenance, they're not my favorite crusher in the world; they were secondhand when they were brought to site. We're looking into buying redundant capacity crushers that we can change in and out. We're looking for some [Northbridge] at the moment. And our maintenance procedures haven't been good. We've had to move some people in certain departments to pick up the face a little bit and recognizing issues.

And as I said earlier we had -- I said to someone, we had a conveyor belt -- one of the overland belts, there was a massive delay in the delivery of the new belt and the old belt has got thread bare and we've broken it a number of times. And every time that belt goes down -- and we're talking about a belt that's a kilometer long or something like that -- every time it goes down the crushing circuit goes down.

And it becomes a combination of poor maintenance practices, equipment that probably was secondhand to begin with and needs a lot more work and we need more redundant capacity. And conveyors that have given us problems because of rubber delivery or new belt delivery, that combination plus on top of that we're in the middle of the wet season and that certainly slows up productivity when they are running.

And I know two other heap leach projects in Mexico that are suffering equally as much as us. We're doing a lot of blending with hard material with soft material, but unfortunately we're still in the upper reaches of the open pit so we will get out of the clays a little bit more, but there is a bit of clay mixed in with the hard material which doesn't help with some of the chutes feeding the crushers.

Wendell, just to summarize. Within the mill about 30% of the issues are just normal, if you like, transitioning from construction to operation, you start to push things and then you find there's premature (inaudible) in the pump so it's the wrong design. I think every project experiences some of these issues during the first year. But what's very encouraging is we're now starting to debottleneck these things from the sort of filter pan back to the mill.

And in the month of July on two occasions we sort of achieved over 18 tons a day. So as you go forward and forward and we sort of debottleneck, improve the efficiencies of pumps and all that, the reliabilities will improve and very consistently the nameplate (inaudible) will be reached if not exceeded.

All right, so are you saying then again moving forward is it a matter then just refining the current process that is in place, also making sure labor is better managed and hopefully availability issues improve? Is that it? It's not again a total design (inaudible) that would have to be done?

No, it's just sort of what I call retrofits and just operating it better.

Wendell, your statement was very accurate then. That's exactly how we see it. That is why I mentioned before the whole concept of fatal flaw. Has the mill been put on the wrong hill or is the crushing circuit falling down the mountain? That's not our issue. It's just getting standard equipment that's industry norm up the stretch. I mean I've started three new mines, (inaudible) in 4 meters of rain a year and Osborne and Granny Smith -- I've been through this many times before.

I've seen all these problems, never quite so many in one location, to be quite honest. And David was there with me at the Osborne startup, he was there all through the (inaudible) hassles in the startup there. We've been there and done it before. Roberto Diaz is the guy that built Los Filos, the Goldcorp for us when I was there and he's seen a lot of this before. And it's a matter of working through the process. I've said to a lot of institutions, listen, I wish there was a switch on the wall I could just flick to make it all happen.

But you hit the nail on the head with one comment, it's getting the guys and the management more coordinated on-site, giving them direction, giving them a new set of standards to which they're working to, and getting basic stuff done like maintenance planning, proper procurement on time, getting procurement and maintenance to work together. For example, our procurement group used to be in Chihuahua, now we're taking the whole group and embedding it in the maintenance group on the site to make sure there's better communication. We're talking mining management 101 here.

Just a couple more real quick questions. You did mention that the underground sequencing for the grades was an issue, that you really had to the muck that was available to put it through the actual mill. I guess I'd like a little bit more expansion on that. My understanding was there was an awful lot of predevelopment that was done in underground and there were supposed to be several quarters of stope availability in terms of being able to drive the current mind plan. Again, it seems a little funny that you would be processing such low-grade underground ore initially.

I think that's a good question, Wendell, and I don't have a full handle on it coming in just being here for three months. But I think what's evolved is that the underground -- while it had a lot of development done I don't think every stope was fully developed and they're still doing (inaudible) raises around ones that they've started but they weren't quite ready enough. There was a lot of stockpiled material when I arrived and that got put through the mill in the first quarter and that's been worked through, but we have been suffering extensively from underground equipment availability issues.

We've only had one jumbo, a new one has arrived. We've got another one coming very soon. Quite frankly, we just haven't had the gear to capitalize on exactly what you've said and that's something that with all due respect I think the underground is going to take a little bit longer to get up to the standard that we see it should be at, but the open cut and the heap leach and the mill will be a lot quicker, but the underground will probably take I think -- I think we'll still be doing a little bit of catch-up right through to the middle of next year.

Certainly the skill shortage with underground miners has hurt in the past.

Right, I would think so. And again, with regard to what you see in the mine plan for open pit material going on to the pads, the sequencing that you've given you can look at is going to get feasibility grade or hitting the pads?

Yes, once we start to break out the production with this new equipment arriving on there's a lot of flexibility not only to put the ore to the pads, but put any higher grade clavos through to the miss where you get sort of, if you like, a 96% recovery so a bit of a heap leach type recovery. So at the moment we're just trying to develop that, but I think if anything there a lot of flexibility.

Wendell, I don't want to get ahead of myself at all, and please do not take any credence on this. But for example, if we start to get clavos, which I personally think may happen, this mill has strong elements of it that have been designed to go to 3000 ton a day. If Dave suddenly came to me and said, look, we're getting a lot more clavos or the drilling on the end of the pit got into some more high grade, I've done and no hesitation in saying to the Board let's take this mill to 4000 ton a day.

That's the great thing about this property, it hasn't had much big picture view of it. KCA did a great job with the feasibility study, they worked with the reserve and the resource that was done. But that was only the limit of the drilling at the time. We're going to continue that exploration program and if we see other opportunities for a bigger underground or a bigger open pit or a bigger mill we will take it.

I really do think you should consider this mine in its infancy. I know there's been skepticism out there and probably quite rightly so given some statements or belief of what the feasibility was to deliver. But I think long-term it's going to do exactly what it should do, it's just a timing process.

I think what investors are really looking for is the original feasibility and being able to meet at least close to those expectations. It's nice to be able to stand up and say, yes, we've got all this great potential moving forward. But quite frankly again, it's been the performance over the last several quarters and the lack of expectations that I think investors are going to be criticizing everybody for. I've just have one more question.

Just on that, Wendell. This is the second quarter after commercial production.

Look Wendell, you're quite right. There is (multiple speakers)

Again, we can argue this point forever, and I agree with you on some of those statements, but there are an awful lot of other companies that are in the same boat when they go into commercial production. There is that period of time where you have to get all the wrinkles ironed out. In this particular case expectations have not been met and, quite frankly, the results are considerably lower than were expected. So it's that that you guys are dealing with. I can see by your comments that you're working to rectify those issues, but it is what it is and investors and of course my expectations as an analyst were not where they should have been.

Look, we've recognized -- I've recognized that skepticism since the day I stepped into the job. And what I've said to a lot of people is, look, there has been so much skepticism, please just watch us quarter-by-quarter. I'm not suggesting people should think this is a miracle of mine today, because it obviously isn't based on exactly what you said, the numbers aren't compelling compared to what the expectations are. But what I do believe is that the team that we've assembled here will continue to deliver incremental improvement quarter-by-quarter and when certain people become comfortable that we're putting the runs on the Board I'm sure that the investors will come back again.

Great. And just a last question. There are two lawsuits that are out. Can you comment on some of the details of those lawsuits and sort of management's viewpoint on those?

I will speak to one, Wendell and I'll ask Glenn to speak to the other. The one that we've heard about in the media and that's pretty much where it's at and on the Internet sites, the one from Midas. We believe that that's a complaint without merit. Gammon is certainly confident of its position and we'll certainly vigorously defend ourselves. The claim will have no effect on Gammon's operations in the short-term production, shortfall will have no implication on the long-term value of the Company.

The management team has certainly been strengthened to a number of individuals to make it work better and our prospects in Mexico remain very positive. We're going to remain focused on the project and, as I said, we just don't think the complaint has merit and we intend to prove to possibly them and the world that this company is a great company and a great project going forward.

On the second matter, basically probably it hasn't been noted before because I don't think it's really warranted being noted, but we thought we'd include it in the contingent liability note. It's a matter that related to 2004 when El Cubo was acquired by [Metalas]. Metalas is a subsidiary of Mexgold and Mexgold is a subsidiary of Gammon Gold and it's a matter that related to a contract in place with the prior owner of El Cubo who has subsequently passed away and basically the contract was broken by this individual and consequently payments were not made and then a lawsuit ensued.

The company that's being sued is a Shell company with no assets and obviously our lawyers and others believe there's no exposure. And for what it's worth we also think the claim has no merit. So we have no worries whatsoever but thought it only prudent and transparent to at least disclose it in our contingent liability note.

Okay, thanks very much, gentlemen.

I would now like to turn the call back over.

I'd like to thank everyone for being so patient with us today. I know we've taken a lot more time than what a lot of listeners normally have to put up with, but we think we have a positive story, we wanted to be transparent. I mentioned before that there will be investor visits to the site. Unfortunately there might be limited number people that we can take. We certainly are very proud of our operation.

I promised David two months to get on the ground to get the place shipshape and hopefully we'll be able to show some even greater improvements when people visit during September and that will be just after the wet season. But again, I thank you very much for your attendance and take care.

Ladies and gentlemen, this concludes your conference call for today. Please disconnect your lines and have an excellent afternoon.