Alamos Gold Inc (AGI) 2007 Q4 法說會逐字稿

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the Gammon Gold Q4 and year-end 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. (OPERATOR INSTRUCTIONS) I would like to remind everyone that this conference call is being recorded on Monday, March 31, 2008, at 2:30 PM eastern time.

I will now turn the conference over to Rene Marion, Chief Executive Officer. Please go ahead.

Thank you and good afternoon. My name is Rene Marion, I'm the Chief Executive Officer of Gammon Gold and I'd like to welcome everybody to Gammon Gold's fourth quarter and year-end December 31, 2007, conference call and webcast. I'd like to refer our listeners to the forward-looking disclaimers provided in all our disclosures. I'm today joined by Scott Perry, the Chief Financial Officer, and Ann Dade, director of investor relations, and I'd like to start by saying that on January 25th I significantly strengthened my senior management team by appointing Scott Perry as Chief Financial Officer, and Russell Tremayne as the Chief Operating Officer. I worked at both Scott and Russell in Russia, at Highland, under similar circumstances that we find ourselves here at Gammon, that is a Company that is undercapitalized in a turnaround situation, and I believe that our working relationships and experience are ideally suited for Gammon. During the call today we'll discuss Q4 and year-end financial results as well as our three-year outlook and resource reserve update, all of which were disclosed earlier this morning. A question-and-answer period will follow the presentation.

I'd like to highlight that we finished Q4 with no material SOX weaknesses for the year ended December 31, 2007, and the Company sold during that time period 121,000 ounces of gold, just over five million ounces of silver, for approximately 218,000 gold equivalent ounces. And in the fourth quarter the Company sold approximately 28,600 ounces of gold equiv -- of gold, 1.2 million ounces of silver, for approximately 50,000 gold equivalent ounces. We implemented a bunch of initiatives during 2007 to address typical start-up issues that the Company faced, namely: Equipment availability, both fixed and mobile equipment; insufficient underground development; underground mining method selection and optimization, processing facility availability; cost management issues; labor relations; compensation challenges; and liquidity constraints. And as listeners will know from our monthly key performance indicator press releases that we've been issuing, we started to gain traction from many of these initiatives that continued well into 2008.

But before I discuss these gains that we've made into 2008 I will now turn over the call to Scott Perry who will provide you with an overview of the financial results for the fourth quarter and year-end December 31, 2007. Scott?

Thank you, Rene, and good morning ladies and gentlemen. I'd now like to review Gammon's year-end financial statements and year-end results and I'd like to begin with the income statement. 2007 was obviously a challenging year financially for the Company, as our net loss is $101.3 million versus a net loss of $25.3 million in the prior-year period. Of this loss about 43% was related to non-cash income tax expense charges arising from the new Mexican single rate taxation legislation. This new legislation relative to the 2006 year result caused a $43.1 million impact on our earnings results and I'll elaborate on this impact in a little more detail shortly.

Moving through the income statement and just focusing on revenues, in the year 2007 the Company sold 121,012 ounces, a little bit more than five million ounces of silver, which resulted in 218,200 gold equivalent ounces of gold being sold at average gold and silver prices of $698 and $13.42 per ounce respectively, which resulted in total revenues of $152.1 million for the Company. These total revenues from mining operations represented a 136% increase over the $64.2 million recorded in last year and this was attributable to the increased metal production profile and the stronger metal price environment that we're operating in in the year 2007.

Looking at stronger metal production, most of this was largely due to the commencement of commercial production at the Ocampo operation in January 2007, combined with the fact that we are now reporting a full year's worth of El Cubo production performance in our 2007 results and this is following the acquisition of the Mexgold Group, which occurred midway through Q3 of last year. In addition to the stronger gold production profile our revenues also benefit by the fact that Gammon is fully unhedged, which allowed Gammon to fully participate in the strong metal price environment that we saw in the year 2007, which allowed the Company to achieve average realized metal prices of gold and silver that were respectively 15% and 10% higher than the prior-year period.

Turning to production costs. The Company's challenges in 2007 were primarily caused by our Ocampo mine operating well below designed capacity and the high production costs relating to that reality; total production costs of $140.3 million compared to $38 million in the prior-year period, while the Company's consolidated total cash cost per ounce result was $650 per ounce, which was also higher than the prior- year result of $366 per ounce.

Now a lot of this increase was due to reporting a full year's worth of El Cubo's performance in 2007. However, equally so, a large portion of this cost increase was also due to high costs at Ocampo. As we've reported previously, Ocampo faces a number of operational challenges which are typical to start-up operations and these challenges negatively impacted the performance of the operation, particularly so in the first three quarters of 2007. The challenges could be generally categorized as follows: Fixed and mobile equipment availability issues; insufficient underground development; suboptimal underground mining methods; processing facility available issues; and cost management and cost control issues.

Most of these unfavorable issues that we experienced in 2007 directly impact productivity and efficiency, and since approximately 55% of Ocampo's operating costs are fixed in nature versus 45% variable, the low productivity obviously has a significant negative impact on our cash cost per ounce as the mines significant figured cost pace is spread over the fewer produced and sold ounces. Ocampo's productivity issues further resonated in forcing uneconomically high unit per ounce valuations in our various production inventory, which resulted in adverse inventory adjustments required to value such inventory at the lower of net cost or net realizable value.

In addition to these productivity efficiency issues our total cash cost position was further impacted by the severance expense charges associated with reducing the Ocampo work force by approximately 30% which took place in the third quarter of 2007. And I guess equally so, similar to most mining industry participants, our Company total cash cost position at both Ocampo and El Cubo was negatively impacted by the general industry inflation that we're seeing in labor costs, fuel, consumables, maintenance, electricity costs and other associated input costs, which have all been subject to ongoing price pressure in the year 2007.

Looking at general and administration costs, in 2007 such costs totaled $24.2 million, which is $4.1 million lower than the prior-year period. A majority of this reduction was largely due to lower stock-based compensation expense, which was partially offset by some increased severance and wages expenses. G&A cost reduction initiatives always remain a continual focus at Gammon, and accordingly the Company is targeting further cost reduction initiatives that are expected to favorably impact our general and adamin -- our general and admin cost position in future periods.

Now amortization and depletion cost of $43.3 million were significantly higher than the $18.8 million in the prior-year period. A lot of this increased expense is attributable to the increased production profile in 2007 at the Ocampo gold mining operation. The increased production results in a largely effective reserve depletion rate that accelerates the depletion and amortization expense on a large number of asset categories that are ultimately depleted with reference to our periodic production depletion rate. Meanwhile, increased depletion and amortization expense is also attained at El Cubo, but again this is largely due to reporting a full year's worth of El Cubo performance this year following the acquisition of Mexgold, which again occurred midway through Q3 of last year.

Our interest on long-term debt was lower than the prior-year period, and again this is largely due due to the fact that our outstanding weighted average net debt position over the year of 2007 was lower than the prior-year period. We had a foreign exchange loss coming through our income statement of $8.9 million. This was significantly higher than the prior-year period, but again this is largely due to exchange rate fluctuations on the Canadian dollar and the Mexican peso and their associated effect in our U.S. dollar financial statements.

Okay, moving on to income tax expense and this is really where a lot of the noise is in our full-year result, our 2007 full-year income results contains all the associated accounting to fully reflect impact of the new Mexican single tax rate legislation. With the implementation of this new legislation on January 1st of 2008, the Company's Mexican subsidiary will now been paying a 17.5% tax rate. It will actually will be lower at transitional rates for 2008 and 2009, but thereafter it will be 17.5%, which will be payable on the Company's accessible taxable income. Under this legislation the Company will pay the single rate of tax each year to the extent that it exceeds its income tax otherwise pursuant -- otherwise determined pursuant to the preexisting income tax system.

Under the preexisting income tax system the Company had significant carry-forward tax losses which primarily related to the accelerated deduction of mining property costs. Prior to the implementation of this new taxation legislation the full benefit of the carry-forward loss positions was reflected as a future income tax asset on our balance sheet. The future income tax expense that has been report recorded in the 2007 account of $27.6 million reflects the portion of these loss carry-forward positions that the Company projects it will not be utilizing as intended in future years due now to the existence of this new single rate tax legislation.

This change in legislation has forced a significant accounting impact on our financial statement in 2007, especially so relative to the 2006 full-year earnings results. The year-on-year comparative impact is $43.1 million unfavorable, and the break down of that is that if it wasn't for this new taxation legislation we project that we would have been booking a tax expense recovery of $15.5 million which is under the old taxation regime. So as you go from a tax recovery position of $15.5 million to now a tax expense position of $20.6 million under the new legislation this has obviously caused a swing which has impacted our 2007 results by $43.1 million versus the prior-year period. Again this is deemed a one-off adjustment which is due to the necessary accounting to reflect down your income tax position under this new legislation. Important to note as well, while the annual loss was increased significantly by this this future income tax adjustment the expense is a non-cash item and there was no impact ob our cash flow from operating activities.

Okay, leaving the income statement now and moving to the statement of cash flows I will summarize our operating, investing and financing activities. Beginning with operating activities, cash used in operations was $34.2 million, which compares unfavorably to the prior-year's cash usage of $20 million. Our unfavorable cash operating flow performance again reflects the operational start-up problems experienced in 2007, especially so during the first three quarters of 2007, and these unfavorable operating performances naturally impacted our underlying operating cash flow results quite unfavorably.

Investing activity used cash of $73.5 million for mining property, plant and equipment editions, which primarily covers expenditures for investments in open pit equipment, underground development and exploration expenditures and other expenditures to upgrade our underground and open pit mining equipment fleet. Our investing expenditures were lower than the prior-year period. which is due to the Ocampo mine being in commissioning mode in 2006, and as a result of which, a lot of the start-up precommissioning expenditures were capitalized in the prior-year period versus operations accounting in 2007 following the declaration of commercial operations.

Financing activities contributed cash of $107.3 million and this largely reflects net proceeds of $170 million from the equity issue that we conducted in the first half of 2007, $33.4 million in proceeds received related to the exercising of in-the-money stock option, proceeds of $37 million from long-term debt less $133.1 million associated with repayments of preexisting long-term debt facilities and capital lease obligations. As at December 31, 2007, it's important to note that the Company had options that were in the money that, if exercised, would inject $55 million U.S. into the Company.

Turning now to the balance sheet, there's just two brief comments I wanted to make. Firstly, 2007 was obviously another year of important investments as we used cash to strengthen our asset base, both for existing capacity and to add to our [name plate] capacity at both the Ocampo and El Cubo operation. We also continued important investments at our key exploration projects and these are most notably reserve extension explorations at Ocampo and El Cubo and also exploration ongoing at y Calvo Guadalupe advanced exploration project, and these investments you can see are largely reflected in the growth in the Company's total assets position in the balance sheet. Now I'll discuss liquidity in a little bit more detail shortly but it's important to communicate that even looking at the Company's balance of cash and cash equivalents as of December 31, 2007, this balance of $3.6 million combined with our available borrowing facility we anticipate that we have sufficient funds to meet our future plans and obligations and I'll elaborate this in a bit more detail shortly.

So leaving our financial statement, the obvious two-point take away snapshot from my results summary is that our 2007 results were heavily impacted by the effects of the new Mexican single rate taxation legislation and obviously the operational start-up productivity issues that we've seen in Ocampo, especially so in the first three quarters of 2007. As most of us know and Rene will elaborate on this further shortly, in Q4 of 2007 Gammon has already initiate a detailed operational asset review to address the start-up issues at Ocampo which has resulted in the formulation of an operational turnaround strategy plan. The plan is based on efficiency improvement and cost reduction initiatives to ensure we are best maximizing the value of Gammon's cornerstone asset going forward. Now operational turnaround strategy is well in place and the targeted improvements have been steadily and increasingly flowing through to the Company's bottom line operational results. This has been witnessed in the latter part of the fourth quarter and more so we are continuing to see this in early 2008 as Gammon has been reporting in its monthly press releases.

We saw good progress in the fourth quarter of 2007 and we are continuing to see this positive momentum carry well into 2008 such that we are continuing to gain positive momentum on our production profile at both Ocampo and El Cubo, which has really allowed the group to start recording strong month-on-month cost reduction which has really underpinned our solid cash flow performance and cash generation in early 2008. The progress to date in Q1 of 2008 has really outperformed our own internal projection. In fact so much so that our operating cash flow performance has proven more than sufficient to meet our capital investment expenditures which has allowed Gammon to generate surplus cash reserves to the point that in the month of February Gammon actually elected to make an accelerated principal pay down of $2.1 million on our revolving finance facility. It's important to note that this is the first time that Gammon has done this since establishing the facility and again, it is faster than what we have been internally projected.

But another strong point that I want to make that further illustrates our cash flow performance in Q1 of 2008 is that there has been no need to make a drawdown on our debt facility in the month of March to date; which is again due to the strength in cash flow generation profile that we have seen. This represents a continuous period of ten weeks since our last drawdown was made and is again due to Gammon's cash flow performance being more than sufficient to both finance our investment expenditures at Ocampo and El Cubo but also to finance our ongoing working capital requirements. So looking forward financially I personally believe that our financial foundation is continually improving which is due to the improved operations performance, which together with our undrawn debt financing facility places the Company in very strong stead to fully fund the Company's recapitalization initiatives and associated working capital requirements up to the later part of this year when our business model is anticipated to maintain steady state positive net free cash flow status.

So I think I've started to introduce the [fame of] looking forward and I guess with that I will now turn the call back over to our CEO, Mr. Rene Marion, who will discuss our reserves and resources update and our positive forward-looking guidance.

Well, thank you, Scott, and briefly into reserves. Depletion from mining activities in 2006 and '07 of 555,000 gold equivalent ounces would reduce the 2005 year-end reserves from 5.14 million to 4.6 million gold equivalent ounces. The 2007 year-end reserves of 3.7 million gold equivalent ounces is approximately 900,000 gold equivalent ounces lower than the 2005 depleted reserves and that represents approximately a 20% reduction. Gold equivalent grade reduced by 13% from the 2005 year-end reserves to 1.69-gram a ton. The reduction in grades occurred in both the open pit and the underground, as dilution assumptions changed to those representative of the experience gained through mining in the past two years.

So accounting for the 2006 and 2007 depletion the net reduction of 906,000 ounces of gold equivalent are primarily attributable to the following. Approximately 194,000 of gold equivalent ounces were reduced in the underground. Mining out of reserves added 26,000 ounces to the production profile. However, the reinterpretation of the [Resario] underground vein resulted in 190,000 gold equivalent ounce reduction. Furthermore, a more conservative underground dilution series of assumptions ended up reducing the gold equivalent ounces underground by 30,000 ounces. The open pit resulted in 665,000 gold equivalent ounces of reduction. Inaccuracies to the original surface topography in the open fit resulted in 150,000-ounce gold equivalent ounce reduction.

The calibration of modeling techniques to improve on the reconciliation of historical mining by restricting the impact to higher grade intercepts resulted in a 250,000 ounces gold equivalent reduction. And the increase in the gold equivalent cut-off grade from 0.2 to 0.3-gram a ton resulted in a further 90,000-ounce gold equivalent reduction. And inaccurate interpolation from surface trenching to ore intercepts, some 50 to 75-meter below surface at the open pit also resulted in a further reduction of 175,000 ounces of gold. We have only explored 20% to 30% of our land position at Ocampo and El Cubo, so together with current exploration programs at the two operations and with the acceleration of our drilling campaign at our advanced Guadalupe y Calvo exploration property we believe that we should be able to augment our reserves and resources from the stated 2007 year-end figures, potentially increasing the Company's future production profile in the longer term.

As the listeners know, Q1 2008 is the first full quarter I've been CEO of Gammon Gold. While I spent my first few months in 2007 developing a turnaround optimization plan with the team out in the field, I also evaluated the senior management team, as well as the management teams at the mines. This resulted in the changes that were made at the management levels, at both the mines and as well as the changes in senior management team in early January. Although these changes may have seemed drastic at the time, I concluded that these changes needed to be made in order to get the best results, those results that we've been disclosing now in Q1 2008. I'm confident that we have in place now the seasoned managers required to execute on our turnaround strategy. As I previously indicated, the Company began to issue monthly updates on our key performance indicators for the fourth quarter 2007; as well as for January and February 2008, and we anticipate releasing key performance indicators for March on April 7, a week from today.

In 2008, we have or will launch a number of initiatives to drive additional productivity and financial performance at Ocampo and let me update you on a few of these. First of all, training is being provide to do operators by equipment suppliers to strengthen operation and maintenance practices, and sufficient spares inventory have been ordered or are in place for fixed and mobile equipment to ensure minimal down time. We're targeting 50-meters a day on average in lateral development underground and a ramp up of the underground production by year end. We also continue to develop long-hole mining stokes to maximize productivity and minimize dilution, and in addition we have established a quality assurance and quality control team dedicated solely to dilution management. And in the processing facility we have already appointed a seasoned processing manager and, in fact, have added to our inventory of spares to minimize downtime.

On the cost management front ongoing improvements to reporting systems and cost controls are underway. Continued implementation of optimal mining methods again continues. The optimization of consumables and reagents consumption is ongoing, as well as continued focus on optimizing the work force. And importantly, on the labor relations and compensation challenges that we face historically we have already resolved the compensation inequities at Ocampo. Production bonus schedule was already implemented in early February. Communications with the work force has been enhanced and more experienced mine management team has been fully appointed. We've been proactive on labor relations and continually work to improve our safety and mine services. And as Scott pointed out on liquidity, the restrictions on the line of credit have been removed. We've improved productivity in late 2007 and into early 2009, which add to the positive cash flow from the operations.

Today we've issued to the Market our three-year production and cost outlook. For 2008 we anticipate that we will produce between 245,000 and 275,000 gold equivalent ounces at a cash cost between $480 to $515 per gold equivalent ounce. For 2009 we anticipate that production will increase to between 300,000 and 330,000 gold equivalent ounces at a cash cost between $435 to $470 per gold equivalent ounce. And furthermore, in 2010 we anticipate additional production improvements to be between 355,000 to 385,000 gold equivalent ounces at a total cash cost between $395 to $430 per gold equivalent ounce. This production profile represents a 17% to 20% compounded annual growth rate. In Q1 2008 we are confident that we will achieve the low end of our production guidance of 56,000 to 62,000 gold equivalent ounces, and considerably lower our cost well below the $580 to $600 cash cost that we have provided to the Market. In fact, Q1 production levels, the lowest forecasted in 2008, we anticipate our cash costs in March coming in even lower than our public guidance offered today in the press release, for the full year, I might add.

Let me explain why I'm so confident. As of March 29, we have hit a lot of milestones this month. The tons per day in the underground remain steady at 800 tons per day. We have received the two new scoop trams in the latter part of the month. We are currently commissioning those units and we anticipate receiving the new trucks in April and deploying our new scoop trams. But more excitedly, the tons in the open pit, month to date we've averaged 83,000 tons a day. This is the single highest month daily rate since declaring commercial production in early 2007.

The mill has also done very well. We've set a record month at 1,700 tons a day. This is approximately 15% higher than the design capacity and recoveries for gold and silver are in line with our historical production numbers. And again we've made further improvements over the crushing plant and heap leach operation. Month to date we have averaged 8,700 tons per day. This is a significant improvement and represents the second best month in the history of the Company. So as you can see, we have been delivering on our expectations in March, on improving on our key performance indicators, and we will be providing further details, as I mentioned earlier, on the April 7th press release.

The newly assembled senior management team remains confident in the quality of our assets and our ability to successfully execute our growth strategy. The management team is currently designing an accelerated exploration program at Ocampo and El Cubo to develop targets to further expand the Company's reserves and resources. The entire Gammon team remains steadfast in our commitment to continue to drive operational and financial performance quarters and years ahead.

And in closing I'd like to add, I have mentioned that throughout the past several months that 2007 is now behind us, especially when considering the significant provisions taken during the year. Q1 2008 is a great new beginning and we will meet or better our key performance indicators for Q1. And we have not drawn down on our involver. In fact, as Scott mentioned, for ten weeks now and we close 2007 with no material weaknesses in SOX. And finally I would like to add that we continue to successfully recruit solid new management personnel at the operations. And in closing I'd like to add that in the coming weeks Scott and myself will be touring throughout North America and Europe to meet potential investors and current investors as we broaden the breadth of our presence throughout the globe.

And with that I would now like to turn the call over to the operator and open it up for questions and answers.

(OPERATOR INSTRUCTIONS) Your first question comes from Craig Miller from BMO Capital Markets. Please go ahead.

Good afternoon everyone. I saw a CapEx estimate for '08. Do you have any guidance for '09 and 2010?

Craig, it's Rene. We do have preliminary numbers in our models but we're awaiting the work being done by [Metalika]. They're doing some further design work on Ocampo, especially when looking at in pit dumping opportunities and haul profiles. So prior to releasing any forward-looking CapEx numbers beyond 2008 I was a little leery of doing so.

Okay. And finally you didn't say much about El Cubo. What do you see for that operation in the next little while?

Yes, El Cubo's really turned around quite well. Our production profile is up 10% to 15%. March is largely consistent, if not a little bit better than February. The areas that we are working on at El Cubo is really cost reduction. The team at the site are confident in maintaining current levels throughout 2007 -- or 2008, I'm sorry. It's work on the high labor cost, and as we mentioned throughout the last few months, the key is closing down the third of our four mills to allow to us reduce the labor costs associated with running those mills. We've already shut down two of those. Also we've moved the entire general administrative group over to [Los Todos] and that allowed us for some further restructuring there.

And the important one is we have commissioned the 600-meter level which ties all the underground mines together and we're currently hauling at about one-third capacity along with 600 over to Los Todos and hoisting there. Once we wrap that up with the new equipment throughout the following two quarters we'll be able to see 100% of our production going across underground to Los Todos and out from there and that'll allow us to get rid of all the surface haulage, so there's a lot of labor reductions in the coming few months. On the equipment availability and productivity we have ordered new equipment. New equipment starts arriving for the underground operation latter part of Q2 and into Q3 and we are successfully expanding on our development. We're targeting about 27-kilometers of development this year, of which 16-kilometer is exploration. So it's really to get the new ore body that was discovered in chut a few years ago, [La Loca], fully developed and it's a higher productivity, much wider, long-haul scoping (inaudible) project. So it's really blending mining methods, eliminating (inaudible), consolidating the mills and doing a labor reduction.

And finally what do you plan for Guadalupe this year?

What we have right now is an approved budget for $1.5 million. We currently are working on an accelerated program that will allow us to advance the project into a scoping study level. That'll include a significant increase on diamond drilling, metallurgical test work, geotechnical work, CSR-type work and a bit of baseline work. And our hopes are to be able to bring it to the point where by the end of this year we've got enough information to conduct a scoping study in early 2009 and advance the project as fast as we can. We're quite excited about it. I, in fact, had a consultant on-site just last week who's been charged with putting together that plan while we go for RFQ.s from drilling companies and recruit a solid project manager.

That's all I have for the moment.

Thanks.

Your next question comes from [Mike Delinon] from Merrill Lynch. Please go ahead.

Hi, Rene.

Hi, Mike.

Pardon my cold. Winter is still here unfortunately. But just a quick call. I was wondering with the low reserves what does that do for your depreciation expense in 2008? Do we assume a bit of acceleration like we saw in the fourth quarter, if I read that -- listened correctly?

Yes. Hi, Mike, it's Scott Perry. A lot of our assets are assets associated with capitalized mine development, capitalized underground exploration costs, et cetera and these assets are assets that we generally deplete or amortize [as in the last of the ore body], so depending on where the reserve reductions took place and what have you it could likely result in accelerated charges in terms of our non-cash costs going forward. We do have some assets that we capitalize as of specific areas of the underground mines so we'd have to actually flow it through all our accounting models to really isolate exactly what the impact will be. But generally speaking you should see an increase in non-cash costs going forward.

Just a rough calculation I have you at $199 for gold equivalent ounce in '07 so it would be slightly higher than in '08?

Yes.

I guess we'll have a better idea with the first quarter results when you release that?

Yes, and they're looking very good, absolutely.

I know the operations look good, I meant the depreciation.

Yes.

Okay. All right. Well, thank you very much.

Thank you, Mike.

Your next question comes from Steven Green from TD Newcrest. Please go ahead.

Good afternoon. Four quick things here. Number one, can you break down your cash operating costs between Ocampo and El Cubo for the fourth quarter?

Yes, sure. It's Scott Perry here. For the fourth quarter cash costs at Ocampo were $591 per ounce and cash costs at El -- I just want to check something 2003 -- from the wrong documents, sorry.

Sure.

Sorry, Steve, I don't have -- yes I do, sorry. Here we go. Sorry, I just got lost on my page. Total cash costs per gold equivalent ounce at Ocampo was $624 per ounce in quarter four and at El Cubo it was $804 per ounce.

The Q4 numbers at El Cubo were high for several reasons. One is when we put the two mills on care and maintenance in November we also did the realign and incurred all those costs associated with putting them on to care and maintenance, including with the reduction in the work force and such. As well as in 2007 the Company did not accrue for the annual December legislated bonus that goes to the employees so we took that hit in Q4. Those were the two biggest hits.

Okay. So you do expect a big decline there in Q1 at El Cubo?

Yes. Like I mentioned, our consolidated number is going to come down even -- in March even lower than the guidance that we've given to the Street in our press release this morning.

Okay, so El Cubo is going (inaudible)?

I think you'll see lower costs -- significantly lower costs in the range of where we were probably around Q3.

Okay. Great. And turning to the reserve statements, I notice in the notes of the reserve statements that it looks like the assumed gold recoveries have been lowered for the heap leach and you've divided up between the fine crush and the course crush. I wonder if you can give numbers on the combined assumptions other heap leach pad going forward?

Yes. On the heap leach, the guidance that has been given is just a little bit lower than what was previously given. I haven't done the consolidated because it really mat -- when I look at it, for example, I look at ore availability going to the mill and my preference is always to send ore to the mill. On a given day or given week or given month, depending on the availability in the mill, especially when I'm averaging 1,700 tons per day now, I may be sending more ore or less ore from the open pit to the mill, so it all depends on what the average grade going to the heap is. If you're looking at the heap at a grade of 1.2-ish, we should be looking in the 82 to 72 -- 82 on gold and 72 on silver for recoveries and that's what we're kind of building up to right now. We do see now with getting five million tons on the heap the leaching curves are longer, especially when it comes to silver and that's not very uncommon.

Right, but your course crush numbers are quite a bit lower than that, so you have a blended rate?

Yes, the course crush is considerably lower and what we've done is we've optimized. Okay, remember metal prices considerably lower in the current spot of $580 and $12, right, and that would determine then that some of the extremely low-grade material, like in the 0.3, 0.4 range, should be course crushed. But the reality is we're crushing fine all of it right now because the cost benefit analysis shows that fine crushing is profitable all the way down to 0.15-gram a ton. So there's a difference between doing reserves and living day to day in the environment where the gold price is $350 higher than your reserve price.

Okay, fair enough, so we can assume close to the fine crush number then?

Well, that's exactly what we're been doing.

Great. Okay, that's all for me.

(OPERATOR INSTRUCTIONS) Your next question comes from [Arco LaCasio] from Equinox Partners. Please go ahead.

Hi, guys. Just a quick question on the reserve update. As it stands today does it reflect all of the changes to mining method and the associated assumptions with costs that you guys will be looking at or have been looking at since the new team has come in place?

Yes, what we've done is -- obviously with respect to the underground we have a good database on operating cost for three different mining methods, shrinkage, cut and fill and long haul. So really we've taken a look at that on coming up with the parameters used for determining what was reserves, so we're pretty solid from that standpoint. Again it does not consider the higher metal prices or anything like that, so that's why in 2007 we mined -- 20% of the underground production was mined out of reserves and so we do take things on an opportunistic basis. For example, a lot of our exploration development ore grades between 1.5 to three grams and we send that to surface and send it to the heap leach because it had to be mined anyway.

Where we are is a lot of the things that we've eliminated are actual backwards looking, okay? They're gone from behind us. The best way to describe that is the open pit tons, okay, from the December 31st topography is within a million tons of the design pit back in 2004 and what our model does now is reconciles extremely, extremely well to what was done historically. So what we're saying is what's before us is very similar to what was before us before. It happens to be in the open pit a little lower grade, in the underground it's about six point -- the high six-gram a ton range and in both cases fairly representative of what we've mined in the last six to nine months.

Okay. Thanks, guys.

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

Okay. Thank you very much, ladies and gentlemen. I would just like to close off by saying 2007 was a very difficult year. There were a lot of challenges that we were faced with, including labor reductions, changes in fiscal regimes within Mexico, obviously disappointments on ramp up and equipment availability. But I really want you to think about where we are today and where we're headed. Again, I can't over stress the open pit being at 8,300 tons per day -- 83,000 tons per day. The mill is now running at 15% beyond capacity. We've done that in a few short months. The crushing plant has gone from an extremely low in Q3 to almost 8,700 tons a day. We've got the team on the ground and we're really positioning ourselves to move the Company forward with Ocampo being the cornerstone.

We are taking this seriously. We've gone to the Street. We told you what we would do by March 31st. We've gotten there on all deliverables, and in fact we'll be going beyond our Street guidance in Q1 when it comes to total cash cost. And that'll really leverage on to the subsequent quarters. In quarter two we will be receiving more of our underground equipment. We will be accessing the higher grade ores in [Picachio] and really positioning ourselves for a great second half of the year. So with that I'd like to thank everybody for joining us and if you have any further calls please feel free to call Ann Day or just called office here. Thank you once again. Good day.

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