Alamos Gold Inc (AGI) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Gammon Gold first quarter results conference call.

(OPERATOR INSTRUCTIONS)

I'd like to remind everyone that this conference call is being recorded on Wednesday, May 7, 2008 at 10:00 a.m. Eastern Time.

I will now turn the conference over to Ms. Anne Day, Director of Investor Relations. Please go ahead.

Thank you, operator. Hello, everyone, and welcome to Gammon Gold's first quarter 2008 conference call.

Before we get started, I'd like to refer all our participants to our forward-looking disclaimer language in our press release.

In the room today, I have with me Fred George, President and Chairman; Rene Marion, our Chief Executive Officer; and Scott Perry, our Chief Financial Officer. They're going to walk you through the Q1 results and provide you with an overview of operations to date.

But for now, I want to turn it over to Fred George for his introductions. Fred?

Good morning, ladies and gentlemen and fellow investors.

What once was a dream today becomes reality; what once was a challenge for us, today it has been conquered. The Board Directors and I, we'd like to take a moment to thank the CEO, Rene Marion, and Scott Perry, the CFO, and our COO, Russell Tremayne, for their exceptional job turning the Company from $20 million in the Q4 negative loss to over $14 million in Q1 cash flow positive.

What this proves to the Board of Directors and to the world, there was absolutely nothing wrong with our deposit at the Ocampo in Mexico and was strictly the management operation team. A tough decision had to be made in January and tough decision we have made as a Board of Director one team. I took full responsibility letting the operation team go and hire Rene Marion as the CEO of Gammon Gold, and then he brought his additional team with him, his CFO and his COO.

And then, ladies and gentlemen, let me assure you, we want to send the message to the world and we'd like to thank all our investors who stood next to us during the tough time, and especially our institution investors who recently we visited in North America and Europe, the people who raised money at the $20 level. They stood next to us during a tough time and they assured me and they reminded me, they have not forgotten the good old days when they raised money at $2 and a $3 and $4 level and the money they made. And they knew a tough decision had to be made and they supported the decision, changing the operation and the management team. And they also assured me that average down on a $6 and $7 level, and they also assured me they are behind the project 100%.

What they were promised during the visit, Gammon Gold will be cash flow positive in the fourth quarter of 2008. Well, today we had many, many calls after Rene Marion was on BNN news and showed the world we were cash flow positive over $14 million in the first quarter.

So, ladies and gentlemen, we're here to tell you today, thank you for your support. And we're here to tell you today what was a dream becomes reality. I've been in this company when it was $1 million market cap all the way to full mid-tier producer.

So without further delay, let me introduce to you and pass it on to the CEO of $14 million cash flow positive Gammon Gold, Rene Marion.

Well, thank you, Fred.

Well, it's indeed been a quarter of firsts and bests. To start off with the firsts.

It's been my first full quarter with Gammon, and when I started late last year, one of the first things that I wanted to do was to conduct the operational optimization review at both Ocampo and El Cubo, and we rolled out the business-critical strategies in early December. And in the four months since that time period, the turnaround strategy that we've made kicked off, we've had tremendous progress.

To support the execution of the turnaround strategy, I knew I needed to have a seasoned and experienced team working with me. In turnaround strategies and situations like this, you need to act quickly decisively. And so, as Fred said, on January 25th, we announced my new CFO, Scott Perry, and COO, Russell Tremayne. Both have the knowledge and the experience in international mining and turnarounds that have added great depth to the Gammon team. And they also worked with me in Russia. And we've also hired a new management team at Ocampo, successfully recruiting over a half dozen seasoned professionals with well over 200 years of operational experience throughout the world.

And what has this new team accomplished?

Well, to start off with, approximately 58,000 gold equivalent ounces of production in Q1, within our Street guidance, and 20% better than Q4.

Total cash costs were $491 per ounce of gold equivalent, which was approximately $100 an ounce lower than the guidance provided last year, and representing a 24% improvement over Q4 2007, and a remarkable 27% improvement over Q3 2007. But what is very important to note, that not only smashing this target but also falling within our 2008 annual guidance of $480 to $515 per gold equivalent ounce. All this in what's anticipated to be the lowest quarterly production for 2008 and while many of our initiatives have just started to gain traction.

And what is also noteworthy is that on April 7, just seven days after the end of the quarter, we were able to issue our monthly update for March and Q1 that included Q1 cash costs which were within $2 of what we reported in today's Q1 statement. This is a real testament to the strength of our internal controls.

Q1 was the first in the history of the Company to be both operating cash flow positive, a $12 million improvement or 440% over Q4 of 2007, in fact generating enough cash to fully fund our $11.4 million capital expansion programs at both Ocampo and El Cubo. With money left over. Yes, in Q1 we were net free cash flow positive for the first time in the history of the Company. I'd like to remind everybody, this is two quarters earlier than the guidance we provided late last year.

And for the first time in the history of the Company, we had positive earnings. The positive earnings of $0.07 a share is not to be taken lightly. From where we started in Q4 at negative $0.19 a share, that's 137% improvement in one quarter since the rollout of the turnaround strategy.

And on liquidity, as of yesterday we've made a total of $5.1 million in accelerated debt repayments. Our current debt stands under $29 million and with a net debt of less than $25 million. And I'd like to highlight that Fred's contribution on executing expiring stock options went towards paying that debt.

And as promised, on March 31st, we provided details on our updated reserves and resources and we, as well, we provided guidance for the production and cash costs for the next three years.

The improvements are indeed impressive and have been better than I had anticipated. I guess really I'm a little bit -- my optimism has been a little bit tempered from my experience in Russia. But these assets are indeed world-class, and Mexico is indeed an incredible country to work in.

But I want to highlight some more firsts, explore best at the asset level.

At Ocampo, production was almost 39,000 ounces of gold equivalent. That is an 18% improvement over Q4 2007. And March's production in fact of 14,880 gold equivalent ounces represents a 33% improvement since the kickoff of the turnaround strategy in December.

Total cash costs at $462, our best ever, 26% improvement over Q4, and a 44% improvement over Q3. In fact, if I only consider the gold production of approximately 23,000 ounces and take silver as a byproduct credit, total cash costs would have been $130 an ounce.

And throughout the quarter, productivity has continued to improve. In March, the open pit averaged 83,000 tonnes per day, the best month ever, and a 36% improvement since December. The heap leach averaged 8,700 tonnes per day, our second best month ever, and a 42% improvement since December. And it goes on, the mill averaged 1,700 tonnes a day, not only our best month ever, but 15% above the name plate capacity of 1,500 tonnes a day, and a 33% improvement since December. And these numbers continue in April and well into May now. So rest assured that our team is focused on productivity improvements and these numbers are not just a one-off.

I'd also like to add that during Q4 and Q1 2008, we spent approximately 130 million pesos, or $11 million to $12 million, on maintenance initiatives, and 50% of that was in the open pit alone. That really has paved the way for us to continue this positive trend.

And let's not forget El Cubo, here, production of over 19,000 gold equivalent ounces was the best quarterly production since the acquisition of Mexgold. It also represents a 26% improvement since Q4 2007. Total cash cost of $549 per gold equivalent ounce represents a 30% reduction in cash costs since Q4 2007.

So, clearly, the new management teams at both Ocampo and El Cubo need to be congratulated for a solid quarter. But it's not ending there. There are further production improvements and cash cost reductions anticipated.

At Ocampo, all long lead items for the mill expansions, 2,600 to 2,800 tonnes a day have been placed, with most items either already on site or in transit. The new underground equipment has been commissioned and we're seeing an immediate impact on April's underground production rates. Our excavators have been fully redeployed into the pit. The fourth tertiary crusher is installed and the [PLCs] are being worked on to increase the heap leach capacity to some 13,000 tonnes per day later this year.

We are well underway with the grid power project and we continue to work on reagent optimization initiatives to further reduce costs.

And finally, the mill and crushing plant reached availabilities of 90% and 78% respectively in March. And this continues to improve as we established disciplined preventive maintenance programs.

And at El Cubo, our third mill, [Tahoe], will be placed on care and maintenance during the summer routing all work to the Los Torres mill where operating costs are 40% lower. We are already hauling approximately 30% of our production along the new 600-meter haulage level to the Los Torres mill and will continue to ramp up production throughout the year, thereby eliminating the expensive surface haulage cost. We anticipate the receipt of the new underground equipment fleet by Q3 this year, and longhole mining at the La Loca vein is moving quite successful and productive.

So before I pass it off to Scott Perry, our CFO, I would like to stress that we have the team, we have the world-class assets, and we are delivering continuously.

So, over to you, Scott.

Okay. Thank you, Rene.

As Rene spoke to, the operational turnaround plan and subsequent asset optimization strategy is really continuing to deliver the necessary results to continue propelling Gammon Gold forward on its turnaround business plan.

The positive momentum today on our operational asset turnaround has been very strong. As Rene said, Q1, it was really a quarter of firsts and bests. And it was. It was a milestone quarter and a record quarter for Gammon Gold, especially so in terms of the number of financial performance achievements and key metrics.

Our equivalent gold production during the quarter was 57,946 ounces, which represented a 35% improvement over average production levels in the second half of 2007, and importantly, was in line with our Q1 production guidance that was originally reported to the market back in December of 2007. This production improvement is almost entirely attributable to focused productivity initiatives encompassing our mine site optimization strategies.

Total cash cost per ounce benefited favorably from our targeted productivity and cost efficiency initiatives, resulting in a cash cost per equivalent gold ounce of $491 in the first quarter. This obviously compares very favorably to the cash costs result of $575 per gold equivalent ounce in Q1 of the prior-year period, or alternatively, it compares favorably to the cash cost per ounce of $676 in Q4 of 2007. This is a significant cost reduction improvement of 15% over the prior-year corresponding period and a 20% improvement over cash costs in Q4 of 2007. Relative to our cash cost guidance for Q1, the result of $491 per ounce favorably outperformed our original Q1 guidance. It outperformed our guidance range by $90 to $110 per ounce -- a great result.

The significant improvement in underlying productivity and cost efficiency at our operations combined with the strong metal prices resulted in strong and novel record earnings for Gammon Gold. Q1 net income after tax was $8.5 million which equates to $0.07 per share, which is obviously a significant improvement over the $20.4 million loss reported in Q4 of 2007, or alternatively, a loss per share of $0.19.

As Rene mentioned, this is the first quarter in Gammon's history that we have posted positive earnings, and the result itself is a $28.9 million improvement over the prior-year corresponding period in 2007.

In addition to the underlying operational asset turnaround, the strength in metal price environment favorably impacted our financial performance, resulting in record sales prices for our gold and silver metal output. In Q1 we realized a record gold price of $928 per ounce, and likewise, on silver, we realized a record silver price of $17.69 per ounce, which is respectively 41% and 32% higher than realized prices in the prior-year corresponding period. It's [effected] realized prices are a result of Gammon Gold being 100% unhedged on all gold and silver metal sales. Obviously, this positions Gammon Gold very well to continue fully participating and benefiting from the strong metal price environment throughout the remainder of 2008.

Our record economic margin and record earnings translated into record operating cash flow and net cash flow results for the Company. In Q1, we reported record operating cash flows of $14.5 million which compares very favorably to the negative operating cash flow result of $9.3 million in the prior-year corresponding period. Again, this represents a significant turnaround and actually represents a $23.8 million improvement in the business' operating cash flow profile.

The strong operating cash flow profile has proven more than sufficient to internally fund 100% of our capital expansionary expenditures in Q1 of this year. As a result, this resulted in a positive net free cash flow of $1.6 million during the quarter. This is compared to an $11 million net cash outflow in Q4 of 2007 and a net cash outflow of $20 million in Q1 of 2007. So again, a significant turnaround.

Gammon's positive net free cash flow status is a milestone for the Company and again was another record for the Company, being the first time in the Company's history that we have recorded positive net free cash flow, which is obviously particularly pleasing given that we have always targeted to be net cash flow positive in the second half of 2008. The faster-than-anticipated improvement in the portfolio's cash flow profile is attributable to our optimization initiatives, gaining traction a lot faster than anticipated. And this was also well underpinned by the strong metal price environment that continues to date.

But what really signifies and attests to the strength of the turnaround in our business performance and our cash flow performance is the significant cash generation that we demonstrated in Q1 since we first put in place this optimization strategy. In fact, cash generation was so significant that it had facilitated a number of unplanned but dedicated debt repayments.

In late February, we made a debt repayment of $2.1 million. We then repeated this with another debt repayment in early April. And as of yesterday, we made another debt repayment of $1.5 million. So in aggregate, year-to-date, the Company has made $5.1 million in accelerated debt repayment since kicking off the Company's turnaround strategy.

The strong cash flow performance and the self-funded business model to date means that the Company had had no need to access its line of credit debt facility since early January. This represents a continuous period of 16 weeks since we've had any need to access the facility. And I discussed, in actual fact, we've been making accelerated debt repayments.

So again, I think this speaks very well to Gammon's strengthened financial foundation given that the Company had always been forecasting to be drawing down on the debt facility in Q1 of 2007. But as Rene and I have both spoken to, we have achieved cash flow positive status a lot quicker than first anticipated.

On March 31st of 2008, we communicated our strong three-year growth strategy for Gammon Gold. And given our strong year-to-date performance, the Gammon Gold management team reconfirms that we are strongly positioned against the 2008 guidance metrics. These metrics are namely -- production guidance of 240,000 to 275,000 gold equivalent ounces at cash costs ranging from $480 to $515 per gold ounce.

Our Q1 financial results, they are good status checks in terms of our strong standing and how well poised we are to meet this production guidance and this cash cost guidance. Let's look at Q1 production.

As we have always planned, Q1 was always scheduled to be our lowest production quarter in 2008. And as our productivity initiatives -- excuse me -- as our productivity initiatives are by no means fully executed, in addition to the fact that we'll be expanding the process and capacity of the Ocampo mill in late Q3 of 2008, we're continuing to forecast and project rising production levels going forward.

As a result, we expect the production profile will continue to augment, and that really places us in good stead both in terms of meeting our production guidance but also in terms of meeting our cost guidance, and obviously we expect to have fixed cost component base to benefit favorably from the higher equivalent gold production in future periods.

So, accepting our Q1 results as status check, if we simply annualize our Q1 production results, it equates that we are well positioned in terms of our production guidance for the full year and illustrates that we should be coming in at the lower range of this production guidance. However, it would be incorrect to simply extrapolate the results as such, because in terms of our productivity initiatives, we are on a 12-month journey and by no means have we fully executed the -- and also we have to bear in mind the mill expansion that's taking place at Ocampo.

On the cash cost front, well, we finished Q1 $491 per ounce. So we're already -- we're sitting at the more favorable end of our full-year cost guidance. And our cost structure per ounce, as I've already mentioned, will continue to benefit from the augmented production going forward.

Our three-year growth profile, as communicated on March 31st, really does leverage Gammon very nicely to the current strong metal price environment. This growth strategy encompasses a 17% to 20% year-over-year growth in production, and likewise, the 15% to 18% year-over-year reduction in cash costs.

So in today's metal price environment, our three-year outlook is a strong operating cash flow and margin story. It's a self-funded organic business plan and will importantly generate the necessary internal funding to accelerate the development of our advanced exploration project, Guadalupe y Calvo, and will also organically generate the necessary funding to proactively target ongoing reserve and resource inventory augmentation programs to expand the mine lives of our two key producing assets, Ocampo and El Cubo.

So, as Rene said and I think as I've elaborated on, in summary, Q1 was a milestone quarter and it was a record quarter for Gammon Gold. Our business was a self-funded business model such that we were cash flow and earnings positive in Q1, which is one to two quarters faster than what we have always been targeting, which really does illustrate the strong traction we have achieved today. On the back of this significantly improved business performance, we are quickly building a strong financial foundation that we can continue to build and expand on in subsequent quarters as we continue to deliver on our 2008 targeted production levels and our wider three-year business growth plan.

I will now pass back to Rene for closing commentary.

Well, thank you, Scott.

As you can see, we've been delivering on our expectations for Q1, in fact, beating even our internal targets. In the press release, highlighting April's results will once again be a testament to our ability to continuously improve. And I want to stress something that Scott said.

We have not drawn down on our revolver in the past 14 weeks. There is no liquidity issue in the Company. In fact, to stress again what Scott said, we believe we can self-fund our three-year growth strategy.

The newly-assembled senior management team remains confident in the quality of our assets and our ability to successfully execute our growth strategy. The entire Gammon team remains steadfast in our commitment to continue to drive operational and financial performance in the quarters and years ahead. And once again, we have the team and we have the world-class assets.

So, for now, I'd like to turn it over to the operator and open it up for Q&A.

Thank you. (OPERATOR INSTRUCTIONS)

Your first question comes from Craig Miller of BMO Capital Markets. Please go ahead.

Good morning, everyone; and I think congratulations are in order.

My questions relate to I guess the next three quarters, one of those is traditionally a rainy one. What steps are you taking or have taken so that the rainy quarter which I guess is Q3 -- or what kind of impact do you think Q3 will have on your plans?

And the second question is, Gammon has really done very little in the way of drilling over the last year and a half to two years. With the cash that you're generating, will you be reactivating drilling rigs?

Hi, Craig, it's Rene. First of all, obviously the new management team, nobody has ever seen the rain. So -- but we've got an action plan. There's about ten items on the action plan to mitigate any impact of the rainy season.

Some of them involve things like we resumed pre-stripping of Conico and Picacho, so that we didn't have any clayey kind of ore going through the crushers during the rains. That was a problem last year and we recognized that. So the pre-stripping will be completed before the rains hit.

There are some other things, like we're evaporating the [preg] solution quite a bit, raising the grade of the solution. So that when it does start raining, it'll dilute back down to a reasonable grade so that we can maintain production there. We're also providing stockpiles ahead of the mill and the crushers, so that if there's any production interruption in the pit for example because of fog and rain or slick roads, we can keep the crushing time going. We've put in an order for an aggregate plant so that we can put some really good roadbed on the roads as well so it doesn't get too slick.

Like I said, there's about ten items. And we believe we fully accommodated the rainy season in our Q3 plan for the budget this year.

On the drilling, that's a very good point. We've done very, very little in the last two, two and a half years on exploration. We did put to the Board a proposal at the meeting on Monday and it was approved on what we're going to be doing. And we'll be issuing a press release likely next week, letting the market know a lot more about the details of that program.

That's all I have for now anyway. Again, congratulations.

Well, thank you, Craig.

Thank you, Craig.

Your next question comes from Steve Green of TD Securities. Please go ahead.

Yes, good morning, gentlemen.

Good morning.

A quick question on the open pit, heap leach, just on recoveries. It looks like a low recovery quarter Q1 based on ounces off of pad, but I'm assuming that's because you had a certain amount of tonnes that were under leach this quarter, is that right?

Yes, what happened is, as you know, we're doing the heap leach expansion, first two quarters this year, and we couldn't put approximately 250,000 tonnes under leach because we would have been putting the construction guys under leach, and that's usually not a good thing to do.

Come March, we were able to get that tonnage under leach and we're seeing the ounces come off the pad now as we speak, the last couple of weeks of April and well into this month, we're getting great ounces coming off the pad.

Right. And can you comment on expectations in terms of recoveries for the rest of the year?

Yes. The recoveries, because we're sending the high-grade material from the pit over to the mill, right, about 15% of our ore from the pit is about 4.5, 5 grams. And so that reduces the heap leach grade down to 1.1, 1.2 grams.

So I would anticipate on the gold in the low 70s as an overall recovery on that lower grade material. And the silver is probably in the low 60s.

What we are doing, we're running the economics and they do favor tertiary crushing, all material above 0.2 gram a ton. So actually once we get that third or fourth crusher up and running, we'll be crushing 100% at these higher metal prices on the pad. So that may increase the recoveries as well.

Okay, thanks. And I wonder, do you break down cash costs between open pit or milling operations and heap leaching operations?

No, we really don't. We do it activity-based, you know, dollars per ton for the different units. We don't look at it that way because, otherwise, where do you charge your G&A in common personnel?

Right, right.

You know? Kind of a tough one.

Okay. Can you give us some kind of rough figures on dollars per ton on the open pit and heap leach?

Yes, we had fairly high costs in the first quarter in the open pit because of all the maintenance, that half of the 130 million pesos that went there. So I think if you take a look at the October, November press release last year where we outlined the cost per ton or the December, that's probably a more reasonable level that we'd be going to.

Okay. Okay, that's all I had. Thanks.

Okay. Thank you, Steve.

Your next question comes from [Marco Montasio] of Equinox Partners. Please go ahead.

Hi, guys. Actually my question was the same that was just asked on the recoveries, so I'll let someone else jump in.

Okay. Thank you.

(OPERATOR INSTRUCTIONS)

Your next question comes from Wendell Zerb of Canaccord Adams. Please go ahead.

Good morning. Just a couple of quick questions.

First one, can you qualify what the strip ratios are going to be in the heap leach over the next few years, Rene? I know that we had some conversation on this recently, but I just wanted to reconfirm that.

Yes. When we gave the public guidance numbers and what's included in the three-year outlook, we assumed fairly high strip ratios because Metallica has not done their sequencing. When we take a look at the Metallica pit and our pits, the strip ratio is below 3 to 1. But in our three-year guidance, we assume 10 to 1 this year, 7 to 1 next year, 5 to 1 the year after. That mines out over 60%, 65% of the total waste.

So we're really waiting for the Metallica plant to come out at the end of June so that we can take a look at the impact on the sequencing that they're doing. What they're doing as opposed to running our reserve sequencing because that's done at $580 gold, they're running their sequencing plan at $800 gold, and that may change things really.

So it's a little early. I believe we're quite conservative on our stripping forecast for the three-year period, but I can't tell you where it's going to go because I haven't seen the numbers yet, sorry.

So, what would have the strip been for Q1 then?

If I recall correctly, the strip was around 8 to 1.

Just quickly on the mill expansion, timeline for actually having that pushing forward?

Yes, we're anticipating the end of Q3, early Q4 for that. It's not that complicated. The critical path is installing the third filter press, and so the engineering is being done right now. And we think that's a reasonable estimate. The other aspects on changing out pumps and the oxygen plant, that's all well in hand, not the critical path.

Great. A couple quick more -- a couple of more questions.

Just qualifying on the capital, I know you recently had mentioned for 2008, $55 million, is that still about correct?

Yes, $50 million to $55 million is about correct. And there's quite a bit of capital development that's going with our exploration programs. We're doing 14 kilometers of exploration development at Ocampo and 16 kilometers at El Cubo.

Okay. And for Q2 then, it was about -- there was about $13 million in Q1, what do you expect for Q2 out of that $55 million?

If I look at the crystal ball, a little bit higher. We've always said maybe about 60% of our capital will be in the first half of the year. And it seems like we're still on target for that.

Okay [within that bracket].

And then just the last question, with regard to gold sales throughout a quarter, do you just typically sell gold as it's produced or is there a particular timeline that you look at for sales?

Yes, hi, Wendell, it's Scott here. Yes, we typically sell the gold when it's produced. Typically we do a weekly shipment. And then when the gold is delivered to the refinery, then we get the final refinery in, the final metal account, that's credited to a metal account, and we typically sell it there and then. And as I mentioned in my update, we're 100% unhedged, so when we sell it, we do sell it at the prevailing spot price for gold and silver.

Great. And you said again, weekly shipment?

Yes.

Okay. That's great. Thanks very much.

Okay. Thanks, Wendell.

Your next question comes from Trevor Turnbull of Scotia Capital. Please go ahead, sir.

Good morning, Rene. I had a couple of questions regarding grades coming out of the underground. One is, looking forward over the next couple of years, you've now got a reserve -- an underground reserve grade, I guess, at Ocampo of about 3.15 grams. I'm wondering if you can give us a sense when you blend in what you're going to get out of the open pit that's also going to be directed towards the mill, kind of give us a sense over, say, 2009 and 2010, where you think you'll be relative to that reserve grade. If you think that'll come down as you ramp up the underground and as you use open pit contributions, or if you think you'll be able to hold that level.

Okay, Trevor. The underground grade in gold equivalent in the reserves is about 6.8 grams, and we believe we can do quite a bit better than that. There's a double dilution in the year-end reserves. And so we're holding steady on that. Our dilution is still below 20% and we believe we can keep on moving it down.

So if you take a look at our three-year guidance, okay, we don't assume expanding beyond 2,800 tonnes a day. We're doing that engineering throughout this year. I'm confident that the mill needs to be considerably bigger, right? But we just don't have the numbers yet on that engineering. We need Metallica to work first and then we need to go to an engineering house to look at the capital cost from a cost-benefit analysis.

Okay.

So the -- for now, you can assume 1,900 tonnes a day come from the underground by the end of the year at the 6.8 to 7.2 gram range. And from the open pit, it will stay the same, right, about -- in the order of about 900 tonnes a day at the 4.5 to 5 grams a ton.

Okay. Yes, sorry, I was looking at the pure gold. I wasn't looking at gold equivalent.

Oh, there you go.

The -- and speaking of the underground, what -- and I apologize, I missed the majority of the opening comments -- but what's the plan relative to the shaft at this stage? Is -- how is that going to be utilized or not at this stage?

Well, what I've done in the -- on the capital projects, I put the shaft back in priority level, right? The key thing is the mill expansion, the heap leach expansion, the crusher plant expansion, getting the equipment running in the pit and all that. So we actually, except for the compressor house, haven't done anything. We just commissioned the compressor house.

And part of my strategy has been looking for step changes, right? So when I take a look at my haulage from the underground portal all the way up to the mill, okay, versus the savings I would have by hauling to the shaft and skipping, there is a savings, but it's not a step change. And so I'm not in any huge rush on that. We will commission, but I haven't even thought about when that would be commissioned. Obviously we need ore passes, waste passes, loading pocket skips, and all that.

But we'll tackle that one when we tackle it. The big one is cyanide and cyanide destruct. That's what we're really focusing on because that's up to $45 an ounce opportunity.

Right. And just following on with the underground and some of the great profiling. Down at El Cubo, there's still a large component I guess of the [Rezago] or the old higher grade backfill. Any sense of when you might see head grades start to migrate back towards the more pure -- the fresh ore and the reserve grades down there?

Yes, it's starting to. We're -- our strategy is to try to phase out [Atazzaga] mining by the end of this year. That's our target and that's what's in our three-year plan. So you'll start seeing grades improve by the end of this year as productivities improve, and we can start dropping off Atazzagas.

We've started longhole mining in La Loca and there'll be more and more of that coming on line throughout this year. And that's really what's going to be replacing that Atazzagas. And the grades in La Loca are phenomenal, so we're really pleased with that. That's what we've been sending to the Tahoe mill actually. And it isn't uncommon to get 6 to 8 grams in Tahoe mill.

So anyways, a long way to answer your question, but hopefully it's phased out by the end of the year.

Okay. And then last question, simply, do you have a sense of guidance on depreciation per ounce at the two operations?

Yes, Trevor, it's Scott here. If you look at our Q1 results in terms of the non-cash cost margin that have officially gone out, that would probably be indicative of the non-cash cost per ounce margin going forward, but obviously you'd have to model the increased production profile going forward. And obviously, as I discussed our productivity initiatives, by no means have we fully executed. Once we expand the mill at Ocampo, that's very cheap capital, so that will obviously benefit non-cash cost margin per ounce.

So I would use Q1 going forward. And as Rene spoke to earlier, we are starting to target reserve and resource augmentation programs. We're really getting a bit more proactive in the drilling. And obviously, any expansions in terms of our reserve inventory will more favorably impact that margin going forward. But you won't see that until 2009.

Okay. Great. I appreciate it, guys.

Thank you, Trevor.

Thank you, Trevor.

Your next question comes from [Paul Tweedle] of [Dunhill] Capital. Please go ahead.

Hello, gentlemen. Congratulations on a great quarter.

I just wanted to get some more color on Guadalupe y Calvo, if you know when you might have a scoping study ready or what the progress at the moment.

Hi, Paul, it's Rene. We do have four drill on site and we just had my consultant put together the 18-month or call it 15-month plan to get us to a scoping study. And we'll be kind of releasing that with our overall exploration press release in the coming week or two.

Okay.

But things looking very encouraging and we'll include all the engineering works necessary for it.

One thing that we're keeping in the back of our mind is an ability to perhaps accelerate development of Guadalupe. As you know, it takes upwards of 24, 26 months lead time on mills. Well, if we have the three mills shut down at El Cubo, that's one opportunity that we have, is being able to dismantle and re-erect. So that's one of the things that we're looking into as well as part of the scoping study.

Dismantle from El Cubo.

Yes. The mills from El Cubo.

Great. That's all I had. Once again, congratulations.

Well, thank you, Paul.

Thank you, Paul.

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

Okay, thank you very much.

Well, on behalf of the entire Gammon senior management team, I would like first of all to thank our teams at the mines. Their determined efforts are helping us achieve this. And I would also like to thank our shareholders for supporting the management team's efforts during this exciting turnaround. And also to thank everybody else participating in the call today.

So with that, this concludes our conference call, and thank you very much for joining us.

Okay. Thank you, everyone.

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