Alamos Gold Inc (AGI) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Gammon Gold third quarter results conference call. At this time, all participants are in a listen only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to key up a question. (OPERATOR INSTRUCTIONS) I would like to remind everyone that this conference call is being recorded on Wednesday, November 12, 2008 at 10:00 am eastern time. I will now turn the conference over to Mr. Rene Marion, Chief Executive Officer. Please go ahead, sir.

Thank you, operator. Good morning, ladies and gentlemen and I'd like to welcome you to the Gammon Gold third quarter conference call and webcast. I'd like to refer to our listeners to the forward-looking disclaimers provided in all our disclosures. Before I get on to the Q3 results, let me take you down a path of where we are today, because this is indeed an exciting time for Gammon.

Typically when launching a turnaround strategy, the productivity challenges are the sole item that management focuses on. And while at Ocampo, however, the turnaround strategy developed in 2007 set forth plans not only to address these business critical productivity initiatives, but also to embark on a transformational expansion program. To do this, we had to build a team,and a seasoned team that includes Peter Drobeck now, our Senior Vice President Exploration and Business Development. A team that I would hold up against any other in the industry, and a team that is tenacious and resolved. A team, really, that delivers. We set out an aggressive report card for 2008, and I belive we've already met every one of those promises. We can't, however, control the volatility in the metal markets and the gold to silver ratio, which has become decoupled since August. What we can do is deliver on mining's physical activities that we're committed to. At Ocampo, we're currently commissioning the Ocampo mill expansion to between 2,400 and 2,600 tons per day, on time and on budget. This represents a 60% to 73% expansion from the nameplate capacity of 1,500 tons a day. Concurrent to commissioning the first phase, no expansion, we're already working on our second expansion with the installation of the El Cubo Marcy mill which will increase capacity by a further 10% or more by the end of Q1. The Heap Leach expansion, the 13,000 to 15,000 tons per day, was also completed on time and on budget during the third quarter. Mill and Heap Leach are performing exceptionally well in October. In fact, the Heap Leach, we averaged 11,125 tons per day onto the pad and in the mill, with over 19,000 tons per day, was our best month ever, and all that without the third filter being commissioned. In fact, during the second half of October, we averaged approximately 2,100 tons a day as we were debottlenecking the plant while waiting for the third filter to become operational. Two pretty incredible achievements during the month of October.

With the third filter now operating, we are ramping up to full production in the mill, and we've already averaged 2,340 tons per day over the last nine days, and of particular interest is just in the last four days, we've averaged 2,494 tons per day or in the mid range of our target capacity. Also the new open pit sequencing plans were delivered in early Q3 by Metallica out of Chile. This allowed us to embark upon an immediate reduction in the waste stripping requirements in mid August. In fact, the average strip ratio, a 6.4 to 1 during the third quarter, represents already a 40% improvement over the same period in 2007, and the strip ratios continue to decline in the fourth quarter with October reducing down to 4.7 to 1. And in conjunction with the reduction of the stripping, haulage distances have been significantly reduced with the commissioning of new haulage roads and waste dumps in mid October. So you can see we're well poised to deliver significant growth well into 2009, but it doesn't stop there. At Ocampo, because of the adverse metal market where the gold to silver ratio is currently 75 to 1, we are currently stockpiling lower grade open pit material in the 0.5 to 0.7 gram per ton gold equivalent. And as a result, current typical grades gone through the Heap Leach pad are between 1.4 and 1 5 gram per ton, even at today's gold to silver ratios. In fact, if you were to compare metals, the grade of gold and the grade of silver, the grades are well above 50% better than the first half of the year. In addition, by adding the Marcey mill that will allow us to access an additional 10% capacity in the latter part of Q1, we are also installing a gravity circuit so that at the higher capacity rates, we won't see any negative impact on metal production through reduction and recoveries. And our engineering firm in Chile is working on the third phase of the mill expansion that we'll announce in Q1. This expansion considers the installation of the Marcey mill and the gravity circuit to fully exploit the ultimate capacity of the processing facility. And at El Cubo, during the third quarter, we ran a test for two and a half months where we largely stopped mining of an (inaudible), our old backfills, in order to verify that (inaudible) were contributing to our metal production and reduced cash costs.

Well, we finished that two and a half month period and have resumed mining that (inaudible) because indeed, they are economic. And in the latter part of September and into October, we're currently processing those (inaudible). We also had a workforce reduction of about 254 employees or 20% at a cost of $600,000 that took place in Q3. The anticipated payback on that is three months, and all this was done without any major labor disruption. Year-to-date, we've reduced our workforce at El Cubo by 379 people, down from 1,296, so 29%. The 600 meter haulage level at El Cubo is running at 60% capacity and with the addition of a further locomotive and some cars, this should allow us to ramp up to 80% capacity by the end of this year. And we're also working with the union on improving productivities while through better utilization of our equipment and a revisit of the work schedule regime. And on the exploration front, we've appointed Peter Drobeck to lead the exploration division and under his guidance, Guadalupe y Calvo, we stated we would start an aggressive program at Guadalupe and as of the end of October, the Company has completed 152 diamond drill holes totaling approximately 31,000 meters or 61% of the plant drill program. We've received assays for 95 of these 152 drill holes and they're showing that there is a substantial volume of potential underground minable vein mineralization that is locally very, very high grade. You know, 49 out of the 95 assays received, or 52% have a minimum width of two meters and grades of over three grams a ton gold equivalent. Mineralization occurs over a 458 meter vertical integral and 600 meter horizontal strike length and is open in all three directions. Two of the best drill hole intercepts to date are the deepest intercepts on our northwest portion. Hole 67 cut a true width of 1.9 meters at 9.16 gram a ton gold and 686 gram a ton silver, and hole 68 cut a true width of four meters grading 5.11 gram a ton and 478 grams a ton silver. We continue to discover high grade gold/silver mineralization and presently have five diamond drills working on the property.

Results continue to support the potential for both an open pit and an underground operation. We have launched a number of engineering studies such as the open pit geotechnical studies, open pit design, reserve and resource modeling as well as metallurgical and processing design work that we fully expect to have included in our scoping study to be completed at the end of the first quarter of 2009. In exploration at Ocampo, while we only started getting drills on site in the second half of the year, we now have four drills on site with two of them working in the open pit. The drilling the majority of the inferred resource that lie within the larger resource pit that we identified in Q1 of this year. 92% of this drilling is intersecting ore grade mineralization over minable widths and therefore, largely validating the pit resource model. This pit drilling will largely be completed by the end of the first quarter. We also announced last week the discovery of a new underground vein, (inaudible) San Amado. This is quite interesting, because it lies just to the northeast of our underground workings and these two holes were 85 to 90 meters apart, but they have bonanza grades with gold grades ranging from 30 to 80 gram a ton and silver between 680 to 2,100 gram a ton. It's a pretty exciting area to be looking into. Now, leaving our exploration program and on to our business plan. It's not only about production. Operating cash flows continue to fund our business plan and for the nine months ended September 30, Gammon has internally funded $51 million of its capital and exploration investment program through the $83 million or 225% improvement in our operating cash flow from over the same period last year.

So in summary, we at Gammon are quite pleased with our progress to date. We've updated the reserves, restated the open pit, expanded production beyond nameplate capacity and are engineering and constructing further expansions at Ocampo. We further anticipate leveraging off this work should translate into higher production and lower cash costs in the coming months. In fact in October, we are already seeing this translate immediately into lower cost, more in line with the first half of 2008 at both operations. And that is without the full advantages from stockpiling the higher grades -- lower grades and sending the higher grade ores to the Heap Leach and the full mill expansion that we're undertaking this month. So I believe we're positioning ourselves quite well for the best ever quarter in Ocampo's history, but company wide, we're forecasting 150,000 to 160,000 ounces of gold, 5.9 million to 6.2 million ounces of silver for approximately 250,000 to 265,000 gold equivalent ounces with November and December assumed at a 75 to 1 ratio. This is in the mid to upper half of the public guidance issued in March of this year and if it wasn't for the adverse gold and silver ratios, we could have possibly exceeded our gold equivalent guidance for the year. Total cash costs will be higher than originally forecasted primarily due to the higher gold equivalent ratio and the net asset -- NRV taken during the third quarter, and we are forecasting costs to be approximately $540 to $565 an ounce gold equivalent. But Q3 was a landmark quarter for Gammon, really a pivotal quarter. We saw 29% improvement in gold production over the third quarter of '07, a 23% improvement in silver production over Q3 '07 and 22% improvement in gold equivalent production over the same period last year. And as we have been clearly communicating, gold production came in the mid range of the Q1-Q2 and in fact, silver production came in better than Q2.

At Ocampo, the Heap Leach. As a result of the success of the rainy season mitigation strategy, production of gold was in the mid range between Q1 and Q2 and in fact, silver came in above Q2 levels. In the mill, it was largely similar to the Q1 on a gold equivalency basis and the reason for that was negatively impacted due to sequencing in the open pit. As you know, we had a fabulous quarter at over 1,900 tons per day, but the majority of that was fed through the open pit at a time where sequencing in the open pit had much higher silver to gold ratio. In fact, if we were to take a look at the beginning half of the year, our ounces of silver to ounces of gold out of the open pit averaged 31 to 1. In the third quarter, the ounces of silver to ounces of gold coming out of the pit were 46 to 1. The sequencing of higher silver and less gold during the quarter was at a time where we had an adverse gold to silver ratio. But things are still going well. Things are performing well in the open pit. With the reduced stripping ratio we're currently parking equipment, and the open pit continues to outperform the mill and Heap Leach capacity. Costs in the open pit are expected to reduce significantly in the second half of October and into the rest of the fourth quarter as we commission the Conoco belt. This is an important dump because with the completion of the rephrasing, we realized quite quickly that by an early commissioning of the Conoco waste dump, we could shorten out the waste haulage by over four kilometers. In addition to that, we were able to put in a new ore haulage road to the primary crusher which reduces the haulage distance by a further kilometer. Both of these things in conjunction with the lower strip ratio will see significant reduction in the open pit costs.

Consolidated cash costs of $735 an ounce were high during the quarter. At Ocampo, there was an adverse mark-to-market inventory adjustment associated with the Heap Leach ore placement strategies in 2007 and early into 2008 as well, the adverse gold equivalency ratio, the reorganization of the underground operations among other things. And at El Cubo, there was also an adverse gold equivalency ratio impact on cash costs, that (inaudible) test program and the restructuring costs increased costs tremendously. These adverse costs are largely behind us now and as we see October's cost, as I mentioned before, are more in line with the first half of '08. Going forward, we'll enjoy the benefits at Ocampo from the processing expansions and the reduced stripping and haulage distances in the open pit. And at El Cubo, the restructuring is largely completed and we'll see significant cost reductions associated with the reduced size of the workforce and the ramp up out haulage activities along the 600 meter level. So with that, I'd like to pass it over to Scott Perry, our Chief Financial Officer, who will discuss the financials.

Thank you, Rene and good morning, everyone. Q3 was a tough quarter for all participants in the precious metals space and the case was no different for Gammon Gold. The question, and I guess the challenge that we often receive is, how do you manage in this unprecedented volatility that's impacting the precious metals space and of course, is impacting Gammon's business plans. Well, we're unhedged, so naturally it does impact us and one of the things that we're very cognizant of is that metal prices are outside of our control, especially so in terms of the gold to silver exchange ratio or the gold equivalency ratio. This is one of the key things you'll see impacting our Q3 results, but in terms of the wider business plan, we simply stay steadfast on executing both on our turnaround, stabilization business plan, but also on our concurrent expansion plan. As we all know, mining is a high leveraged volume driven business and the best way to optimize that, be it in a high metal price environment or even in a low metal price environment, is ultimately for improving productivity at minimum capital investment, and that's a large component of our strategy blueprint for Gammon Gold, and it's also our best response to this unprecedented market volatility, and this is something that we're quickly executing on here at Gammon. As I mentioned, being volume driven business is so much more efficient to tackle reduced cash flow margins by increasing productivity and volume than it is through slashing costs to seek minimum cost reductions. Before we get too far into this, let's take a review of our Q3 results and how we're positioning the Company for the remainder of 2008 and beyond.

So firstly, looking at the gold and silver prices in Q3, it could be argued that the metal price volatility that we saw in the third quarter and even early into Q4 is unprecedented. I don't think there's too many market participants who have ever seen such volatility before in this space. During Q3, gold traded in the range of $737 to $988 per ounce. That's a range of $251. On silver, the volatility was even more dramatic. Silver traded in the range of $10.27 per ounce to $19.48 per ounce. That's a range of $9.21, almost 100% volatility between the minimum and maximum during the period. In Q3, as we all know, the price of silver depreciated significantly compared to the price of gold, and that significantly impacts Gammon Gold's Q3 results on a number of fronts. One of the key themes of it during Q3 is the gold to silver exchange ratio has adversely increased to a ratio of 59 to 1 and that's compared of a ratio of 52 to 1 in the first half of 2008 which is consistent with the ratio during 2007. So all in all, we're seeing a 14% adverse depreciation in this ratio, and that's really impacting our equivalent gold production and it's also having an inflationary impact on our cash cost per gold equivalent ounce.

To quantify that for you, in terms of equivalent gold production in Q3, the adverse decoupling of the silver valuation, it impacted our production by 5% or so, or approximately 3,000 gold equivalent ounces. And likewise, this had an impact on our reportable cash cost per gold equivalent ounce of up to $41 per ounce given that gold equivalent ounces is the key denominator in the cash cost per ounce result. But as Rene spoke, what really amplifies these effects even further was the fact that the way our mine plans were sequenced, it was such that operations were mining materials that were grading higher in silver than what we had seen previously in the first half of 2008, such that Q3 was a record quarter in terms of the level of silver metal to gold metal in our production profile.

Obviously, the resulting larger position of silver metal in the production mix even further amplified the adverse gold to silver equivalency ratio that the whole industry was experiencing. Now, those familiar with Gammon Gold will know that operationally, Q3 is a very uncharacteristic quarter relative to the other quarters during the full calendar year. Obviously, Q3 is the wet season and Q3 of last year was a key time period where a lot of things came unstuck with Gammon's business plan, so obviously, we're very cognizant of that and going into the wet season of 2008, we're very focused on insuring we had a large number of mitigation measures in place to insure that we could successfully combat the wet season.

As Rene mentioned, it really was a pivotal quarter for the operational team and that was demonstrated through a number of key KPIs this year relative to last year. Just quickly in terms of gold equivalent production, we improved 22% to gold equivalent production of 57,521 ounces, and that's despite the adverse depreciation in the gold equivalency ratio. In the third quarter of this year, we generated $7.1 million in positive operating cash flow, whereas last year the Company recorded negative operating cash flow of $10.5 million. That's an improvement of $17.6 million. In terms of net free cash flow, this year's third quarter result was a net free cash outflow of $10.4 million whereas last year, it was a net free cash outflow of $36.7 million, so that's a turnaround improvement of $26.3 million. And in terms of underlying earnings or profitability, this quarter, we're posting a loss of $6.6 million. Last year at this time period, we posted a loss of $44.8 million. So, that's a significant turnaround of $38.3 million. But as Rene spoke to, what really held our results back from even shining further was a number of non-typical cost items that we would argue are not representative of what we saw in the first half of this year and what are not representative of what we saw in the first half of this year and what are not representative of what we expect to see going forward.

So, just to talk about some of those key cost items in a bit more detail, firstly, the one that's causing the most noise in our Q3 results is the inventory valuation adjustments. Now these are non-cash mark-to-market product inventory valuation adjustments that we had to book predominantly on our Heap Leach inventory. It was associated with the contained gold and contained silver in the Heap Leach inventory stockpile, and a lot of these ounces were valued at full cost relative to the prevailing gold price and silver price in the first half of this year. But as we all know, the volatility that we saw in Q3 resulted in gold prices and silver prices closing in Q3 at much reduced levels to what we saw in the first half of this year. So when it came to the period end during the quarter, we have to mark-to-market the value of this contained metal in our inventory. The depreciation in the gold price and the silver prices forced us to record an accounting adjustment on our balance sheet to reflect the new market value for this Heap Leach inventory. So as I mentioned, it's non-cash, and I don't want to dwell on it too much because we do see it as balance sheet accounting volatility only. It does not impact our cash flow performance. And that's how we organize and run our business. We focus on operating cash flow, net cash flow, we don't focus -- don't overly focus on what's residing on the balance sheet.

The second key impact in terms of cash cost per ounce and earnings was the gold equivalency ratios. Obviously, due to the significant devaluation in the silver price, that's impacting our cash cost by $41 per ounce, and that's because of the penalty -- the penalization effect that the lower silver price is having on our gold equivalent production. We saw a $33 per ounce impact that was associated with the cessation of mining lower grade (inaudible) material at the El Cubo operation. And again as Rene spoke to, this was a test mining methodology to focus mining practices on (inaudible) reserve material, which obviously resulted in reduced equivalent gold production, but was necessary to verify and validate whether or not (inaudible) lower grade material actually does contain viable grades that contribute viable ounces. In any event, we need to show that El Cubo can stand on its own two feet by mining in-situ reserve material because the (inaudible) material will not be there forever, and it is scheduled to be fully depleted by the end of 2009. As Rene said, we have since confirmed (inaudible) is viable and we have now reentered a mining plan phase of where we are mining (inaudible) at full capacity rates, so you will see production levels increase in Q4 of this year.

The other impact was the reorganization of underground mining operations at the Ocampo property. We're putting in place a lot more time for focusing on training, especially in terms of long haul mining techniques and supervision and also introducing a more area based mining methodology that's based on more traditional team based cycling from heading to heading and as a result of this, we did see some lower productivity, and the lower productivity resulted in a $32 per ounce inflationary impact on our cash cost per ounce KPI. The workforce restructuring costs at El Cubo, they impacted consolidated cash cost to the Company by $11 per ounce, and that's mainly associated with severance expense. Year-to-date at El Cubo, we reduced the workforce by approximately 29%, and that's a key value initiative in terms of optimizing this asset. So the way we look at this severance expense is it's a very quick payback. You'll see a very quick payback in terms of reduced costs going forward at the El Cubo operation. The open pit haulage and waste dumps in Ocampo, as Rene spoke to, we've got new haulage roads put in place and new waste dumps. You're going to see a reduction of four kilometers on the haulage cycle route in terms of waste dumping and likewise, in terms of all transport, you're going to see a one kilometer haulage cycle reduction. So we're going to see significant cost savings going forward, however, these cost savings were not prevalent during Q3. We're attributing that as an inflationary impact. And some other smaller items were associated with increased tie issues in terms of the open pit mining equipment fleet and also, we're using a new type of explosives, being the wet season, and that was the more higher cost explosives, so we don't believe that will be representative of what you're going to see in Q4 going forward.

So looking forward into Q4, as I did mention, the cost that you saw during Q3, again, I just want to make a point. We definitely argue that they are non-representative of what you'll see going forward, and I think I'm comforted in saying that because we've already finalized our monthly cash costs for October, and we can confirm that they are in line with what we saw during the first half of this year from Gammon Gold. And from what I'm seeing, this is Q4. In terms of the various mill facility upgrades that the operational team is now executing on that Rene spoke to, we really are shaping this quarter to potentially be one of the strongest quarters this year. We're going to really enjoy the benefits at Ocampo from the processing expansion and the reduced stripping and haulage distances in the open pit. At El Cubo, the restructuring is largely complete in terms of the workforce and we will see significant cost reductions associated with the reduced size of the workforce and ramp up of haulage activities along the 600 meter level. And I shouldn't omit to mention other initiatives underway focusing on reagent optimization consumption at Ocampo and also, the connection to the electrical grid such that we'll have 100% power sourced from the electrical grid. So I'm pretty confident that we'll be posting a very strong, robust cost result and also underlying profitability and cash flow result in Q4 of this year. All of which will be favorably underpinned by the devalued Mexican peso, which is another theme that we're seeing early in Q4. This will obviously favorably impact our US dollar cost.

So let's leave Q3 now and let's sort of look at where we are year-to-date, because obviously, the key plan for this year was 2008 was a turnaround year and it was a stabilization plan. We're nine months into the year, and I just wanted to focus on some of the key metrics. In terms of gold equivalent production, year-to-date, we've driven a 10% improvement in gold equivalent production and year-to-date we've posted 186,000 ounces of equivalent gold production, which is obviously a significant improvement over last year. Year-to-date cash costs of $572 per ounce, that compares very favorably to last year, it's a 14% improvement over last year where we were sitting at $668 per ounce. Year-to-date, we are earnings positive of $8.5 million, which is versus a net loss position last year of $80.6 million, so that's in improvement of close to $90 million, and one of the more important KPI metrics was operating cash flow. Year-to-date, we've generated $46 million of positive operating cash flow whereas this time last year, we had made a loss of $36.9 million in operating cash flow. So that's a significant turnaround improvement of $83 million.

And then in terms of net free cash flow, year-to-date we're sitting at negative $4.5 million whereas last year in the year-to-date period, net free cash flow was a negative $93 million and again, those familiar with the Company will recall that last year, the Company was heavily reliant on funding from debt facilities and funding from equity shareholders in terms of financing the whole business plan, whereas this year, it's really all about stabilization and turning around the assets, and I think we're demonstrating that in terms of those cash flow metrics in that everything is predominantly being funded internally, so it's an important step change for the Company. And in touching on that, there's really two plans. There's two budgets that we as the management team are operating through this year. The first plan is really the turnaround plan, and that's ultimately to stop the negative cash outflow we saw in 2007 and to build a sustainable positive cash flow business model. And as I mention those year-to-date metrics, I think we're demonstrating that. But concurrently and maybe aggressively, but demonstrating success, we're also executing on an expansion plan at the very same time, and the great thing that's underpinning all of this is that the Company's operating cash flow profile is fully funding all of this expansion plan. The first half of this year we were really focusing on neutralizing the cash profile of the Company and insuring that we are cash flow positive in funding all of our sustaining and expansionary capita, and the real focus in the second half this year has been on expanding the production profile at our corner stone property, Ocampo. Phase I and Phase II that Rene spoke to in terms of the mill upgrade in terms of upgrading the tonnage profile, all of this expansionary capital has been fully funded internally. You're going to see it realize a significant increase in our production run rate. Our capital budget for 2008 is approximately 90% complete, and it's being fully funded internally.

What we've invested our capital on, approximately $40 million has been in direct capital expenditure, $6 million has been incurred on advancing Guadalupe in terms of the scoping study, and approximately another $6 million has been invested in reserve exploration drilling programs at Ocampo and El Cubo. So all this capital is behind us, and it's already invested in the ground, so now stand -- we are positioned well going into Q4 to realize all of the benefits of these investment programs, and we're already seeing this as we sit here today, and Rene spoke to that in terms of the daily mill tonnage at Ocampo. In the last four days alone, we've been achieving an average throughput rate of 2,500 tons per day, which obviously compares very favorably to the average 1,800 tons per day that we've been achieving in the year-to-date period. Even in a gold equivalency ratio of 75 to 1, Q4 is shaping up to be an unprecedented record quarterly production result. And in the current price environment where all this investment capital is already behind us and sunk, I think this is the best mitigation strategy for the current week metal prices. We are very strongly poised for a strong production step up in terms of our portfolio. And that's the best way to combat the current metal price environment and it's fortunate, because it's also the quickest way to maintain and even expand profitability in the weaker metal price environment.

The final aspect of these cash flow and liquidity discussions is to touch on our debt facility. Now as we've discussed, our operational cash flow profile has been very strong this year. It has demonstrated a stabilized business model, and that's allowed us to fully fund our capital program, which has really allowed for limited external financing needs during the 2008 calendar year. As such, our debt facility drawn balance remains very low. For those of you familiar with the Company, we have the $60 million debt facility. It's a revolving line of credit facility, and it expires on the 31 of March of 2008. The current balance sheet drawn down balance in this facility is $31.4 million, and we've only really utilized approximately 50% of this facility. The facility expires at the end of this year and we've already entered very advanced negotiations with our syndicated financiers. These negotiations are presently underway in terms of restructuring and extending the maturity profile of this debt facility. Preliminary terms and conditions, although subject to possible change, have been discussed with the financiers and agreed, and they've been Incorporated in the bank's loan evaluation and approval assessment that is currently being presented through both banks, credit review and approval processes. What we're seeing so far is in line with all parties expectations and we expect to have a new facility finalized in the coming days if not in the coming weeks, at which point we'll be in a position to communicate according to the market.

So just in wrapping up from the financial perspective, as I said in the beginning, we can't control the volatility in the metal market, but I do think we've been very quick to respond to the weakened metal price environment, and really, that's by being steadfast on picking what we see as a key value drivers to keep maximizing cash flow. Ultimately, that's productivity and ounces, and what that results in is augmented operating cash flow profile, augmented cash flow profile and essentially, it focuses on delivering on the very mining and processing physicals that we committed to and more, and I think you're seeing that. As I mentioned, we've definitely stabilized the business, operating cash flow continues to fund the larger entirety it of the business plan, and now we have fully entrenched an expansion mine, and these expansions are going to be transformational for Gammon Gold and transformational for Ocampo. So much so that I think early in the New Year, you'll see us come out with a new three year outlook that will be over and above the outlook previously issued. So the most single important take away to note from the year-to-date results is that we have funded everything internally. It's $14 million of direct capital expenditure, $6 million of advancing Guadalupe, $6 million of reserve exploration drilling programs at Ocampo and El Cubo, our investment capital program is predominantly spent and is being funded internally. So really, no more than ever -- sorry, now more than ever, Gammon is strongly positioned for increased production, cash flow generation and expanding profitability and ultimately taking the high value potential in our portfolio and now making it a reality. So we really look forward to Q4, which I think will be the first stepping stone in this regard. So with that, I'll now pass you over to Rene Marion.

Thank you, Scott. Yes, just to wrap up, I really wanted to stress we have a management team that delivers. We said that we would expand the mill capacity at Ocampo, and we're doing it now. From this time last year, Q3 last year, 1,200 tons a day and 1,950 a day in October. And the rate of capacity in that mill was 1,500 tons a day ,and we're currently commissioning that 2,400 to 2,600 ton per day expansion on time and on budget. With an additional increase already being executed upon with the installation of the El Cubo mill which will be completed by the end of the first quarter. We said that we would increase the Heap Leach capacity. The fourth quarter last year, we averaged 6,700 tons per day. In October, We're at 11,125 tons per day. We said that we would bring in a new management team that can deliver, and we've done that. We said that we would resize the workforce at El Cubo, and we've done that. We said we would operate by a business plan where we largely were self funding. Well, we're sitting here at the end of the third quarter with a drawn debt largely the same as it was at the beginning of the year. We said that we would relaunch our exploration program and appoint a new Senior Vice President of Exploration, and we've done that. You're going to see an unprecedented metal production growth in the coming quarters, and I think this is an exciting time. We've really laid down strong foundations at Gammon Gold, and this will all culminate, as Scott said, in the first quarter when we release our reserves, our resources, our final three year guidance on Ocampo and El Cubo and the results of Guadalupe. And with that, I'd like now to pass it over to the operator for a question-and-answer session.

Thank you. (OPERATOR INSTRUCTIONS) The first question comes from Trevor Turnbull of Scotia Capital. Please go ahead, sir.

Good morning, Rene. I had a question, and I guess it's probably for Scott. As far as the NRVs are concerned, where you've adjusted for the inventory on the leach pads, I'm just wondering going forward how we should think about this and if you can give us a sense of what the cost base, and forgive me if I missed a bit of that, but if you can give me a cost base for the ounces that are on there so that we know how to think about the metal price environment, say in Q4 and 2009 relative to perhaps future NRV adjustments.

Yes, first of all, just before I pass it over to Scott, I'd like to stress that the cutoff rate strategy is really what is creating this NRV. Back in 2009 and into early this year, obviously, if we're processing lower metal grades on the Heap Leach pad, there's a potential exposure there, and it really doesn't even -- when we take a look at our cash, our metal prices during the quarter they were substantially higher than what we had taken for the closing price in September for the NRV adjustment, but Scott can talk to you about the current market and what this involves going forward.

Yes Trevor, as Rene spoke to, we have changed the cutoff grade strategy in the third quarter this year and also going into the fourth quarter of this year, and that philosophy in terms of the cutoff grade strategy is a different philosophy to what we were operating under in 2007. So in terms of the material that we're putting on the Heap Leach pad for processing for that facility, it's a lot higher grade material, which means the ultimate ounces, the contained ounces that are going on are going to be lower cost ounces, and that's going to have a favorable impact in terms of the weighted average value of this Heap Leach pad facility. But the other thing to point out as well, operating in Mexico is the key currency that we track our Heap Leach facility in is actually in Mexican peso, and the reason I point that out is all my cost of that Heap Leach facility are in Mexican pesos and as you may know, the Mexican peso has devalued significantly in the month of October and even today in November. And so, when we assess the Heap Leach pad for NRV assessments, we have to use a Mexican peso gold price and right now, the Mexican peso gold price is trading at the highest level it's ever traded at, so we are seeing a lot of cushion coming about all of a sudden in Q3 because of the depressed Mexican peso exchange rate.

And again, probably the best way to give you comfort on that is just most recently we have finalized our October monthly results and we are not seeing significant issues there associated with mark-to-market carrying value adjustments or what have you, so it's one of these items that we have to keep under watch going forward. And the other thing to note about inventory mark-to-market valuation adjustments under Canadian GAAP accounting standards is that also, if metal prices should appreciate in the future, then we may have to revalue this inventory stockpile back upwards in terms of the writedown that you saw booked during Q3. So it is one of these highly volatile items that you may see going forward, but in terms of Q3, in terms of all of the improvements that are coming about and what we see in terms of currency markets, we're not expecting to see, dare I say, any volatility in the Heap Leach pad going forward.

So it's actually possible that you would have a one-time gain if there was a sharp spike in the metal prices?

That's exactly right.

And because it's treated as mark-to-market in a balance sheet fashion, that means that it isn't relative to the weighted average of the gold prices, it has to do with the price as of the end of the reporting period?

That's exactly right. It's the price from the last day of the reporting period. Exactly.

Okay, great. The other question I had then was, I guess operationally, a quick question on El Cubo. You took a look at the resagas, stopped processing them because you wanted to get a better sense of just what they were contributing to the economics at El Cubo. Now that you've gone through this, you obviously see that there was a beneficial -- there was definitely benefit in processing these. What I'm wondering is, does that give you a better feel in terms of guidance going forward or -- we've learned that they 're economic, but can you give us a better sense of -- do you internally have a better sense of just what kind of grades to expect and does it help in your forecasting at this point ?

It's still -- it's always difficult to understand on a reconciliation basis month to month when you have resagas. I guess the best way to answer your question, Trevor, is that we're currently going through the budgets and lifeline plans. We're showing in our lifeline plans that resagas will be largely gone by the second half, if not not the fourth quarter next year, and they're developing their plan to increase the productivities of in situ mining to replace that and subsequent increase in grades. So we assume that the resagas we are sampling is somewhere in the 2 to 2.5 gram range.

Okay.

Really it just augments the in situ ming. in situ mining is ranging in the 1,600 to 1,800 ton a day range.

Okay, and sorry, so what tonnage -- it's just incremental to the in situ mining, say 10%?

Yes, you can assume rate now is about 10%, 10% to 15%. It used to be over 40% last year.

Okay, great.

The plan in the first half of the year was about 25%, if I recall correctly.

Okay, perfect. All right, thank you, Rene.

You're welcome.

Your next question comes from Anita Soni of Credit Suisse. Please go ahead.

Good morning gentlemen. A couple questions with regards to your CapEx. Actually, first, can I ask where the 118 per ounce, that non-cash item on the revaluation, where is that showing up in the cash flow?

Sorry, Anita, it's Scott here. The revaluation item, you're referring to the $88 per ounce impact in the mark-to-market carrying value adjustment?

Yes.

That has no impact on cash flow. That is a revaluation of the Heap Leach inventory that's on our balance sheet, In terms of the financial statements, where that's impacting is in terms of the cash flow is being added back in the working capital items, but it's a non-cash flow event.

Yes, no, I was just wondering where it was added back after working capital.

Yes.

And then also, in terms of your CapEx budget for Q4, could you remind us if you have given it out or if you're willing to give it out for 2009?

No, we haven't given given it out. We initially said our capital excluded in the exploration was approximately $55 million this year. As Scott said, we're 90% through that. The remaining capital, true capital, not the exploration side, is really the installation of the Marcey mill, some cyclones and some capital development.. The capital at El Cubo is done except for development and at Ocampo, it's just the mill modifications for the second phase mill, and we're just finishing up the emergency storm water fund. So it's not a heck of a lot. If you want to guess at a number, you'd probably be looking at about $3 million to $5 million.

$3 million to $5 million remaining?

Yes.

Okay, because I was just taking the 55 and the 46 that you just mentioned on the call and excluding the reserve drilling and that would get me to about $11 million.

Yes.

Sorry, $9 million.

Yes, well what we got to look at -- I'm thinking of November-December, so I can't even recall what the total was for October. But yes, you'd be in the right range, your 55, subtract 46, you got 9, and then you've got -- that includes capital development, right? At the two mines, so about half of that is capital development.

All right, and then just with respect to the underground mining rate and open plan, sorry, open pit mining rates in October, could you give us some guidance with respect to that ?

Yes. As I mentioned earlier, I'll do the open pit first. We're at about a 4.7 strip ratio in October, and it continues to produce in November-December. So, you can do the simple math, but the pit can out produce to the Heap Leach and the mill and especially with the shorter hauls that we're seeing in the month of November and December. So what we've actually done is parked a bit of equipment. In the mill, it's safe to say that -- it varies on a daily basis, but probably in the 1,800 ton a day range, will be coming from the pit. Typically that grade is between 5.1 and 5.5 gram a ton gold equivalent of 75 to 1. And the Heap Leach, of course we're stockpiling the lower grade material, so taking a look at it, it will probably be in the 10,000 ton a day range at 1.5 gram a ton at the current gold/silver ratios. From the underground, what we've done in the third quarter is we brought in an additional jumbo trainer and two more senior supervisors and put engineers in as front line supervisors, and that's why the lower tonnage over Q3 and will be continuing in Q4. As we train these guys in how to schedule out these team areas so that we're better utilizing our equipment, we found that we needed actual engineers to be thinking toward -- along those lines.

Okay, thank you very much.

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

Yes, good morning guys. First question relates to the Credit Facility. You mentioned you have some negotiations in progress already. Can you tell us about the terms, just in general terms, are you looking to have the same kind of terms as the previous one?

Good morning, Steven. It's Scott here.

Hi, Scott.

Just to start of talk about it in a general way, what we're looking for in terms of the current facility, it's at $69 million capacity. We're just looking to do a simple restructuring of this facility in terms of the maturity profile more than anything, and also in terms of the drawn balance. So what you're going to see when we're in a position to announce this is it's going to be a similar sized facility. In terms of the current drawn balance, there will most likely be an amortization schedule attached to that, like a repayment structure going forward over a certain time period. And then the remainder that hasn't been utilized, that will then become our general working capital component that we will have set up as a revolver to utilize going forward. With the repayment structure, we are pretty comfortable putting this in place. As you've seen us do throughout this year, we've been aggressively paying down our debt facility and obviously, the cash flow profile next year is going to improve even more significantly to what it has this year on the back of these various capital expansions. So cost of borrowing, obviously, in the current market, and this is applicable to every company, you will see an increase in cost of borrowing. Does that sort of answer your question?

Yes, so you expect interest rates to come up a bit?

Yes.

Okay.

Right, but keep in mind that LIBOR has gone down.

Right. Okay, next question, the underground. It looks like you've got less, quite a bit less ton this quarter than the last couple of quarters from underground. Can you just talk about that and where you see that going forward?

Yes, that's correct, Steve. What we opted to do, once we got the Metallica plan and rephrasing and felt convinced we could actually sequence the pit to always provide high grade to the mill, we made the decision in the third quarter to actually sit down and regroup. The team that we had there were having a hard time on sequencing the underground like you would in North America. It's not a management style that they had. So we intentionally said okay, let's slowdown for a second and start training these guys and like I said, brought in a jumbo trainer and brought in skilled supervisors that will teach the guys how to sequence headings area by area, more of a team based approach. So where we were initially aggressively pushing the underground, what we've done is said, let's take advantage of this short-term and be able to train these guys. So I think what we'll see now is more of a slower ramp up over the next four quarters, so that it's sustainable underground and that's the important thing. So we're taking one team at a time and training these guys, okay? So it will take -- obviously, if you have to focus on a team for two or three months before they can manage themselves, you have to do that before you can move on to the next team.

Okay, so this is more a labor issue than like a lack of development, that sort of thing?

Yes, what I'd call it is front line supervisor skill set. The way the front line supervisor was deploying his workforce during the ship is the jumbo operator would go to a phase, as an example, and he would bolt and then drill off his round and maybe have to put in services, and that's not an effective way of going. What you need to do is jumbo operator stays on a drill and he drills off three rounds in a shift, and that's how you get your productivities up. To do that, your supervisor has to be able to schedule that. He has to be able to think to a point on sequencing his team of eight to12 guys, and that's where we were running into the problem. And so what we're doing is we've changed those supervisors to engineers who are used the scheduling matters and training them.

Okay. I just want to turn to SG&A. You have SG&A costs of $8.2 million in the quarter. Could you tell us how much of that is stock based compensation?

Yes, hi, Steve. It's Scott here. I'm just flipping through the section on that. Sorry, Steve, I can't readily identify it right now. I don't have the documents in front of me. I can get back to you on that.

No problem. The reason I bring it up is -- this line item is quite high and growing and really, it's a lot higher than most of your peers by a factor of two in most cases. I'm just wondering why it's still rising and what's going into that.

In terms of overall G&A expense?

Yes, I mean, $8.2 million is fairly high for a company of your size.

Yes,one of the things to bear in mind that's impacting Gammon is we spend a lot of costs or professional fees associated with legal costs more than anything, defending the Midas lawsuit action, which was successfully resolved this year, so you are seeing some legal costs associated with that. There's also some legal costs associated with the other, the Siskin legal action out of the Province of Ontario. So in terms of consulting fees and professional fees, that does inflate our G&A costs somewhat. In terms of our stock based compensation expense, I've now identified the number. And the year-to-date result as of the end of September, we had $2.7 million of stock based compensation expense.

Okay.

That's probably about 25% of it and that is a non-cash flow number per se.

Right, and I guess another thing that makes this up and I'd like to get into a little bit, you have this relationship with the company operated by Fred George which provides your workers in Mexico, and you pay cost plus 10% on that, so how much are you actually paying Fred George for that service?

This is Rene, Steve. It's isn't Fred George, the company is owned by his brother, Tony.

Okay.

And the 10% markup covers his G&A costs as well, right? We don't pay for his G&A in Chihuahua State. When we went out for competitive bids last Fall, he was one of four companies that came in and at the time, he was still below us and we negotiated from a 13% premium down to a 10% premium, so he is still far lower than the other labor service providers.

Right. Okay.

So yes, if your labor force is costing you, including social burdens and all that, let's say $25 million a year, his fee would be $2.5 million which covers all his G&A costs.

Right. This is something that I could -- as a company starting out, it's not totally unusual to have an arrangement like this, but as you become a mature company, most companies do this in house and there are no outside costs involved. I think optically, it's a little bit questionable having arrangements like this. That's why I ask.

Yes, Steve, let me explain to you why it's done like this. In Mexico, there's a legislative 10% profit-sharing, and so if you had a year-to-date profit, let's say $20 million, $30 million, you'd have to give $3 million back to your employees on top of what your production bonuses and all that, so it's actually the most cost effective way to do it, and most firms in Mexico are doing it this way. They are not directly employing their own employees. So in other words, the 10% profit-sharing would apply to CTM and the profits that they make, which are significantly less , they would give 10% back to the employees.

Right, and you couldn't outsource that to yourself basically, to one of your own companies within Mexico?

That would be pretty dangerous, because it would fall under our organizational structure and what you don't want them to do is to go back all the way through Halifax and go for the corporate profit-sharing, right?

Right, okay.

We run Ocampo, for example, out of Gammon Lake in Mexico. We run El Cubo out of a different firm.

Okay, fair enough. I'm just trying to delve into the SG&A because it is fairly high for a company of your size. Thanks.

You're welcome, Steve.

Your next question comes from [John Kays] of Paradigm Capital.

Hi, guys. I'm trying to sort out your cash flow in the quarter. Looks like you have $7 million in cash flow from operations but there's some one-time items. What I'm trying to do is figure out what is going to be a reasonable number to work within Q4. You got silver and gold looking like they are conspiring to bring down your revenues by about $9 million, but you are going to have obviously a lower cost base and you've got fuel in the FX working to your advantage. I'm just trying to get a sense of what would be the percentage impact you are seeing from your October numbers in terms of how that's helping your cost structure.

Yes, all in, and keep in mind October wasn't at the higher processing rate in the mill at our Ocampo and it didn't have , we didn't start recovering the higher grade ores off the Heap Leach until about the last week, the recoveries didn't start coming out. In October, our total cash costs per ounce at Ocampo and El Cubo came in line with Q2.

Ok.

So if things stay -- 4X stays where it is, the gold/silver ratio stays where it is, we're seeing deflationary pressures on fuel and consumables, I would assume we'll do as well as Q2, if not better.

Great, thank you.

Your next question comes from [Marco Locasiov] of Equinox Partners. Please go ahead, sir.

Hi, good morning guys. There's been a couple questions on underground operations, but just one more quick one here. Looking ahead to next year and filling the 2,500 ton a day capacity at the mill, as we move through next year, is that going to shift more to or from the underground, or do you expect to keep the ratio we've seen in third quarter?

Marco, I'm going -- this is Rene -- I'll be going down to finalize the budgets for next year on Friday, so I wish I could answer that exactly, but what you'll be looking at is a merging, because we will be expanding the mill a further 10% in Q1, so the underground will start increasing towards the second half of the year on a percentage basis of that mill tonnage, probably approaching 40% to 50% of the fee, and the open pit will naturally decrease which will increase the Heap Leach grade. But right now, if you want a snapshot in the first half of next year, it will be disproportionate and that grade seems to hold at 5.1 to 5.5 gram a ton in today's gold/silver ratios.

I see. And then just one follow-up question on the writedown of inventory issue. The ore that -- where you had the writedown take place, that was stockpiled during 2007 or was any of that mined fairly recently?

All of the ore, because we've got a one year leach, we envision of one year leach on gold and a two year leach on silver, this was the low grade, the .3, .4, .5 material that was placed throughout '07 and into early 08. We didn't start stopping that process and stockpiling the .5 to .7 until October.

Okay.

Yes, we're just seeing way too much volatility in late August and September, we said we can't predict what the closing price was going to be on any quarter, so -- even though it does make money, let's just stop.

So the ore that was stockpiled in this quarter has been classified not as -- wait, sorry, it's not going into the strip ratio.

Yes. The point -- starting in October, the .3 to .5 is being considered waste.

Okay.

That's going in -- you'll see in the fourth quarter, that goes into the strip ratio calculation. The .5 to .7 material, that's being stockpiled as ore.

Okay, all right, thank you.

Okay.

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

Sorry, Rene. There was something I forgot to mention, although Steve covered it in some detail. I just wonder now that the legal action is behind you, at least the one in the United States, can you give us a sense of where G&A should go, say next year now that a large proportion of the legal fees are behind you?

I can't comment because Scott hasn't shown me the G&A budget yet, so -- (laughter) I do know that one area that he didn't touch on is, we have had a lot of consultants this year as well outside of the legal side advising us on open pit mining. We've got Bert Jeffries on site right now and we've had John Wells and stuff, but any guidance?

Yes, I mean, Trevor, you may have heard me discussing with Steve. G&A costs year-to-date -- sorry, for the quarter they were $8 million that year-to-date is sitting at $21 million, and there is a large portion in there that is related to stock based compensation expense, which is obviously a non-cash flow item. We have incurred a lot of expenses on legal fees and professional fees. Looking forward to 2009, a lot of the legal costs are out of the way. These legal costs I should point out, they are largely covered under our directors and officers insurance coverage, so from a cash flow perspective, we will get to see refunds there. I think moving forward, we are targeting a 10% cost reduction, but as Rene speaks to, our budget is currently in progress items. In terms of cash flow, cash flow G&A, what is actual cash G & A? It's probably more indicative to think of around $12 million to $14 million. When you look at our profit loss statements and you look at G&A expense, there is a lot of non-cash items in there.

Okay.

Stock based compensation expense being the most obvious one.

Okay. And then just a quick question, you've talked in the past, and I notice there was a bit of discussion in the MD&A about the cyanide destruct and ways to save some money along those lines. Can you give us an update on where you think -- how you think you might be able to get some of the cyanide costs down, both on the destruct side and on the supply side?

Yes. First of all, on the consumption side, we've got the oxygen plant in and running in August, and then obviously, we're waiting for the ramp up before we started going too crazy on modifying the cyanide. Cyanide consumption is still up there. In fact, if I looked at yesterday's -- or two days agos production, we did over 2,500 tons in the mill and recoveries were in the 90s for both metals, low to mid 90s. So once we stabilize the mill, we'll start reducing the cyanide. Now having said that, we've already reduced cyanide by 10%. On a cyanide destruct ,we've already moved the destruction -- the location of where we destroy the cyanide, so we're starting to see a reduction in September/October in the cyanide destruction cost. So I think really what you'll see is us gaining traction in the first quarter, give us this quarter stabilize the mill, and then we can start focusing on the cyanide consumption and destruct. One project that we are working on right now is also bring the barren solution from the mill that has cyanide in it straight down to the Heap Leach and that will reduce our cyanide consumption considerably as well.

Okay. Thank you again.

Your next question comes from Anita Soni of Credit Suisse. Please go ahead.

Thanks, just a follow-up question are respect to the underground. The original target I believe was 1,900 tons per day by the end of the year. Is that something that now is still the same target, but pushed out basically four quarters, or is it pushed out beyond that?

Yes, right now, like I said, I'm still waiting for the final physicals plant, Anita. It will be pushed out definitely into 2009 and perhaps into early 2010.

But that's still the ultimate plan, right? 1,900 tons per day?

That's correct.

Thank you very much.

Ladies and Gentlemen, (OPERATOR INSTRUCTIONS) Your next question comes from Chris Marvin of Oaktree Asset Management. Please go ahead.

Hi, gentlemen. I didn't see this in your release. It's not a huge, huge deal, and I don't know if you're prescribed from answering this question because it does not pertain to guidance, which I did not see in your release, but do you have a general goal on your costs of production per ounce for 2009, i.e., obviously, you want it to be lower, the higher mill throughput of course will help that, but similarly, do you have a goal on the strip ratio from Ocampo?

Yes, Chris, this is Rene. We put out three year guidance on March 31.

Okay, so this is from a release much further back?

Yes. But Scott will give you the numbers in a second. The important thing to consider though, when looking at that guidance, it only assumes the 2,400 and 2,600 ton a day mill expansion this year and assumes a much lower stacking rate on the Heap Leach than we're currently doing, and it does not assume that we're stockpiling lower grade materials, therefore placing the leaching higher grade materials. But for 2009, Scott?

The equivalent gold production guidance was the production of 300,000 to 330,000 gold equivalent ounces, and that's at a cash cost per gold equivalent ounce of 435 to 470.

And I'd like to point out that that was at a 52 to 1 gold equivalency ratio. As Scott mentioned earlier, as we look at the expansion programs that we marked and are executing on right now, we're looking at beating that even at our revised forecasted gold to silver ratio of 75 to 1.

And is it -- at a certain point, does it get -- at what point does it get prohibitively too expensive to produce gold and silver from the Heap Leach, or does that point not really exist?

Well, what you would do, Chris, is -- one of the earlier conference calls I said that 15% of tonnage in the open pit carries 35% of the metal and if I want to look at 20-25% of the tonnage, we would probably carry about 50% of the metal. So you would -- let's say if gold were to drop down to $500 an ounce, we would still have the same reserves, because our reserves were down at $580, we would just drop off the lower grade materials. So you might drop down to 7,000 tons a day on to the Heap Leach but increase your cutoff rate to one gram. We only send to the mill anything above 3 grams a ton from the pit, so you still got that one, two, three gram material that will go to the heap. I havn't run a sensitivity on it. The pit wouldn't change because it was optimized at a $580 goal.

Okay, thanks very much guys.

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

Good morning, just a couple of quick questions. Can you give a breakdown of the unit costs associated with the open pit at Ocampo from mining through process and in G&A ?

Well, we gave those out, the first four or five months this year, Wendell.

So nothing has changed in this quarter?

In the quarter, they were higher at open pit, while we had these longer hauls, right? The way, it's hard to describe over a phone, but the way we were getting out of Plaza de Gallos and then back down to a waste dump, it was actually two kilometers each way longer, we've now eliminated that, so the costs we've seen in October come down substantially on a per ton basis. And then the costs on the mill have come down substantially from the first half of the year, the first month or the first four monthly press releases on a dollar per ton basis. The Morarton line benchmarks extremely well on that side of the plant.

Well what effects the costs coming down at the mill?

It's strictly capacity and as I mentioned to Trevor, we have moved the location of where we do cyanide destruct, so the destruct costs come down. So the mill is definitely below $20 a ton.

So what do you expect then, moving back again in this question for mining costs pushing forward on a per ton basis from the open pit?

It's always a snapshot of reporting in US dollars and right now, we've got a 12.5 to 1 Mexican peso, so a majority of my costs, including fuel, are all Mexican pesos. We generally don't give that kind of guidance, but I don't think you're going to be far off in the open pit on the first four months of the information we've released this year, now that we've got these shorter haul loads.

Okay, let me change the direction here a bit. Is there any sort of feel that you can give with regard to how much the rainy season would have affected your costs in the quarter?

Yes, in the open pit, we had higher explosives, right? The numbers I could actually track to the rainy season, where we had a lot higher explosives, about $13, $14 an ounce -- total ounce, but the rest of it we spent all in Q2, right? The aggregate that we put on the roads and such, that was all spent in Q2. The Heap Leach itself wasn't adversely impacted by the rainy season because that was -- all we did there was we evaporated solution and you can see it from one of our previous presentations that our pond was running at about 35% capacity versus last year where at the same time, it was running at about 85% capacity. So the production still came off the heap because it was higher grade than last year, still lower grade than we normally produce at.

Okay.

But I don't view as the rainy season adding material costs except for the previous quarter, when you prepped for it. We grade it and upgraded the road all the way to Comasuri, where I think Newegal has their camp, and that was expense, but that was back in Q2.

All right, a couple other real quick questions here. Sustaining capital moving forward for Ocampo, can you give any guidance there?

Yes, I think of, again, we don't have budgets yet, but I look at it on a consolidated basis and that kind of thing, company wide, it's probably $30 million to $35 million excluding exploration. But including capital development and sustained capital.

So that includes all your capital number and your sustaining, okay. So for 2009, $35 million; is that right?

Well, we'll have the finishing up the second phase mill expansion, and then there's the third phase mill expansion, but I don't have those numbers yet. That's what the Mexican engineering firm is working on right now. And then there's Guadalupe pending on Phase I, that's (inaudible) study we're doing there.

And would that number include any of the detailed drilling that you're doing that you're capitalizing?

Yes, the detailed drilling that we're doing is part of that $26 million to $29 million that Scott said we spent $6 million already at Guadalupe and six at Ocampo and El Cubo, so we would assume exploration is going to be $16 million, $17 million next year.

Okay, and again, just to be clear, that is included within the rough number of 35 that you were talking about or excluded?

No, it's excluded.

Great.

Again, these are all subject to change because we haven't done our budgets yet.

Okay, thanks very much.

You're welcome.

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

Well, thank you very much, ladies and gentlemen, for joining us today, and we'll be signing off. Thank you.

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