Alamos Gold Inc (AGI) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Gammon Gold third-quarter results conference call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. (OPERATOR INSTRUCTIONS)

I would like to remind everyone that this conference call is being recorded today Tuesday, November 13, 2007 at 8:30 AM Eastern time and would now like to turn the conference over to Ms. Anne Day, Director of Investor Relations. Ms. Day, please go ahead.

Thank you, operator. Good morning. My name is Anne Day, Director of Investor Relations of Gammon Gold. I would like to welcome everyone to the Gammon Gold third-quarter 2007 conference call and webcast. I have in the room with me today Fred George, President and Chairman; Rene Marion, Chief Executive Officer; Dave Keough, Chief Operating Officer; and Glenn Hynes, our Chief Financial Officer.

I would now like to turn it over to Fred George for some brief comments. Fred?

Good morning, everyone. Thank you, Anne. Let me speak briefly first about the quarterly report of Q3 and what the management and the Board we think about it. I'd like to remind everyone Gammon started as an exploration company. Now we had to change from exploration phase to building phase in order to replace our team and hire new team and build one of the largest gold producer in Mexico.

After we complete the building, then we had to find new operation team who can operate this mine. So you are right. We are a little bit behind on the time we give to the market. But I want everyone to see it the same way we are viewing it now, the great opportunity we created.

So now what I'm going to say is this, you heard Russell Barwick in the last quarter when he mentioned to you this Q3 again is going to be a bad quarter. And the reason it's going to be a bad quarter because they're going to take that quarter and they're going to change the way the mine was running. They want to replace some of the equipment. So we had a lot of time with shutdown but however in the end, we were very glad to see here as a management the turn around our management team and our operation team have put into place.

And that's why we believe after you listen now to Dave Keough, the Chief Operating Officer; after you listen to Rene Marion who came with us from Barrick, and you will witness for yourself I do believe as a President and Chairman and as Board of Directors after we had our meeting yesterday, this is the worst quarter our investor ever gone to see in Gammon Lake as far as the cost and as far as the ounces.

And after you listen now to our operation team, we're proud to introduce to you our new Chief Executive Officer, Rene Marion, and you're going to hear from him and then you're going to hear from our Chief Operating Officer and then you are going to hear from our CFO and then you're going to come to the same conclusion I'm letting you right now at Gammon now is at the bottom and it is great opportunity and I'm going to turn it over right now to Rene Marion, Chief Executive Officer.

Thank you, Fred. I'd like to open up by saying I joined the Company as CEO on October 25 and just completed my first tour of all the Gammon properties. I'm very excited by the potential of the Company and the assets we own. I am pleased to see the progress that Dave Keough and his operating team have made in the past few months and I'm quite happy to have joined the team to help move the Company forward to the next level.

As you know, I was not on board during the third quarter so it is more appropriate that the third-quarter update be presented by Glenn Hynes, CFO, and Dave Keough, COO, as they were hands on during that quarter. After they complete their presentations, I will summarize the Company's go forward plans and outlook. Following my wrap up, we will open up the lines for Q&A. The operator will provide all those details at the end of the presentation.

Now I would like to introduce Glenn Hynes, our Chief Financial Officer, who will provide you with an overview of the third-quarter financial results, who will be followed by Dave Keough, Chief Operating Officer, who will provide you with the overview of the operations. Glenn?

Thank you, Rene, and good morning, ladies and gentlemen. I will now review the third-quarter financial statements beginning with the income statement. Q3 was a challenging quarter financially for the Company as our net loss was US$44.8 million or US$0.38 per share. Over 40% of this net loss or US$0.18 per share related to a non-cash income tax expense arising from a new Mexican income tax statute substantively enacted on September 28, 2007. I will elaborate on this shortly.

This loss compares to a net loss of US$16.1 million or US$0.16 per share in Q3 of last year. During Q3, the Company sold 25,104 gold ounces and just under 1.1 million silver ounces for 44,863 gold equivalent ounces at average gold and silver prices of US$679 and $12.54 per ounce respectively for total revenues of US$30.4 million. This was an 85% increase over the US$16.5 million recorded in Q3 of last year.

This increase reflects the commercial production commenced at Ocampo in January of this year and we are reporting a full quarter of El Cubo performance this year since the acquisition of Mexico occurred midway through Q3 of last year. Being fully unhedged, the Company is benefiting from the strong gold and silver prices including even stronger prices in October where we averaged approximately US$756 and US$13.89 per ounce for gold and silver respectively which is a further 10% improvement over Q3 prices realized.

Turning now to production costs, the Company's challenges in Q3 were primarily caused by our Ocampo mine operating well below capacity and the high production costs relating to that reality. In Q3, availability of Ocampo's crushing and heat fleet circuit decreased to 53% from 65% availability in Q2 primarily as a result of 17 equivalent days of unplanned downtime. Mill productivity improved to 82% availability in Q3 up from 67% in Q2 but still below the low 90% availability contemplated.

Since approximately 55% of Ocampo's operating costs are fixed in nature and 45% variable, this low planned availability had significant negative impacts on cash cost per ounce as significant fixed costs are spread across fewer produced and sold ounces. Adjusted total Company cash cost per ounce of US$601 for Q3 increased to US$764 per ounce after reflecting a US$6.5 million cash write-down of leach pad and mill inventory to reflect the lower cost and net realizable value which is US$144 cash cost per ounce and an US$800,000 cash expense to reflect Ocampo's low operating utilization which is a further US$19 cash cost per ounce impact.

Also included in total cash cost was a US$22 per ounce Q3 severance charge associated with reducing the Ocampo workforce by approximately 30% near quarter end. General industry inflation is also negatively affecting cash cost per ounce as wage settlements, fuel, consumables, maintenance and electricity costs are all subject to ongoing price pressure. Irrespective of this inflation pressure, an aggressive cost reduction program implemented at Ocampo identified over US$10 million to date in annual savings from products primarily 60% thereof of savings related to the reduction in headcount late in the third quarter. These cost savings are expected to be realized in the fourth and subsequent quarters.

The realization of these savings and better leveraging of our fixed costs once improvement and product productive output occurs, should result in significantly lower cash cost per ounce moving forward.

General administrative costs for Q3 totaled US$5.6 million which was US$2.1 million lower than Q3 of last year, primarily arising from lower stock-based compensation expense this year. While most of the Company's transactions are denominated in either U.S. dollars or Mexican pesos, the recent strengthening of the Canadian dollar has caused inflationary cost impacts to the extent of our Canadian dollar costs which primarily include our Halifax corporate office expenses which are not material.

Q3 amortization and depletion costs of US$10.4 million compares favorably to an average expense of US$13 million for each of the first two quarters of this year. The lower Q3 expense reflects the lower ounces production in the quarter and the outcome of our review of our future exploration properties where depletion expense need not be reported until they are incorporated into our mine plan.

As noted, the Company recorded a net non-cash future income tax expense and corresponding future income tax liability of $20.5 million in the third quarter representing the largest change in the Company's net loss quarter over quarter. The Q3 expense reflects the impact of a recently enacted Mexican single rate tax, substantially enacted on September 28.

With the implementation of this new tax on January 1, 2008, the Company's Mexican subsidiaries will pay a 17.5% tax on the Company's revenues less certain deductions all determined on a cash basis. The Company will pay the single rate tax each year to the extent it exceeds its income tax otherwise determined pursuant to the previous income tax system.

The Company had significant income tax loss carryforwards primarily relating to the accelerated deduction of mining properties costs permitted for income tax purposes. Prior to the implementation of the single rate tax, the full benefit of these loss carryforwards was reflected as a future income tax asset on our balance sheet. The future income tax expense reflected in the quarter of US21.6 million reflects that a portion of those loss carryforwards that the Company projects will not be utilized as intended in future years due to the existence of the new single rate tax.

While first-quarter net loss was increased significantly by this future income tax adjustment, the expense is a non-cash item and there was no impact on cash flow from operating activities arising from it. We are closely monitoring developments on this matter in Mexico as while we were required to estimate its impact on our Q3 financials, we had little opportunity to assess the details and there appears to be much discussion still taking place as to the exact workings of this new tax.

Leaving the income statement now and moving to the statement of cash flows, I will summarize our Q3 operating, investing and financing highlights. Beginning with our operating activities, cash used in operations for the third quarter was US$10.6 million. This consists of increases in non-cash working capital of US$4 million and a cash loss for the quarter of US$6.6 million or US$0.06 per share.

For working capital, the US$4 million increase consists of an increase in (inaudible) supplies inventories of US$2 million as inventories of critical spare parts were enhanced in the quarter at Ocampo to enable improved plant availability. And our ore and process inventory increased by US$3.2 million reflecting finished good dory bars on hand at quarter end which were sold early in October. Offsetting these working capital increases was a US1.2 million increase in accounts payable for capital equipment that arrived late in the quarter.

The Company continues to aggressively pursue the collection of commodity tax receivables with significant recoveries of US4.5 million received subsequent to quarter end and more are targeted later in this quarter.

While Q3 net loss was significant at US$0.38 per share or US$44.8 million, it was materially impacted by non-cash items. For example, non-cash items represent US$0.32 of the US$0.38 Q3 quarterly loss as future income taxes were US$0.17; foreign exchange loss US$0.05; depreciation and depletion of US$0.09; and stock-base compensation US$0.01 comprised this amount. While not desirable, this Q3 cash loss of US$0.06 per share or US$6.6 million compares to a cash loss of US$3 million in Q3 of last year and US$9.4 million cash loss last quarter in Q2 of 2007 putting the quarter's results into perspective.

Investing activities for Q3 used cash of US$26.1 million for mining property and plant and equipment additions. 80% of the Q3 additions relate to Ocampo and primarily include investments in open pit equipment, underground capital restoration expenditures, and the initial expenditures to upgrade underground equipment.

Financing activities for the quarter were the source of cash of US$4.9 million primarily relating to advances in the Company's line of credit which totaled US$6.4 million at the end of the quarter.

Turning very briefly to the balance sheet, I wanted to make two brief comments. First, Q3 was a quarter of important investments as we used cash to strengthen our asset base, both for existing capacity and to add to our nameplate capacity at both Ocampo mines. We also continued important investments at our Santa Eduviges and Guadalupe y Calvo exploration projects.

Secondly, I'll comment about liquidity. The Company's balance of cash and cash equivalents as of September 30, 2007 was US$1.1 million and combined with our available borrowing facility, anticipates having sufficient funds to meet our future plans and obligations. Subsequent to quarter end, we finalized a US$60 million revolving facility with the Bank of Nova Scotia and Bank of Montreal with its term expiring on December 31, 2008.

The Company will have an initial availment of US$47.5 million increasing to US$60 million upon the completion of an updated resources and reserve study, life of mine plan and 2008 budget which are all expected to be finalized early in 2008. This facility replaces the existing US$20 million revolving facility.

We are confident that with the financial investments made to date, the recent bolstering of our senior management and mine my management teams, significant focus on cost reduction and process improvement initiatives, and traction on the various initiatives we've implemented to enhance operational availability, progress on all of which were accomplished in October, that we are poised to deliver the improved financial performance that our management team and our shareholders expects.

I will now turn the call over to Dave Keough, our Chief Operating Officer, who will discuss our operational performance and initiatives.

Thanks, Glenn, and good morning, ladies and gentlemen. Firstly to Ocampo. While operationally this quarter was disappointing, it was a quarter we had to have to implement change and significantly turn the corner on key operational performance metrics such as tonnes mined, tonnes processed and importantly, the cost of tonne metrics.

In addition to implementing required operational and management changes, production particularly in the Open Pit and the heap (inaudible) crushing and processing circuit were also negatively impacted by an unusually heavy rains in July and August and these rains include a hurricane which tracked very close to the project.

Productivity from the (inaudible) course was also affected by the effort and distractions caused by the (technical difficulty) to significantly reduce the overall site workforce by 30% or over 600 people. What is extremely pleasing is that with this distraction behind us and with a significantly strengthened site operational management team with a combined experience of over 250 years in place at Ocampo, several site production records were broken and several feasibility study production metrics estimates exceeded in our favor and we are looking forward to continuing improving on what was achieved in October in all areas.

For example, tonnes milled in October was a site record of 49,000 tonnes or 1580 tonnes per day which exceeded the 1500 tonne mill nameplate capacity of the first tonne on a monthly average by 6% despite mill availability being only 84%. An optimization initiative introduced at the end of Q2 involving costing the mill or growing without a significant loss in gold, silver recovery has proved very successful.

This cost (inaudible) has improved instantaneous throughput above the mill nameplate capacity with peak [valley] frequence of over 2000 tonnes per day occasionally achieved which is indicative of the installed capacity of the milling circuit and a good example of operationally the mine turning the corner.

Third-quarter tonnes milled was 112,000 tonnes for an average of 1200 tonnes per day which is 19% below current nameplate capacity but a 9% improvement on Q2 results. The third-quarter mill availability improved from 67% in Q2 to 82% availability with further improvements anticipated in the fourth quarter. October mill availability was 84% despite a full day plan generator maintenance outage at the beginning of the month. Mill availability is targeted to be in the low 90% and the work plan is in place to achieve this level.

Productivity of the crushing and heap leach circuit decreased to 53% in Q3 from 65% available in Q2 primarily as a result of 17 equivalent days of downtime related to the unavailability of a replacement for a worn out overlaying conveyor belt and delays associated with plugged shoots and screens due to the unusual heavy rain in July and August.

The overlaying conveyor belt was replaced late in the third quarter and improved productivity was immediately achieved with October availability at 70% with tonnes placed on the pad in October being the best results since May. Leach pad crushing circuit availability is targeted to be in the mid-80s and a work plan is in place to achieve this level.

Open pit mining was essentially at the same levels as Q2 which is a pleasing result if you take into account the critical delays caused by the wet season. However, late in the quarter, we took delivery of three 100 tonne trucks and an additional drill rig and front-end loader.

Once this additional equipment was commissioned, daily peak production on [occasion] exceeded 115,000 tonnes per day. Total tonnes mined in October in the open pit was a site record of 2.8 million tonnes, an average of 89,000 tonnes per day which exceeded the previous monthly performance by 19%. Notably the feasibility study only assumed the daily open pit mining rate of 80,000 tons per day and in October this was the first month this was exceeded and the mine is now on track to consistently achieve the planned 100,000 tonnes per day average with the arrival of additional loader and drill late in October.

Open Pit daily tonnes mined was another example of an operational metric turning the corner performance wise. Total open pit production for Q3 was 580,000 tonnes at a gold equivalent grade of 1.51 grams per tonne which is approximately 90% of the life of mind average grade. Underground grade in Q3 was 6.5 grams gold equivalent which are consistent with Q2 grades. Site management is focused on improving head grades to the mill through improved mining methods that will decrease mining dilution.

Recoveries for the mill remain consistent with feasibility study estimates with recoveries of 95% on gold and 90% on silver and recoveries for the heap leach continue to improve consistent with the first half of 2007 and are trending towards feasibility study estimates.

During the quarter, an aggressive cost reduction program was implemented at Ocampo which identified over US$10 million in annual savings. This included reducing service employees from 1300 to approximately 1000 and reducing by half the number of contractors involved in a project. This reduction of over 600 people has reduced total site mining from the previous 2000 to around 1400 which is felt to be the appropriate level for a project the size and complexity of Ocampo.

Other areas of cost reduction including reducing rental equipment and focusing on effective utilization of company-owned equipment and closely examining reagent use in the processing facilities. The savings in the use of cement is a good example. These cost savings identified will be realized in the fourth and subsequent quarters.

Onto El Cubo. Operation of the mine performed the same as the previous quarter with only a slight drop in tonnes processed and gold silver head grades. The reason for the drop in bouillon production was related to the variable nature of both in the grade and metallurgical performance particularly of the silver of the stope fill and surface material from small open pits which was the ore feed to the Las Torres Mill.

By focusing on grade (inaudible) sampling to minimize dilution and changing chemical reagent use in the flotation process to more ore specific, we have seen an improvement in the run of mine grade and metal production of the Las Torres Mill.

El Cubo being a mature mine is subject to the inflationary pressures being experienced by the mining industry and an [issue] is underway to offset the rising cost. A project to integrate El Cubo underground mine workings with the Las Torres shaft and mill infrastructure is underway with all the engineering completed during the quarter and a minor rehabilitation of underground infrastructure in progress.

The project involves all of El Cubo underground mine with the train haulage level at 600 and hauling all underground ore via train to the Las Torres shaft and plant which has a capacity of 2400 tonnes per day. This will result in cost savings to the closure of existing flotation plants, two at El Cubo and all haulage costs. It is anticipated the full use of this haulage system will occur in the second quarter of 2008. We are also investigating ways to fast-track this initiative in order to bring forward the savings.

Similar to the management process implemented at Ocampo during the second quarter, we've implemented a thorough review of the cost structure at El Cubo to identify where additional savings can be realized. One area of coming focus will be total site manning, including the use of contractors which is currently over 1200. We are very confident that additional savings can still be squeezed out of this mature mine.

And lastly onto our advanced exploration project, Gyadalupe y Calvo, which we are extremely excited about and believe it is one of the better exploration projects in Mexico. During the quarter, exploration activity included diamond drilling recommenced after several years on this highly prospective project with three holes of the planned 15 completed. As with everyone else in the industry experiencing delays with laboratory [SA] turnaround and we are currently awaiting the FA results from these first holes. We will certainly be reporting results in the next quarter.

In addition to diamond drilling, a total of 28 surface trenches were dug and sampled across the main [Rozaria] structure to determine potential for bulk open pittable mineralization. SA results available for the first 12 trenches from sampling across the structure were very encouraging with wide zones in some cases over 50 meters on medium grade, plus 2 grams equivalent gold mineralization [recounting], supporting the concept that the project has potential for bulk open pittable mineralization.

During the quarter, we will continue to accelerate the exploration activity on these projects as the results to date are very encouraging for both bulk open pittable mineralization and high grade underground mineralization.

I will now turn the call over to Rene Marion, CEO, who will discuss his first impressions and future plans.

Well, thanks, Dave and Glenn. My first priority when I joined the Company was to visit the Company's assets in Mexico. And last week, Dave Keough and I toured Ocampo and El Cubo mine, and I will be heading back shortly for a follow-up at Ocampo to focus on the underground operations and to tour our Guadalupe y Calvo exploration property, which looks quite promising from what I've seen thus far.

What I saw at Ocampo was a mine that's working through some startup issues that are typical for new operations. In my most recent position as COO of Highland Gold where I had some (inaudible) on Barrick, we face identical productivity issues that we are dealing with at Ocampo. So my background and experience will augment the already strong management team that we have assembled at Ocampo.

Let me set some highlights of the progress that had been made late in the quarter and continue to demonstrate improvements in October. (inaudible) tonnes at Ocampo in October in the open pit was the record 20 million, as Dave said, which exceeded previous best monthly performance by 19%. And while on site, I saw the accelerated stripping program and the focus on wider, higher productivity [vention] which will lead to improved performance. And I fully support Dave and his strategy as the short-term accelerated stripping will soon lead to greater ore access resulting in improved operational flexibility.

As Dave mentioned, the overlaying conveyor belt was replaced in the third quarter and improved productivity was immediately achieved in late September. In October, 245,000 tonnes of ore were placed on the pad averaging almost 7900 tons per day as availability improved to 70% similar to levels achieved in Q2. Dave assures me that the leach pad crushing circuit availability [targeted fee in 80s] will be reached by midyear 2008.

I would like to highlight, however, that the heap leach facility capacity may indeed not be as critical for production moving forward if history is any indication. Why I say this is because as we have seen in the past quarter, over 13% of the open pit ore has been above 4 grams and therefore subsequently sent to the mill for processing due to the better economics. This represents 63% of the mill feed during the quarter and was totally unplanned. We are currently remodeling the open pit and anticipate that we will -- there will be a need to seek further milling expansions and a possible corresponding decrease in the heap leach feed.

In the underground operations, Dave has the team focusing on development so that the operation can have adequate developed ore. Support in this program will allow us to slowly ramp up production throughout 2008 to provide us with the operational flexibility that is required in vein mining. I want to stress, however, that the slow ramp up of underground operations is not uncommon during the startup. New underground mines take considerable time to ramp up fully as you focus on safety, training and maintenance initiatives.

Tonnes milled in October were a record 49,000 tonnes or almost 1600 tonnes a day which exceeded the mill design throughput of 1500 tonnes a date by 6% despite the mill availability being only 84%. We continue to work on establishing best practice on the plant facility and targeting improved mill maintenance procedures to achieve a plus 90% availability by mid 2008.

As underground production improves in the coming quarters, and as we see the continued significant contribution of the higher grade open pit ore, we are currently evaluating the necessary steps required for increasing mill throughput which of course will afford the operation improved metal recoveries and further improved economics.

As Dave and Glenn have already described, we have implemented a number of initiatives to improve operational consistency, increase capacity and manage our cost structure. We will continue to drive these initiatives in order to augment the momentum we have already achieved and expect significantly lower cash costs going forward as we realize the benefits of these initiatives.

To conclude, we have already positively impacted the cash cost by US$10 million annualized going forward primarily to the reduction of project manning at Ocampo along with lower cost of consumables such as the substitution of cement, to name a few. But we are not stopping there. We will continue to rationalize all costs in the months ahead.

To focus on short-term guidance, at Ocampo, we are currently working on the 2008 budget and updating the life of mine plant and as a part of this process, we are updating the resources and reserves and anticipate having this fully audited by an independent engineer. While we anticipate not having this completed for a few months, I can say the following. Production at Ocampo in Q4 will be 10% to 15% higher than Q3. And Q1 next year will improve a further 10% to 15% or a similar amount.

Cash costs are anticipated to reduce over 30% to 40% by mid 2008 when further reductions as we continue to improve on production focus on cost to year end 2008. In fact, we've already seen a reduction of over 15% in total cash cost in October from Q3 as we gain a foothold on a lot of these initiatives.

At El Cubo and at Ocampo, we are working on 2008 budget and the life of mine plant. And while we don't anticipate any material changes in production forecasts in the coming quarters, we do anticipate reductions in cash cost as we commission the 600 level haulage to Las Torres facility, centralized processing at Las Torres, and affect the appropriate layoffs. As a result of these initiatives, we forecast a reduction in cash cost by 10% by mid 2008.

As for the longer-term outlook for our operations, we will be presenting to the market our key 2008 metrics and a three-year outlook by the end of the first quarter 2008 once I have the reserve update at Ocampo in hand along with a thorough understanding of the life of mine plant.

And with that, I'd like to pass it back over to Fred for some closing discussion.

Thank you, Rene. Well fellow investor, as you all heard now Rene and you all heard Dave Keough, they have turned the corner at the mine with all the changes they have made and what I want to say for the record is this. I, Fred George, President and Chairman, I still have my 4.6 million option that had been given to me over the last past ten years. So as Brad Langille, the former CEO was still with the Company, still have his 3 million option being given to him again in the last 10 years. And Colin Sutherland still have every single option also was given to him in the time he was with Gammon Lake and Gammon Gold.

So even if share reach US$20 twice, we still have our option. Because we promise to [all], we will deliver this mine to you when we can now realize the run rate of 400,000 ounce of gold equivalent and when we're going to realize the cash cost would be below the $300 U.S. level. So we are committed. We stand behind the Company. We are supporting our new team now under Rene Mario and with Dave Keough and we will be behind them all the way till these number realized.

And for the investor for you to take in consideration, compare Gammon Gold to any other midtier producer, we have 117 million share outstanding. The number we aiming is the run rate of 400,000 ounce of gold equivalent and the cash cost below $300 U.S. So when you compare 117,000 shares outstanding, take out 400,000 ounce of gold equivalent, take out cash cost below 300, you would know when you make your own calculation where Gammon Lake should be trading and the multiple you will make on your investment today.

And we already set now for January. Rene and I will be visiting New York will show the outlook for Gammon Gold and we show achievement we made in the first quarter. And we will be visiting Boston, Los Angeles, San Francisco, then we are doing a tour in London, Paris then we're going to Geneva, Zürich, Switzerland and show the new midtier producer how far away from reaching this goal of 400,000 ounce of gold equivalent of run rate.

And then Rene going to introduce this Gammon Gold to the new market we've never been there before such as Russia, Germany, Dubai, and the rest of the world.

So we look forward to see you in January, our investor in New York, in Europe, the rest of the world. Right now we have a (inaudible) to end.

Great, thank you very much, Fred. We will now move to the Q&A portion of the call. So I'm going to turn it back to the operator who will provide instructions. Operator?

(OPERATOR INSTRUCTIONS) Trevor Turnbull, Scotia Capital.

Good morning. I guess my first question is probably for Glenn. I was just wondering relative to the credit facility you have in place now subsequent to quarter end, if you could give us a sense of has there been any drawdown on that subsequent to quarter end already?

Sure, Trevor. Our net cash position today in terms of borrowing is probably in the range of about US$13.5 million. That would be our net drawdown net of cash balances.

Okay, great. The other question I had probably for you as well would be can you give us a sense going forward over the next two or three quarters what the capital spending plan might look like Q4, Q1, Q2, next year?

We anticipate that we'd have about US$35 million of capital spending to finish off the bulk of what we talked about in the second quarter. We had the US$26 million investment that you will notice on the statement of cash flow and I alluded to it in my comments. We still have some significant investments to make in underground equipment, the delay times on arrival and those have pushed many of those into early '08. We have equipment coming at both Ocampo and El Cubo and we're containing as well with our underground capital development program just running at about US$3 million per quarter per property, or about US$6 million a quarter.

I would say between now and the end of the first quarter of next year we will be in that sort of US$30 million to US$35 million range of overall CapEx spend inclusive of all of the above.

Okay, great. And I guess the last question I had for you is can you give us a sense of any of the cost per tonne figures? I realize perhaps on some of the underground operations, they may not be as meaningful. But on the open pit, do you have some Ocampo numbers based on cost per tonne?

I will let Dave Keogh speak of that, Trevor.

Yes, the costs are trending down from the previous guidance that we've got and we've seen just with the cost savings we've implemented it is they are starting to bite and they are trending toward the previous guidance that we had on the cost per tonne. So we're anticipating moving forward of US$1 per tonne mining cost and the US$3 -- US$3.50 for the crushing and leaching. Does that answer your question?

Yes. Sorry, crushing, leaching and mining and do you have a sense of milling cost now?

Yes, the milling cost actually is very much close to the guidance particularly at that 49,000 record run rate we've got. It is very, very to the previous guidance.

You can appreciate, Trevor, in Q3 when we didn't put many tonnes to the pad as we anticipated and with the extra stripping that we did because we had the available time to do it, that our open pit metrics were very poor in Q3.

Yes. No, for sure. Yes, just as the cost per ounce numbers aren't all that meaningful I guess cost per tonne would reduce throughput is going to be the same way. But last question on operations, relative to some of the problems you had getting material out to the pads due to the rain, you talked about having plugged screens and shoots. That was an issue that came up last year in the rainy season and it looked to our mind that it had been addressed but it doesn't look like I guess it was completely resolved. Can you speak a little bit as to what happened that caused the problems getting materials during the rainy season?

Certainly. We actually reduced the delay to about half last year and we're prepared for using cost of screens etc., etc. The big delay during the quarter was the late delivery of a replacement conveyor belt which was worn out. With this industry at the moment purchasing procurement is very, very difficult for parts and everybody was chasing conveyors. So it was delayed of the scheduled changeout. So that was a big time loss.

Yes, for sure. But specifically it mentioned that there was plugging of screens and shoots. Was that not as big a deal as --?

Not as from last year, the new operation was prepared for it. But as you appreciate when it does rain heavily then you do have to stop operations. That is normal with crushing.

Okay, great. I will let someone else ask some questions. Thank you.

Craig Miller, BMO Capital Markets.

Yes, good morning everyone. I want to follow up a little bit on Trevor's questioning on the cost side of things. I think I heard that 65% of the Ocampo costs were fixed in the quarter. It will be a simple math to figure that out in dollar terms. Can you allocate that at all between the underground and the open pit? And secondly, how does that fixed cost component look on a relative basis in Q4 and maybe Q1 '08?

It's Glenn. I think the 55% is what I mentioned, 55% of our costs are fixed and 45% variable. I think that rate is pretty normal and I don't think we see it changing materially going forward. In terms of allocation between open pit and underground, I think you would start off with the same fixed cost reality on both. What we would say though is that the G&A portion of our costs are about 60% allocable to the open pit and 40% to the underground.

So that might help you, Craig, in your calculation. But we've looked at our numbers a couple of times now and the fixed variable reality of 55/45 is fairly consistent.

Okay. In terms of the dollar value, do you see it -- can you give some kind of direction for that in Q4 versus and Q1 '08?

In terms of what?

You know, the reduction that you expect the cost savings that you've been implementing towards which I think most of them are fixed cost related. So do you see fixed costs dropping 10%, 50%, whatever in the quarters going ahead?

Certainly we anticipate that the US$10 million that we spoke of today at Ocampo that is going to be fully available for reduction. That is an annualized savings, the fully available for reduction beginning in the fourth quarter. You are right, haven't done that calculation yet as a fixed variable reality of that, probably it is more of a reduction on the fixed cost because headcount of course and staffing is a significant fixed cost. So that is something I can work through the calculation of and perhaps share with you after the call. But the key point to your question is we are anticipating to see that US$10 million beginning in Q4 being a reduction in our total costs.

And finally on that the new taxation rules, do I understand it correctly that there are no more deferred or accelerated depreciation that you will get taxed on your profits going forward at that new rate?

It's a different regime. Going forward the big issue for us is the fact that we anticipated in the years when we turned corner and began to be profitable that we would pay no tax because of the loss carryforwards being available. It's essentially the minimum tax that is going to be in existence so we will pay some tax in a couple of years when we thought were going to pay none.

The new tax regime in and of itself means that we will pay the greater of an income tax and a flat tax and in that flat tax regime, Craig, CapEx for example is fully deductible in the years that you buy something. So it's a very different sort of calculation process. Many of the income and expense items that are similar but you do get to deduct all of your capital investments in the year that you spend them. There are some transitional rules of course for any undepreciated capital costs that exist at the time of implementation.

But it is just a different regime. Once we hit our stride and are profitable, we will just be taxed in the regular income tax regime. This regime is particularly unfair for us because we do have loss carryforwards available to us. But once we turn the corner, I expect we will be paying the regular income tax which is the 28% tax in Mexico.

Okay, that's it for me. Thanks.

Steve Green, TD Newcrest.

Good morning, guys. I wonder if we could talk a little bit about El Cubo? There has been quite a bit of variability in that asset lately. I understand a lot of it is because the mining of the stope fill. But your cash cost increased this quarter from [439] to [651]. I wonder if you can give us some kind of and idea of what the steady-state expected operating costs are there and what you expect in terms of grades there?

Sure, I should mention, Steve, one comment. About US$75 of that increase this quarter was simply because we had some finished goods inventory at the end of the quarter. So because our cash cost is based on ounces sold, US$75 was that. That 651 comes back to sort of 575 range. I think and Dave can jump in to what I miss here -- but I think in the quarter we saw a bit of a reduction in recovery particularly on silver. I think our grade was off a little bit. Those were the main drivers and I will let Dave give perspective on sort of where we can expect to see that level out.

Yes. The silver particularly during the quarter was affected by surface oxide material. We've now had the specific reagents to get the recoveries back to the normal levels and I think going forward the costs certainly will be the same as Q2, Q1 and once we start to integrate and shutdown these plants, I do see a further reduction of possibly about 10% in the cost structure.

Okay. And the stope fill that you are mining now has obviously brought grades down quite a bit. How long do you intend to keep going through that stope fill and when do you expect grades to come back up to the resource reserve grade level?

As of now, the reason is as you appreciate stope fill is quite variable. We increased the sampling frequency and put a number of control measures in place to make sure that we do get the plan delivered grade of that stope fill material.

Okay. And I wanted to follow up quickly on CapEx. You mentioned a figure of 30 million to 35 million. Was that to the end of this year do you expect?

No, that would take us about the end of Q1 of next year?

Okay. So what roughly would that be half and half Q4 -- Q1?

It depends on timing, you know, we have at this point I'd say it would probably be a little bit more than half in Q4 but it's going to depend just on the timing of arrival of equipment. We have some delivery dates that haven't been met particularly on some of the underground equipment. But at this juncture I would expect maybe 20 million in this quarter and perhaps 10 to 15 million in Q1. But that is ballpark.

Okay. And is the lion's share of that at Ocampo?

Lion's share of that is at Ocampo but increasing a little bit. We're committing now to about US$3 million of underground equipment at El Cubo which is direly needed there. And the balance of underground equipment at Ocampo is probably in the US$5 million to US$6 million so it is probably 70% of this upcoming CapEx will be at Ocampo.

Okay, great. And just quickly, you mentioned October and the improved throughput. Would you say on an operating basis your cash flow even or positive now or --?

On an operating basis, it's a little too early to tell. But at these metal prices if we can have a good Q4, we talked about we had a very bad earnings quarter from an earnings per share basis. Our cash loss was US$6.6 million. It's quite possible in Q4 with improved production that we will see positive operating cash flow. That is before investment in CapEx, of course. But we are -- with this improvement in October and with continued momentum forward, we should be quickly turning to cash flow positive.

Okay, great. That's all I have.

[Kali Gozer], Eaton Vance Management.

Good morning. First of all, I'm trying to better understand the heap leach facility. It is my understanding that it takes three to four months for the heap leach process to take place. So it sounds like you expect improvements from the facility in the fourth quarter. And I'm just trying to better understand the lag time because it would seem to me if you were putting material on the pad that had not been crushed properly, etc., it's going to take time to draw off the sort of less than ideal product.

Kali, to answer your question, yes, you are correct in that it does -- there is a [ponded] lag of material you spec on the pad until you get the metal. Essentially what we find is we're getting very close to the feasibility out of estimates as in we get 90% of the gold as in a bunch of things within 120 days. And then with the silver what we're finding is that's stretched out a little further. So we're getting as far as predicted silver recoveries, it takes about an additional 20 days. So if you're trying to model this, certainly there is a ponded lag as you correctly pointed out.

Another point, Kali, that's important is that in the wet season, we probably draw about 70% of the anticipated ounces so from July to December because of the extra delusion that is in the pregnant pond, we are off by about 30% but then in the dry season January to June, we would anticipate recovering that additional 30%. So that is the other factor that weighs in on the derivation of leach pad ounces.

It's Rene. The other thing is with our experience in mining, (inaudible) experience in Peru, we will definitely be looking into raincoats which really help out the delusion issue during the rainy seasons.

Great. Secondly, again you talked about production in the fourth quarter increasing possibly 10% to 15%. Could you just sort of summarize the source of that belief and just so I understand it thoroughly?

Certainly, one of the things is the mill sort of using October as a run rate. That was -- you multiply that out for the next three months and that gives us the ability to certainly increase the tonnes milled. And going forward is the tonne spec from the payable increase as well.

Okay.

Mathematically, we gained 1220 tons per day through the mill in Q3; October we did 1580. Not suggesting 1580 is sustainable every day all day through fourth quarter but that certainly for October was a solid month. Q3 in the leach pad we put through 5550 tonnes a day and put through 7800 in October. So again, all we're saying is that October we've seen a movement in the right direction in terms of production. Still not to where we entirely want to be particularly on the open pit but the mill we certainly are pleased with our progress.

Again, as I mentioned before is the operation metrics that we really focusing on turning the corner things like tonnes mined, tonnes processed, and in October there is -- the trends are in the right direction.

And the cash cost per ounce right now as spoke to Craig Miller's question is 55% fixed and 45% variable, you can appreciate how the math can -- turns against us so hard now when ounces are down; will certainly reverberate quickly and positively when we get production up because of existence of those substantial fixed costs.

Great. Thank you. That's all I have for now.

[George Kozmas], Deloitte & Touche.

Thanks for taking my question. I'm not sort of focusing on production and all but I was trying to find on the website or in the financials anywhere if there is the shareholder rights plan in place? Obviously as you can understand, the shares are trading at a bit of a depressed price and I'm wondering what prevents someone from coming in and making a hostile bid without leaving the shareholders protected in any way? Thank you.

Currently no shareholder rights plan in place.

And is there any option to put one in or like what is the protection sort of an individual shareholder has against someone accumulating a position and making a hostile offer for the Company?

We are currently looking into that. We raised it yesterday at the Board meeting and we will continue on along those lines on discussing it with Fred and the Board this week.

Great. Thank you very much.

(OPERATOR INSTRUCTIONS) [Ray Hahn], Altrinsic Global Advisors.

Hello, thank you for taking my question. Just as investors, we were wondering if you can give us a bit more comfort as to the run rate CapEx spend that you might have in 2008? I guess just backing out from some of the numbers you had mentioned it's roughly about 15 million a quarter. Would you anticipate that for the remainder of the 2008 year?

This is Rene. If you don't mind I will take that. We know very well the short-term capital because orders have been placed and it is capitalized developments and such. But we are still weeks away from even having an idea from the operations what the wish list is and then consolidating that and really giving them feedback. So unfortunately it's a little premature for us to answer that at this point in time.

In terms of ounces in Q4, Q1, are you anticipating any target ounces of gold production?

Yes, we are looking at 10% to 15% compounded for the next couple of quarters. And with a significant reduction in cash cost. (multiple speakers)

How much does that come out to on an absolute basis?

I would have to multiply it out.

How much did you make this quarter?

Capital is 32,000 ounces.

32,000. And Rene, (multiple speakers) long-term 400,000 ounces, when do you anticipate that happening? Would that be like 2011, 2012? Is it fairly far out there?

No, we are looking at reaching a target of capacity by the end of '08. The key one obviously at Ocampo, is the underground getting it ramped up to speed and that is not done quickly. The delivery times on equipment is much longer than open pit. And of course its capital development intensive.

So roughly right now we're on an annualized basis close to about 140,000 ounces so there would be a pretty strong ramp up then you anticipate in Q3/Q4 of next year?

Well, yes, because keep in mind also in the open pit is we're accelerating the stripping ratio between 10 to 12 to 1 at this point and once we get caught up on our strippings, then the proportion of ore to waste or the stripping ratio is going to change dramatically throughout next year. And in underground, it's more of a steady-state ramp up.

And then what is still up in the air is as we are reupdating our reserve model that is going to give us better definition on what portion of the open pit is above 4 grams and therefore mill feed and that impacts your ounce profile as well because the recoveries are quite different from the mill feed [leaching].

And in terms of the evaluation metrics of looking at the Company on a per ounce basis or per reserve basis, it seems very attractively valued. Have you been approached by other possible strategic buyers of the asset or would the Company consider putting itself up for auction just given how much effectively you are at like a distressed type pricing, the market really isn't giving you any credibility whatsoever for the type of assets that you have down there? And to maximize shareholder returns, would you auction off the Company?

It's Rene again. At this point in time, no, we have not been approached by a third party and we have no interest in going down that road because we think we've got a lot of the key value drivers, business critical initiatives in hand, got a clear strategy on how to turn the Company around and deliver shareholder growth.

So we've got a strong management team, focused team and we're starting to see the results in October and we're pushing pretty hard to get back the appropriate valuation. But I do recognize that this is a credibility issue that we have right now and we have to deliver to the market.

And just to add to this one -- it's Fred George here, President and Chairman -- you are right 100%, the market having given us the credibility for the ounces or for the tonnage and that is why, that is why I went after a guy like Rene Marion who was the QP for Barrick Gold, one of the largest gold producers in the world. He is the one that used to sign off on their resource calculation and reserve calculation.

And most of the analysts and the market are familiar with his work in the past and that is why in January after we started the two -- him and I -- and he will show every analyst and every investor similar work what he did to Barrett in the last 12 years, he is doing now and implemented in Gammon Gold. And then (inaudible) his work in Gammon Gold and he is going to buy a lot of credibility back again into the Company and that is why we're doing this tour in January so you will see huge difference after January 2008.

And how much options and what is the [strike] price that Rene has in terms of the options he has received?

It is 500,000 shares --

500,000 option and a strike price I believe was --?

-- 34, I think.

934.

934, okay about the same price as ourselves.

As the market, yes.

Okay. In terms of that ramp up, could you just give us comfort -- is there an issue at all with the reserves or the quality of the tonnage that is being taken out of the ore reserve within the tonnage? Or is it just an operational issue? And could you just walk us to a timeline over the next few quarters as to how you're going to get to that 400,000 ounces? I think that would give some better credibility to some of the market participants out there.

Certainly, from what we see so far is really if you like production and the one thing we are really focusing on is the underground production and minimizing the dilution of the grade there. As we said previously, we're getting 6.5 grams and we know that we can do better on the dilution to increase that head grade delivered to the mill. That is a focus of the operational team and currently underground is delivering around about 800 to 900 tons of ore and we've got measures in place with site services, additional equipment arriving to get up to the 1500 tons plus of high grade underground ore.

This coupled with the million capacity we know that it is certainly being stored capacity as 3000, well over 2000 and with expansions of that milling circuit to the 3000 tonnes per day coupled with above 4 gram high grade open pit ore, that is one of the key drivers of getting it up. And then also with the heap leach circuit is getting the design throughput in the heap leach and (inaudible) because we know we're getting the recoveries from both the heap leach and we know we're getting the planned recoveries from the mill so it is just a matter if you like tonnes processed, tonnes mined?

Okay and then sort of one last question. I know you've cut headcount significantly. It was quite surprising that you were able to cut so much. Was there just so much fat or have you cut to the bone? And this one last question that shareholders were always concerned about the safety of workers and just want to ensure that there is enough people there and there's enough CapEx to go and that there is fatalities in the mine.

It was really an organization structural review as in the first things we do not want to do is a jeopardize safety or the maintenance as well maintenance (inaudible). Typically (inaudible) when you transition from construction to operations, there is always duplication in functions and tasks so by analyzing everyone's actual job role and their contribution to the organization, we are able to identify a lot of duplication which we're able to eliminate. Certainly for the underground we're trying to recruit underground miners and everything else so it is more of -- was an efficiency review.

And with the contractors as in a lot of jobs when you have contractors on-site you find that the contractors are doing the same job as you do. So we eliminate again -- we're doing all what all the contractors were doing and we found out we could do it ourselves in a lot of areas. And there's also contractors involved with capital works programs which we're finishing up.

Can I just add that Dave and I both come from organizations that have a strong focus on health and safety. And we are working toward putting systems and plans and training in place to ensure significant improvements in safety. But also the appropriate culture.

Okay, well thank you very much and we look forward to seeing you on your January tour.

Ladies and gentlemen, we currently have time for one last question and it is from [Marco Locasio] of Equinox Partners.

Good morning. I was wondering in terms of Ocampo, if you comment on the maintenance issues that occurred in the third quarter and sort of had an adverse impact on the cash costs? And then going forward, how you plan to address those and also the inventory write-downs if the strip ratio is going to continue to be high as you develop the open pits?

Marco, just addressing the maintenance issues, what we found was that if you like critical [space pots], etc., there was a shortage of those on-site. Glenn mentioned before we had an increase in the amount of equipment, we had spare parts of 3 million. The main area of maintenance focus was with the overland conveyor. We had a worn conveyor belt as for the industry is very hard to buy things like truck tires, etc., etc. So it was identified to be replaced but the delivery time for the manufacturer blew out and unfortunately we had to run with a worn conveyor belt.

And then the other area of maintenance focus was with generators. Again, these generators require highly preventive maintenance programs and we're really focusing on the preventive maintenance and spare parts of the generators on site.

Okay.

And the inventory.

Marco, on the inventory in terms of write-downs, its really a function of getting the throughput up so when I mentioned the fixed costs earlier, as we get higher throughput through the open pit operation to the leach pad and we start spreading those costs against more production, then we should see better cost per tonne, lower cost per ounce and therefore no need to do a lower cost net realizable value adjustment.

What we saw in October, for example, was a significant improvement in that regard and we had very little write-downs in inventory in October so that was a positive signal that in addition to the other metrics that were positive for October, we're moving in the right direction in terms of not having to see these cost write-downs.

Okay, thank you.

Ms. Day, please continue.

Okay, to conclude on behalf of the Gammon team, I would like to thank everyone for joining us today and personally I'd encourage anyone who has a question to contact me directly and I'd be more than happy to have your question addressed. Thank you again for joining us and this concludes our call.

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