Alamos Gold Inc (AGI) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for joining us today. Our presenters this morning will be John McCluskey, President and Chief Executive Officer; Jon Morda, Chief Financial Officer; Manley Guarducci, Vice President and Chief Operating Officer; and Mr. Ken Balleweg, Vice President, Exploration. Any questions you may have regarding the announcement will be addressed at the end of the presentation. Mr. John McCluskey, please go ahead.

Thank you, operator. Good morning, ladies and gentlemen, and welcome to the call. Jon Morda, the Vice President and Chief Financial Officer of Alamos Gold, will make a comment regarding forward-looking statements.

Thank you, John. We refer all participants to our forward-looking statement disclosure at the back of our press release and caution that mining and exploration is subject to a number of risks and uncertainties, particularly in respect of mining and processing of ore, achieving projected recovery rates, operating efficiencies, and conversion of mineral resources to proven and probable reserves, to name a few. There can be no assurance that forward-looking statements made in this press release and in this conference call, made based on information on hand today, will prove to be accurate. Future results and events could differ materially from those anticipated in such statements.

Thank you, John. We will follow our usual format with Jon Morda providing an overview of the financial picture, followed by Manley Guarducci, who will discuss operations; Ken Balleweg, who will provide an overview of exploration activity, after which we'll open the call to a Q&A session.

Alamos Gold has turned in a strong quarter; in fact, this is our best operating performance so far. The Company exceeded its market guidance, delivering 38,500 ounces of gold production against a target for the quarter of 35,000 ounces. We're committed to meeting or beating our quarterly guidance, and we've achieved this goal now for three consecutive quarters. We've demonstrated over this time frame incremental improvements in gold recovery, productivity, cash flows, and earnings.

The second quarter has also seen a significant ramp-up in exploration activity, with emphasis on new grass-roots targets which are advancing to the drill stage. A specific target that we are quite excited about is Cerro Pelon. This is a target we've been intrigued by for years because of the compelling geography and its proximity to our leach pad and plant facilities. While still early days, this is one of the largest gold anomalous zones that we have identified so far in the district. Indications from channel sampling and reconstructed drill roads show that there is gold in the system. By now, we have two drill rigs onsite drilling and a third scheduled to arrive shortly. Ken Balleweg will be providing more detail in the exploration overview.

As many of you know, the third quarter marks the rainy season in the Sierra Madres, with July and August having the highest rainfall. Some of you will recall that Q3 2007 was an unusual year, with rainfall two standard deviations above normal. I'm pleased to report that 2008 has followed a near-normal rainfall pattern. While this means heavy rain, the steps that have been taken in the past nine months to improve performance in this season have proved successful, and results are bearing this out. With about three weeks of high rainfall remaining, we are ahead of our internal forecast.

Specifically, July production was over 11,500 ounces, and we are on track for gold production of 32,000 ounces for the third quarter. This substantially exceeds the 22,000 ounces of production reached in the third quarter of 2007.

The Company ended the second quarter debt-free and with working capital in excess of $45 million and growing. We generated $0.16 per share in cash flow during the quarter, a fourfold increase over a comparable period in 2007. These numbers are particularly important as we come to the conclusion of the mill study for processing high-grade ore. It is becoming clear that we are in a position to finance the mill construction through cash flow generated from operations, along with a debt facility or line of credit arrangement.

The new mill will allow us to substantially increase production from operations at Mulatos, as well as maximize recoveries from high-grade ore. We've encountered high-grade in several areas of the property, including the Estrella pit, the Escondida zone, the gap and San Carlos zones, as well as others that are in an earlier stage of exploration. Over time we expect to continue to develop high-grade resources in the district. The option value of an existing mill as these resources come onstream will be highly beneficial to the Company. We expect to announce the results of the mill feasibility study before the end of September.

While we have seen significant improvements over the last nine months, there remains more to be done to improve production and lower cost. Some of these projects will be discussed in the operations presentation later in the call. But I want to emphasize the consistent theme. The objective is continuous improvement, and this applies to all aspects of our Company--from safety to maintenance, production and exploration.

The second quarter has seen some significant changes to our management team. Manley Guarducci, formerly General Manager of Mining Operations, was appointed Vice President and Chief of Operations in May, taking over from John Van De Beuken, who remains a Director of the Company.

Another addition to the management team is Charles Tarnocai, who joins us as Vice President of Corporate Development. Charles has a Ph.D. in geology and comes with an enviable track record of finding big gold deposits. He has worked previously in the Mulatos district during his years at Placer Dome. Charles will help in exploration, as well as pursuing property acquisitions and M&A opportunities.

We have also appointed James Porter as Vice President, Finance. Jamie is a CA in Canada and holds a CPA designation in the US. He's been with us for the past three years in the role of Controller. He'll continue to oversee this function, as well as take on additional responsibilities in the areas of Treasury and Investor Relations.

I would now like to call on Jon Morda, CFO of Alamos, to provide an overview of the Company's financial position. John?

Thank you, John. Financial highlights for the second quarter of 2008 included revenue of $32.3 million, an increase of 55% over revenues in the second quarter of 2007 of $20.8 million. Cash from operating activities in Q2 of $15.2 million after working capital changes were $0.16 per share. Sales in Q2 were 35,482 ounces of gold sold at an average of $911.00 per ounce. On a year-to-date basis, revenue was $63.3 million, compared with $37.8 million in the prior year period. Year-to-date cash flow from operations were $30.0 million compared with $7.6 million in the comparable six-month period. Earnings from operations for the second quarter were $9.6 million compared with $3 million in Q2 of 2007. Earnings were $6.2 million or $0.07 per share--$0.06 diluted--compared with $1.9 million, or $0.02 per share, in Q2 2007.

Our balance sheet liquidity has improved. Cash at the end of the quarter was $18.3 million, while our working capital position was $45.0 million. We have a strong balance sheet with no debt, apart from non-interest-bearing liabilities incurred in the normal course of business. A significant portion of our working includes in-process leach pad gold inventory. At June 2008, that amount was $19.7 million compared with $22.7 million at December 2007, reflecting a drawdown of higher grade recoverable ounces stacked in Q1 and a slight decrease in the average cost per ounce of gold in process.

On the fixed asset side, we added approximately $5.6 million of plant equipment for the quarter, including several projects designed to improve the efficiency in gold recovery and included conveying, stacking, and agglomeration systems, improvement to warehousing, maintenance facilities, lab, and the ADR plant.

On the liability side of the balance sheet, strong cash flows in Q2 allowed us to significantly reduce both current and long-term debts. During the second quarter we completed the conversion of the outstanding debentures and repaid amounts in respect of our capital leases. Apart from trade payables, taxes, and other such liabilities, the Company is now debt-free. We are currently in negotiations with lenders regarding partial financing of the construction of the mill to process high-grade ore from Estrella Escondida and adjacent areas subject to a positive investment decision from the Board.

I'll just touch on some operational cost figures at the mining Q2 before our Chief of Operations, Manley Guarducci, provides you with an operations review and update. Ore production was $1.2 million in Q2, compared favorably with 873,000 tonnes for Q2 2007. Our mining cost per tonne of material in Q2 was $1.67, slightly higher than $1.52 for Q2 2007. Mining cost per tonne of ore was $3.90, lower than $5.40 in Q2 '07. The waste-to-ore ratio of 1.3 year to date is almost 50% lower than in the same period of 2007 and has contributed to lower cost per tonne of ore. The waste-to-ore ratio is expected to be near current levels for the balance of the year.

Crushing and conveying costs on a per-ton basis were $2.11 for the second quarter, lower than $2.84 from last year, representing improved tonnage and stacking efficiencies. Processing costs of $2.39 in the second quarter were about the same as last year's $2.34. As you can see, all major mining departments performed well in Q2 2007.

For the second quarter, we reported cash operating costs of $3.61 per ounce. This reflects both the improved cost per tonne reported by mining operations and the costing and long-term recovery assumptions inherent in our leach pad in-process gold inventory model.

Several projects have been implemented over the past month targeting improved recovery. We're constantly assessing recovery results from column tests, monthly composites, daily bottle rolls, all results on mine door, assessment of leach pad percolation and long-term modeling, and the combined evidence suggests that long-term recoveries are increasing. High recoveries will have the effect of lowering our reported future cash operating costs per ounce.

One of our primary objectives was to improve mine operations to the point where operating and financial results are both predictable and improving. We have seen the results of the initiatives we've taken in the last year as we've not only been able to meet our guidance, but outperform our production target.

With that, I'll turn it back to John McCluskey.

Thank you, John. I'm now going to call on Manley Guarducci to provide an overview of the operations. Manley?

Thank you, John, and good morning, everyone. I would like to start by saying that I'm pleased to be able to review our progress with you today. As you can see from both our operating and financial results, projects that we initiated in 2007 have clearly had a positive impact on all aspects of our operations. I'm also pleased to report that the second quarter has continued to demonstrate our strength and ability to meet and exceed our production goals and cost targets. For the third consecutive quarter, we have seen successful increasing gold production, cash flows from operations, and gold recovery.

I'd like to take a moment to summarize the projects that we've completed and the benefits that we're starting to realize from this project. The conveying and stacking system--we started belt stacking on the leach pad in March of this year. This complete conveying and stacking system was commissioned in April. This project had an immediate positive impact on leach pad percolation. The benefits included noticeably less ponding on the pads, less settlement of stacked materials, and less segregation on the lifts. Even now, in the middle of the rainy season, there is little to no ponding on the newly stacked areas of the leach pads. This compares to the old areas of the leach pad which show significant water ponding on the surface of the heaps.

In terms of heap settlement, we've surveyed and determined that the current level of settlement is approximately one-third of what we were experiencing in truck loading the leach pads. This translates into lesser pad density and allows for superior percolation and ultimate recovery.

Solution control system--we implemented a solution control system in conjunction with the leach pad expansion and first days of application of inter-lift liners. This new solution control system is proving highly beneficial during the current rainy season, demonstrating significant improvements in gold production. The solutions in process control starts in individual cells within the heap and allows for solution to be sent to a control system in an individual pipe. The solution control box facilitates the diversion of lower-grade solutions to the intermediate pond instead of the pregnant pond. This means a higher undiluted head grade is sent to the ADR pool's recovery plant. The pregnant pond is currently reporting solution in excess of 0.9 grams per tonne before going to the ADR plant for processing. This compares to approximately 0.5 grams per tonne in the same period of last year.

The lime application system--the new lime application system was commissioned at the same time that the (inaudible) system was implemented. Shortly after we began using the new silos and automated application process, the lime application rate was reduced from seven kilograms per tonne to five kilograms per tonne in order to maintain the pH at the required level. The new lime application process has resulted in a more uniform distribution which has decreased lime consumption and corresponding lime costs.

Cement agglomeration--we began belt agglomeration just after the end of the second quarter in July of '08. While it is too early to report any proven results from this project, column tests demonstrate that agglomeration should increase the overall level of gold recovery. We are still fine-tuning the agglomeration system in order to optimize performance, and we expect to begin drum agglomerations in early 2009. The precise levels of improvement in gold recovery resulting from agglomeration will take several months to quantify.

Gold recovery--All of the projects described above were initiated and completed with a view towards improving gold recoveries. And, as I presented, we feel strongly that our recoveries are increasing towards the results we're obtaining and daily bottle roll and monthly column testing.

Comparing the ounces of gold produced in any given period to the ounces of gold stacked in that same period provides a rough indication of the level of gold recovery during periods of steady-state operations. During the first quarter of 2008, dividing ounces produced by ounces stacked, we calculate a recovery ratio of approximately 38%. In the second quarter, this increased to 55%. Preliminary production numbers for July 2008 show that we produced over 11,500 ounces and that the recovery ratio continued to trend higher.

I'd now like to talk briefly about certain other areas of the operation. The crushing circuit continues to perform very well, and the average crusher throughput for the first half of this year was 13,300 tonnes of stacked ore per day. This is an excellent result, especially given that during this period we transitioned from truck loading to the conveying and stacking system. Normally, a process transition like this results in difficulties as operational issues are ironed out. We were pleased that we were able to efficiently manage this process and minimize any potential downtime resulting from it.

To follow up on some of the items I've discussed in the past, I'd like to give a status update on those projects that I've mentioned previously. The new laboratory is fully functional and operating. We plan to have it independently certified. As previously mentioned, the conveying and stacking system and lime application system have been operational for over three months now. The new mechanical shop, warehouse, and office are occupied and functional. The first phase of the inter-lift liner program is complete, and the cement silos are operational.

In the second quarter, we continued our focus and dedication to employee training, particularly focused on health and safety. In the second half of 2008, we will continue our training programs with a focus on procedure documentation and implementation. The results of employee health and safety training have been positive, and this is evidenced by both lower accident frequency and severity rates.

Additional plans for mine operations for the remainder of 2008 and 2009 include design and construction of a closed crushing circuit in order to guarantee that 100% of the crushed materials have less than three-eighths--due to the size sensitivity of the ore (inaudible), this is expected to further improve recoveries; addition of drum agglomeration to improve the agglomeration process; powerhouse expansion in anticipation of mine expansion; general reserve and resource update schedules for year end 2008; continued cost-benefit analysis of projects to reduce costs and improve production.

The high-grade mill feasibility study is currently being reviewed by management. We've seen some delays as a result of both the limited availability of consultants and certain additional test work that was requested in order to finalize the study. A global mine plan is being developed to enable management to review life of mine production and costs, including production from both existing heap leach operations and the potential new high-grade milling operation.

With respect to the high-grade mill, two distinct process options are being evaluated on the basis of both long-term benefit and flexibility. It is our intention to make a recommendation regarding the construction decisions to our Board in September, with a public announcement to follow.

We just finished July, which was the first month of the rainy season in Mexico, and operations fared extremely well. The tonnage for the month was above budget, ounces produced were above budget, and the recovery continues on an upward trend. We look forward to continuing to benefit from the projects we've completed in achieving our operational target.

Thanks, and back to John McCluskey.

Thank you, Manley. I'm now going to call in Ken Balleweg to give an overview of the exploration highlights for the quarter. Ken?

Good morning. The second quarter for the exploration department was characterized by acceleration. We increased our professional staff by hiring several new geologists. The number of active exploration projects increased. We sourced and mobilized two additional drill rigs, and we significantly increased the pace of our corporate development activities with the appointment of our new VP of Corporate Development, Charles Tarnocai.

A total of seven exploration projects were active in the quarter, with over 12,000 meters drilled to date in four project areas. We currently have three drill rigs onsite with a fourth scheduled to arrive later this month. The Company is very well positioned for exploration success during the second half of this year.

One new and high priority project area, Cerro Pelon, was advanced to drill stage with highly encouraging surface sampling results. During the second quarter, we completed an extensive surface exploration program and constructed drill roads and paths for Phase I drilling. Drilling is currently in progress with two rigs.

I would like to lead off with a somewhat detailed discussion of this project area. Cerro Pelon is located 2.5 kilometers southwest of the current leach pad and is the closest potential satellite deposit to mine facilities outside of the greater Mulatos deposit. Cerro Pelon is a 400-meter-high silicified massif that is a prominent feature of a large area of silicic alteration, which is the alteration type hosting the majority of gold in the district. The geology of the project area is very similar to Mulatos, consisting of a dacitic dome complex with stratiform bracchia indicative of multiple eruptive events.

Exploration work during the quarter consisted of establishing road access into the project area, geologic mapping, and extensive surface sampling. The large 2.5-by-1.5-kilometer soil geochemical bid was completed over the project area. Analytical results identified a well developed soil gold anomaly approximately 400 meters by 100 meters in size on the southeast ridge of Cerro Pelon with a maximum gold concentration of 3.3 gram-per-ton gold, coincident the vuggy silicon alteration.

New drill road cuts within the soil anomaly have exposed two areas of extensively oxidized vuggy silicon alteration. Channel sampling has revealed potentially ore grade gold within the vuggy silica with the first channel sequae containing an interval of 33.4 meters of 2.7 gram-per-ton gold with an included interval of 19.8 meters of 3.7 gram-per-ton gold. The second channel samples series in the same zone, located 85 meters to the north across a largely covered area, returned 27.4 meters of 1.35 grams-per-ton gold. While these are not representative of true zone thickness, they demonstrate relatively widespread distribution of gold in the vuggy silica. Grab samples from a second road cut approximately 50 meters below and 100 meters distant returned 3.2 grams-per-ton gold from similar oxidized vuggy silica.

Geologic mapping indicates that the silicic alteration hosting the gold has a strike length of 400 meters and extends a minimum of 440 meters downslope to the east. The zone appears predominantly stratiform with a northwesterly strike and easterly dip, but most likely has the structural overprint suggested by hydrothermal breccia. The first drill hole intercepts indicates that silica persists to over 260 meters below the surface exposures. The soil gold anomaly is strongly anomalous also in pathfinder elements arsenic, antimony, and barium, very similar to what we see in the La Yaqui gold zone.

A second, larger, higher magnitude arsenic, antimony, and barium anomaly occurs higher in elevation along the zone trend to the northwest and may indicate that the same gold-bearing zone is present at depth. Drilling of the gold-bearing zone is underway with two reverse circulation rigs. The Phase I drilling program is projected at 20 holes or 3,000 meters, although initial results indicate additional holes will be needed. Road and drill site construction in the north anomaly area will also be undertaken this month.

I'd like to next jump to the Puerto del Aire project area. The resource estimate there is now receiving full-time attention from our resource modeler and has advanced significantly. Sectional modeling is completed, and 3-D alteration shapes have been generated. We expect to include the Puerto del Aire zone in our resource and reserve update at the end of the year.

Resource drilling at Puerto del Aire was conducted in the last year. However, an additional 11 holes were drilled in the first quarter of 2008. It encountered additional mineralization extending 250 meters beyond the area of closely spaced resource drilling. The zone remains open to the northeast with an intercept of 21.3 meters of 6.27 grams-per-ton gold occurring at the edge of the drilled area. Additional drilling in the extension area is planned for the third quarter of this year.

The La Yaqui project area was also advanced during the quarter with 66 holes, almost 8,400 meters, completed to date. Over half the drilling has been in the main deposit area, with the remainder directed towards locating the faulted extension of the deposit and testing nearby target areas. Recent holes targeted oxidized vuggy silicon near the top of Cerro La Yaqui, with the best result to date being 18.3 meters of 1.37 grams-per-ton gold. A recently completed soil geochemical survey has identified a large geochemical anomaly directly northeast of the drilling area and coincident with the inferred vent portion of the system. The anomaly has the same geochemical signature as the Yaqui mineralized zone and is slated for follow-up drilling later this year.

Drilling in the Yaqui deposit area is completed and sufficient for resource estimation with the exception of some core drilling for specific gravity data, which is scheduled to begin as soon as current geotechnical drilling for Escondida pet wall stability studies is completed.

As previously mentioned, the Yaqui deposit is a flat-lying zone exposed at the surface, approximately 250 meters long, 50 to 100 meters wide, and up to 40 meters thick. The zone is completely oxidized, with cyanide extract for gold analyses indicating 90% to 100% recovery.

I'd like to briefly talk about El Halcon. We put a total of 20 holes, representing over 3,400 meters, into El Halcon, an area that had been selected as a potential site for relocation of the town of Mulatos. As reported during our 2007 year-end conference call, a large soil copper anomaly was identified in this area. Drilling results, however, show only weak copper concentrations in the proposed town site area and no ore-grade intercepts.

Recently completed drill holes at the south end of the drilled area, however, encountered alteration and mineralization similar to that surrounding high-grade copper, silver, or gold mineralization further to the south in the central Halcon area. Additional follow-up drilling will be undertaken in the third to fourth quarter.

Exploration activities on other regional targets in the second quarter included soil geochemical grids at the La Dura and Carboneras project areas, which are ongoing.

In conclusion, the planning and mobilizing efforts we undertook in the second quarter are expected to result in accelerated results from exploration in the latter half of the year. Cerro Pelon is our highest-priority target and is currently being aggressively drilled with two rigs, and we will most likely be adding a third rig. We intend to conduct additional in-fill and step-out drilling at Puerto del Aire to test the northeast extension area while resource estimation is underway. Geotechnical core drilling in the Escondida pit area is in progress and will be followed by core drilling at both La Yaqui and Cerro Pelon. Additional follow-up drilling is planned for the north Halcon area in conjunction with step-out and in-fill drilling in the central Halcon area for Placer Dome identified at a high-grade copper-silver-gold occurrence in 1995. Mudding contractors are being solicited to reserve mining activities in the Escondida-Victor tunnel to facilitate underground drilling and sampling in the gap. And finally, resource modeling and estimation will be undertaken on the La Yaqui and gap deposits as well as compilation and modeling in the historical data for the Halcon copper-silver-gold deposit.

I'll be glad to address any questions you might have at the end of the call. Thank you.

Thank you very much, Ken. That concludes the first part of our presentation. I would now like to ask the operator to open the call to questions and answers.

(OPERATOR INSTRUCTIONS.) The first question is from Ryan [Morales] from Credit Suisse. Please go ahead.

Hi, good morning. Just a couple of questions. Quarter over quarter, there was a slight decrease in mining and crushing rates. I was just wondering, what was the cause of the decrease?

Good morning, Ryan. The decrease, as I mentioned in my statement, is really kind of insignificant, but we did do a lot of transitions. The transition to the stacking system from the truck hauling is probably the biggest. We also had a couple of very major events, which was breaking up cell number two, which is a 1.8-kilometer belt and blowing up of, we had a powerhouse problem where we lost two gensets at the same time. These things were resolved, and I feel very good with the numbers that we've had considering all these changes.

Okay. Just another quick question on what are your expectations for tonnage and strip ratios for the remainder of the year?

Everything should maintain consistent with what we're doing. The tonnages--well, we're approaching the end of the rainy season, so those will be back up to where we were previously at. I foresee everything being consistent with what we're doing.

Okay. And my final question is, unit money costs quarter over quarter increased, and it looks like it was driven by the mining, processing, and admin costs. What were the key drivers of the increase?

Everything's pretty much relative. The costs aren't affected too, too bad, or didn't increase significantly. But a little bit lighter in the tonnes affects the mining costs.

Right.

Probably the biggest issue. Also, everything's coming up. Lime, lime costs just came up 7.5%. There's raises across the board with respect to inflation and everything else.

Okay. Okay, great. Thank you.

Thank you. (OPERATOR INSTRUCTIONS.) Our next question is from Kerry Smith from Haywood Securities. Please go ahead.

Thanks, operator. I was just wondering if you could talk a little bit, John, more about, you said you had some preliminary discussions with some lenders about the debt facility for the mill. What size of facility are you discussing?

The facilities, generally, we're looking at between $45 million and $50 million. That could be adjusted depending on the mill study, but we were looking at our cash on hand, which is about $20 million, but for cash flowing better than we ever have, so we feel at this point about a $45 million facility will be about right.

And have the lenders indicated how much hedging you might have to do for a facility of that size?

Currently we're not anticipating that we'll be required to do hedging. We may look at it and determine that some is appropriate, depending on the price of gold. But I don't believe the bank is asking us to do any as part of the lending facility.

Okay. Why don't they need hedging? Are they that comfortable with the--?

Kerry, we--.

You don't have any reserves yet. I'm just curious.

We had a $15 million credit line right from the start when we didn't even have any production, and there was no hedging or anything else attached. And we had no revenues and cash flow or anything else at that point. We had a $15 million credit facility. At this stage of the game, putting a $45 million credit facility together with the strength of our operations, this isn't that difficult. It's not, that credit facility won't be attached to the mill construction at all. It's just related to our existing operations and cash flow.

Okay. Okay. And you didn't talk at all about the relocation of the town. I know you've got (inaudible) about half of the people have signed up and will be moved over time. Does it impact the operation at all if the other 50% of the people don't physically agree to move for an extended period of time, or how are you managing the program?

We actually have a little more than half done at this point. There is certainly a desire on our part that the remainder of the people in the town, the remainder of the families in the town, relocate prior to commencing with pre-stripping of the Escondida zone. But it's not absolutely necessary. Essentially, everything that we're looking to do at the Escondida zone and elsewhere in the district right now, it's essentially all occurring on land that we own. We also have land beyond that in a buffer zone that we currently lease, but we're in the process of negotiating a purchase on that land as well. So [Vajito]'s very happy right now, particularly with respect to the land purchases.

We've also offered an extremely attractive compensation scheme for relocation, in addition, so I'm not really envisioning any real difficulty with the relocation of the town at all at this point.

And of the slightly over 50% that have signed up to move, how many have actually physically been relocated, John?

Oh, they've gone.

They're physically gone?

More than half have already moved. Essentially, everybody that has moved to date has moved to existing towns, and they've moved into existing dwellings, into the housing stock that was available in those towns. So we actually haven't built a town or had to relocate anybody to--.

Accommodate their assets.

Like that we built at this point.

Right. And you did give sort of a rough number as to what you've accrued to complete the removal of the first half, roughly. If we just double that, that's roughly what you're expecting?

That's right. Nothing will change. In fact, that's a very important point, that we just have to hold firm. The agreement that we have in place was one that was brokered by the Governor of Sonora State and his people, and they're signatories to the agreements. And effectively, it's a fair agreement all around, and we're just going to stick with it until it's done. I think the people that remain in town recognize that.

But they're obviously asking for something more, or they would have taken the cash and moved on?

Not really. In fact, most of the people that remain are [jitatarios]. Most of the people that left were people that lived within the town but without (inaudible) right. The people that remain, the jitatarios, I think they stuck around mostly to see through the traditional land purchase that we're doing. I think once that's concluded, they're going to be comfortable to take the relocation package as well. So it's really related to the land purchase rather than to the compensation they're receiving for relocation.

Oh, okay. And can you give any guidance--I know you haven't released the feasibility yet, but you've seen a draft. Just from the time you actually made the decision to go ahead and commit to building the mill, roughly how long would it take to complete the construction?

That will depend on which of the two scenarios we decide to take.

Can you give me what the range is, like for each scenario?

I think you'd be pressed to do it between a year to a year and a half.

Okay, so sort 12 to 18 months, then. Okay. Okay. And Manley, do you have a targeted throughput through the crushing circuit on a go-forward basis that you think would be a reasonable, sustainable rate? In Q2, you were at, I think, slightly under 13,000 tonnes a day, and I'm presuming that's all at 100% or 80% passing three-eighths. Is there a tonnage rate that you think is sort of a steady-state rate that we should look for on a go-forward basis?

Q2 was our best month with respect to size. We actually achieved 80% passing three-eighths. And going forward, I'm going to stick with the 14,000 tonnes a day that we're budgeted for.

Okay. So that's kind the number you're looking for on a go-forward basis?

Yes.

That certainly yields the production rates that we ideally, or speed from a heap leach operation here. So that's why it's set.

Right, okay. Although you didn't quite get that in the first six months, but you've had some other issues, obviously, that you've been trying to deal on the pads and stuff.

Correct.

Okay. And there was a $600,000 or $700,000 mill expense that was in the MD&A. Was that for the engineering work, or is that for something else?

Oh, that's the feasibility study that's ongoing.

Okay, so that's the cost that you paid to the consultant?

Correct.

Okay. Okay, that's great. Thanks very much.

You're welcome, Kerry.

Thank you. There are no further questions registered at this time. Excuse me, we have a question. Wendell Zerb from Canaccord Adams. Please go ahead.

Good morning, everyone. Just a follow-up on Kerry's question with regard to that ongoing 14,000-tonne-per-day average. Is that going to be 100% passing three-eighths that you're anticipating?

Good morning, Wendell. No, we're still at 80% until we figure out if we're going to put another crusher and a screen in or what we're doing. We're just in the design stage of that. When we do that, we're looking at two options--will we increase the throughput or will the throughput remain the same? And that's a function of the recirculating load to our current system.

Okay, great. And just a couple of quick questions for Ken. With regard to the exploration program, what is the overall budget right now again? Please remind me.

The annual, or the budget for 2008 was almost $8 million. We're definitely behind on our spending, but that's going to accelerate considerably, either, latter portion of the year. Then we'll probably be drilling with four rigs here pretty shortly, and that's going to eat up all our money.

Okay. And anything for 2009 at this point?

We always let our results dictate what the next year's budget will be. I'm anticipating probably funding about the same level. We've got more people now, and we're being more aggressive. So I expect that it will be close to the same, perhaps more, based on the Cerro Pelon result.

Okay. And maybe just a question for Jon Morda. How much of that would be capitalized versus expensed?

Most of that would be expense. The only capitalization would be assuming that we do have proximity to an existing reserve, which would be Puerto del Aire, for example, or anything that might be done adjacent to Escondida. So if Ken does additional work that he's planning in the gap area, that could be capitalized.

Great. Okay. And then three, going back to Ken. With regard to Cerro Pelon, any anticipation on what you're looking at in terms of oxide-sulfide mineralization?

Yes, the road cut material I was referring to was all oxide, but that's not too big a surprise. That's just on the surface. Now at Mulatos itself, there was a lot of sulfide right in the outcrop. So this is a much more porous and permeable vuggy silica, so we're expecting greater oxidation, and in the first couple of drill holes, the material up to within 80 meters of the surface or so was all oxide. So, and it's sitting on the top of a ridge of very porous, permeable material, so I'm expecting--so far the indications are that oxidation's deeper than what we're seeing at Mulatos.

Okay, and then can you expand a little bit once you get past 80 meters? Are you seeing a mixed zone, or is it a pretty quick transition?

It's a mixed zone, and then at depth, we're, as you'd expect, we're getting into sulfide, maybe silica.

Right. Okay. That's great.

(Inaudible) we've got, I think, three holes complete in the zone right now, so it's pretty premature to say, make too many projections. Although it is occurring high on a ridge, and there's, the Mulatos fault passes fairly close to the southeast. But usually when we have faulting nearby, we get a lot more broken rock and more extensive oxidation. But time will tell.

Okay. That's great. Thanks very much.

Thank you. Your next question is from Kerry Smith from Haywood Securities. Please go ahead.

Thanks. Since there's nobody else on, I just maybe had a couple more. Manley, can you just remind me what the two mill options are that feasibility's considering?

They're not so much mill options with respect to process. It's ore, the options are between conventional and a newer and different type of technology, which is the Gecko system.

Oh, so just the Gecko, okay.

Yes.

So just a conventional milling operation versus a Gecko sort of (inaudible) essentially?

Exactly. Like I said, it's not two different processes.

Oh, okay. And just one last question, if I could. On the inter-liners that you're installing on the pad, how much of the pad do you actually have where you've got some of this material that was, you had poor percolation, didn't have very good leach characteristics. How much of that has actually been blinded off now with the inter-liners? Do you have most of that blinded off now, or do you still have a lot of material that--if that is getting leached, it doesn't give you much in terms of recovery.

That's such a good question, Kerry. Very little of the area has been blinded off because we just lined the slopes of the old pads. We're still looking at the old area, and we just finished doing the vicinity analysis. We're waiting for the models to come in. But that model mostly will find some blind sports and stuff like that and then determine what we're going to do with it in the future. We still have not lined the top of it, and we will continue to leach it as long as we can until we get no economical rate out of it.

We're getting quite a bit of head grade still out of it. I think the head grade's running close to 0.8.

It was, yes. Kind of 0.7 to 0.8, yes.

Okay, so you don't think you'd have the inter-liners installed, then, for--you could go like this for another three months anyhow, at least?

The inter-liners, the next set of inter-liners, are planned for six months down the road.

Okay. Okay, great. Thanks a lot.

Thank you. Your next question is from [Mark Power], CPA. Please go ahead.

Yes, I'm wondering about your income tax rate going forward. It looks like in the first quarter you have 36.6% in paying income tax on earnings from operations, and in the second quarter, you're about 34%. Could you give us some guidance on what to expect the income tax rate to be going forward?

Okay, I think you're quoting the effective tax rate in the financial statement?

That is correct.

Right. And that really depends, when you look in the financial statements, what items are in there that are not tax deductible that really increase the statutory rate, which in Mexico is 28%. But I think the rate that we're using, the rates that we're using--in the high 30s--seem to be where we're going to end up. Subject to any changes in tax regime in Mexico, the high 30s seem to be where we're settling in.

It actually was down this past quarter, so you're saying that it's going to go back up to around the 37%?

I think that's correct.

Okay, and another question. Just looking at your mining and processing costs, just quarter over quarter, they really haven't gone up that much, and we have the price of oil and gasoline rise dramatically. I guess you have more throughput, to a certain extent, but I'm rather surprised that you've been able to keep your mining and processing costs relatively similar to the prior two quarters. Could you comment on what's driven that? Is that the conveyor system, or what else is driving those numbers?

Good point. I think the key ones are the conveyor system and not using the trucks anymore. Another one is the decrease in lime consumption, and there's a bunch of little other projects that are on the go to save pennies here and there. But the conveyor system and the lime consumption are the two big ones.

Okay, and then finally on the moving of the town of Mulatos. I think I like what you're doing here. You look like you're giving them two payments rather than giving them one payment upfront and saying, "Please leave." It looks like the second payment is actually dependent on them actually moving. Is that correct?

We're actually doing three things there. We're giving them a payment for their dwelling, and that would be put directly into their pocket. Then we're offering to purchase a house for them in an existing town of their choosing up to a certain value, which is more within the ability of them to go to virtually any town within the Department of Sahuaripa and purchase a house. Then they take possession of that. And then on top of that, they get a monthly stipend over a period of five years. If they relocate to an existing town, it's for a period of five years. And that's essentially a subsidy for making a transition, and some of these people have lived in this town for their whole lives. And in fact, their parents and their grandparents have lived in this town. So in order to assist them to make a transition to this other place, we've worked out this particular compensation scheme. And it works very well. And everybody to date has been extremely happy with it.

Okay, fine. But I'm still trying to--and that does sound good. But reading from the MD&A, it says an additional $1.25 million is payable once the land has been vacated and transferred to the Company.

That's something different. We're doing two things here. We're relocating the town, on the one hand, and we're buying additional land off Vajito on the other. So that refers to a land purchase that we're making but has nothing to do with the town relocation. We're buying, I think it's around 1,300 hectares of land as a buffer zone around our existing operations. We've made a 50% down payment at this point, and we'll pay the balance, which is referred to in the financials, on the conclusion of the transaction.

Okay, thanks very much. You had a great quarter. Thanks a lot.

Thank you.

Thank you. There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. McCluskey.

Well, thank you very much. That's got to be the shortest Q&A we've ever had. I thank everybody who attended the call. It's a beautiful summer day, and I'm sure many people have taken off to the cottage or elsewhere and get an early start on the weekend, or otherwise watching the Olympics.

But for those who did attend, thank you very much, and we've had a great quarter, and we're looking forward to some exciting results for the balance of the year, both from exploration and in terms of our continued good performance from the mine. I'm really pleased with the results to date. We've had an excellent first half. We have exceeded where we expected to be. We thought we'd be in the range of about 60,000 ounces, and that's where we were budgeting late December last year, and here we are, just over 70,000 ounces. So that's a very good result for us, and I think it's going to continue.

So we're looking forward to a very strong year, we're looking forward to some great results from exploration, and now we're starting to look ahead as well. We're looking at acquisition opportunities outside of the district. Charles Tarnocai is very much involved with that. And I would say the way the market conditions are shaping up, there's definitely going to be an opportunity for us to pursue, given the fact that we have a very solid balance sheet and strong cash flow.

So having said that, I'd like to thank you once again for your attendance, and with that, I'll close the call. Good afternoon, everybody.

Thank you, Mr. McCluskey. If you have any further questions that have not been answered, please feel free to contact Cynthia Boes at 416-368-9932 extension 204. Thank you. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.