Alamos Gold Inc (AGI) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Gammon Gold fourth quarter and year-end results conference call. At this time, all participates are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions provided at that time. (Operator Instructions). I would like to remind everyone that this conference is being recorded today Thursday, March 26th, 2009 at 10:00 a.m. Eastern time.

I would now like to turn the conference over to Mr. Rene Marion, Chief Executive Officer. Please go ahead, sir.

Thank you. Good morning, everyone. My name is Rene Marion. I'm the CEO of Gammon Gold. I would like to welcome everybody to the Gammon Gold fourth quarter and full-year 2008 conference call.

With me today I have Anne Day, our Director of Investor Relations, and Scott Perry, our CFO. I am pleased to be here today to update the analyst and the investor community on one of the best-ever quarters for the financial and operating performance. But before I start, I would like to refer our listeners to the forward-looking disclaimers included in our press release.

At the beginning of the year, we laid out some aggressive targets. We were resolved to strengthen the management team, to grow the production, to reverse the cash flow drain at both of our operations, and to embark on a significant exploration program. And I'm pleased to say we're in a position right now that we have largely delivered on many of these key performance indicators. With production of approximately 252,000 gold equivalent ounces, we're one of only a handful of companies in the precious metal sector during 2008, not to have revised our production guidance during the year and in fact, meeting our guidance despite the gold equivalency ratio adversely defining throughout the year from a starting point of 56 to 1 to 79 to 1.

Both of our mines turned cash flow positive as we drove down our cash operating costs by a combined 22% to $525 for gold equivalent ounce. In fact, if we were to assume a 55 to 1, gold/silver ratio, as for when we gave guidance, we would have fallen in the mid-range of our guidance. The improved cash cost in conjunction with metal prices improved our cash flow from operations to approximately $80 million. We expanded the mill at Ocampo, what we referred to as Phase I, completing the commission in late November.

And in fact on March 4th of this year, we successfully commissioned our Phase II expansion tying in all our new equipment, including our new mill months ahead of schedule. During the period from March 4 to March 20, we averaged over 2800 tons a day during this commission period. That's up 120% from the 2009 average rate of 1275 tons per day. I take particular pride in the El Cubo team where they improved the mining rate of in-situ ore by 55% during the year. We launched our first exploration program in many years with the initial goal of improving the delineation of ores scheduled for mining over the next two to three years. And now in 2009, we are targeting the reserve and resource additions.

On the liquidity front, we ended 2008 with our debt facility essentialIy drawn down to the same level as at the end of January 2008. We were able to fully fund our $53 million sustaining capital and expansionary program, our $13 million exploration program and our corporate G&A. Gammon moved from a $34 million operating cash deficit in 2007 to a positive operating cash generation of $56 million. That's a $90 million swing. In October, we moved our US stock exchange listing to the New York Stock Exchange from the AMEX, helping to increase the profile of the Company and increase average daily trading volumes by 27%.

To summarize, we first announced a turnaround strategy in late 2007, and for much of 2008, our focus was on getting the right people and the right equipment in place. And it is in the final quarter of the year where the benefits of these changes really started to be apparent. Let's look at Q4 2008 over Q4 2007. In the fourth quarter, Gammon increased gold production by 59% to 44,000 ounces and silver by 45% to $1.6 million. Gold equivalent production in the quarter increased 35% to 65,000 gold equivalent ounces, despite the unfavorable move in the gold to silver ratio which climbed as I said to 79 to 1 from 56 to 1 in the last quarter of 2007. Had the gold to silver ratio remained constant, our gold equivalent production would have grown by 52%.

Our cash operating cost decreased 43% in the quarter to $384 of gold equivalent ounce, including a $35 mark-to-market reversal of a provision taken during the second and third quarters of last year. This improvement in cash cost is in spite of the unfavorable move of the gold equivalency ratio. In the fourth quarter, our top line revenue increased 22% to $48 million. It's important to note that this increase was entirely due to the increased production.

The average gold price in the fourth quarter was unchanged from the year-earlier level of $7.96 an ounce while the price of silver fell 30% down to $10.05 an ounce from $14.32 an ounce. Earnings improved an impressive 205% to $22 million or $0.18 a share, compared to a loss of $21 million or $0.19 a share a year ago. Operating cash flow improved an equally impressive 270% to $10 million, up from $2.7 million a year ago.

Our results were equally impressive on a full-year basis. For 2008, we produced 154,000 ounces of gold and 5.8 million ounces of silver for the 252,000 of gold equivalent at a cash cost of $525. This is 27% and 15% improvement in gold and silver production respectively, and a 22% improvement in the cash costs from what we reported in 2007.

2008 full-year revenue increased 40% to $212 million. Earnings grew 130% to $30 million or $0.25 a share from a loss of $101 million or $0.90 a share in 2007. And as I said earlier, our operating cash flow improved by $90 million, climbing to $56 million compared to a loss of $34 million in 2007. And as of March 20, our cash position remains quite strong, standing at just under $20 million.

Let's look at our individual operations. At Ocampo, our ongoing process improvements throughout 2008 resulted in an impressive fourth quarter indeed. The expansion of the Ocampo mill (inaudible) increased worker training, grew gold production in the final quarter by 73% over the year-earlier period to 34,000 ounces while silver production increased 58% to $1.2 million. Total cash costs declined markedly to $345 per gold equivalent ounce, compared to $623 of gold equivalent ounce a year earlier for a 45% improvement on an adjusted basis. Keeping the gold equivalency ratio constant at 56 to 1, as we realized in the fourth quarter of 2007, costs improved in fact 51%.

On to the mill, these strong results were largely a result of the pit optimization plan as well as the successful completion of the Phase I mill expansion which was commissioned in mid-November 2008. As I mentioned earlier, the Phase II expansion was commissioned on March 4 of this year. These two expansions that more than double the processing capacity of the mill cost only $4.5 million, or approximately 10% of the original construction costs of the plant. We anticipate that Phase III will be commissioned early in the third quarter at a cost of only $2 million. This expansion is targeting an increase in processing rates upwards to 3300 to 3400 tons a day.

We took the decision in early January to commission the Phase II mill expansion and considerable down time was experienced during the first two months of 2009 as we did the following. We realigned the rod mill. We had to upgrade the majority of the plant electrics as they were undersized for a higher processing rate. We changed out much of our switch gear. We reconfigured the setup of the feed hopper. We tied in our third mill, including hiring out a clutch alignments and bushing issues, not uncommon during commissioning periods. We fine tuned the [flocculation] addition for the higher tonnages and changed out pumps and installed larger pipelines to accommodate the higher flows. In my mind averaging 2800 tons per day in the first 17 days of commissioning in March is an exemplary smooth start up. And the Ocampo team are indeed to be commended for their efforts.

The Phase III expansion is being worked on as we speak now, and we'll see a further 10% increase in throughput. This work involves fitting the 500 HP comb crusher to the mill crushing circuit, fitting an ore hopper with a screen and conveyor to remove the undersides from the crushing unit, installing a second bank of cyclones to (inaudible) indicators and flow meters to control additives, fitting a new screen on the cyclone overflow, installing the remaining extra pumps and pipelines, and finally installing the gravity circuit and [occatious] valve which is on route now.

In addition to the expansion of the Ocampo mill, in the open pit we also commissioned new haulage roads, waste dumps in the fourth quarter. And we continue to optimize the heap leach tonnage profile for the coming seven quarters. The new open pit sequencing plans have so far resulted in a decline in the strip ratio from 6.8 to 1 in the first quarter to 4.2 to 1 in the fourth quarter. This is expected to fall further in 2009 to be closer to the life of mine rate of approximately 3 to 1.

In the fourth quarter, we elected to stock pile approximately a quarter million tons of lower grade open pit ore and we sent 127,000 tons of 0.2 to 0.5 gram of ton material to waste due to volatile metal prices. We also launched a selective mining program in the pit where we greatly reduced the high grade tonnage, but increased the grade substantially to the mill. Had we not done this, our mine grades during the fourth quarter would have been at lower grades, more consistent with our 2007 year- end reserve calculation.

Production in 2008 reconciled quite well to our 2007 year-end reserves with tonnages being up 12%, contained gold up [3%], and contained silver down 7%. This positive reconciliation shows that there are further opportunities on high grade dilution. We have now introduced selective mining with a backhoe on the mill or high grade.

We continue to improve survey control. We are working with our explosives provider on minimizing blast heat. We are working towards blasting only on day shift. And we are introducing split benching on the high grade ore.

In the underground mine, we have improved water and compressed air reticulation. We increased the mine ventilation. We accelerated the primary declines to the 15,000 level, and have started long hold stoke development in the San Juan and San Jose days with over 450 meters of ore development completed on three sub levels just in the last two and one-half months. All of this material, being outside of reserves.

The (inaudible) veins are now being developed for long haul as well. These veins are historically high-production veins and are targeted for approximately 32% of our 2009 underground production; and again, outside of reserves. We anticipate at the start production from all five of these lower vein extensions in the second half of Q2 this year. The accelerated development of these areas has all been due possible to the restructuring of the mining working groups and improving development productivities. In January and February, we met our targeted productivities. And site management remains confident from what they have seen thus far in 2009 that our forecasted improvement and underground production to 1500 tons a day by year end is quite achievable.

Looking at El Cubo, the mining in-situ ore increased by 55% in 2008. Milling operates have now been consolidated at the Las Torres mill and new underground equipment has arrived at site by mid-year and was fully commissioned. We undertook a significant workforce rationalization, primarily in the third quarter which has reduced the workforce by 29% from 1296 to 920 by the end of December, and a further 2% already this year in January and February.

The benefits of these changes can be seen in El Cubo's fourth quarter results, where gold production increased 10,000 ounces or 23%, and silver production increased 473,000 ounces or 20% higher than Q4 '07. The cash costs improved markedly in the fourth quarter to $502 an ounce. However (inaudible) on a full-year basis to $623 per gold equivalent ounce, due in part to workforce restructuring costs, a reduction in [en asaga] mining in the year by 49%, and higher consumable and power costs.

On the exploration front, by the fourth quarter we had ramped up the drilling program such that the Company had four exploration drills working at Ocampo, five at Guadalupe y Calvo and one at El Cubo. The year saw total our drill production of some 78,000 meters at all three projects; the vast majority completed in Q4 when the availability of drill rigs in the region improved dramatically.

At Ocampo in the open pit, we drilled 21,000 meters and about 13,000 meters in the underground. The focus in the open pit drilling was to drill off probable ores to proven categories so that we could in detail schedule out the next two to three year's production. When we drilled this material on a tight 25-meter by 40-meter pattern in order to secure our short-term planning requirements in [Plato des Guayos], Conoco, and [Refuco] pits.

We did this as we didn't want any short-term adverse surprises as we expanded the milling capacity. In 2009, we have already switched our focus to drilling off inferred resources in all of the pit areas with this work scheduled for completion during the second quarter. To date already in 2009, we've drilled over 13,000 additional meters. Following this program, the surface drilling in 2009 will then switch over to exploring the [Alta Gracia] southeast extension of the [Pacatcho] pit area where drill holes and channel samples have demonstrated significant potential.

In the underground working area, we announced the new discovery of the [Santo Mado] bonanza grade vein which will be followed up in 2009. And in fact, we have already starting driving a drift the 200 meters to get in to that vein this month. We also focused on drilling the down dip extensions of the [Advensulado] and San Juan veins. Exploration and development drilling in 2009 will focus on the down dip extensions of all 21 veins below the 1500 level and resume our work on the Santa Eduviges underground deposit.

To date this year, we have drilled over 9100 meters underground. At El Cubo, we drilled 5200 meters [step down] dip projections of several reins, the principal targets focused on the [Consara, Maculada and Tuberous] veins. At Guadalupe y Calvo, we've only explored less than 1% of our 26,000 hectare land package.

During 2008, we relaunched the drilling program and completed 39,000 meters and 126 holes for a total of 52,000 meters of drilling. By year end, we are significantly behind on logging and assays. And we made the decision to continue on with eliminating this backlog and completing the metallurgical test work program while concurrently looking into district target generation that may augment the scoping study. One the metallurgical test work program is completed in late Q2, we'll have the opportunity then to revisit the recommencement of the scoping study.

Turning to our reserve update, I'll refer listeners to our AIF filed last night on the website and SEDAR for a complete summary of our 2008 year-end reserves and resources. Take note though, that the 2008 reserves have been updated, assuming a $7.20 gold price and a $13.50 silver price. As I mentioned earlier at Ocampo, the open pit, our 2008 drilling program focused on tightening up the drill spacing and providing more detail on our existing proven and probable reserves to allow for short-term planning requirements.

I mentioned earlier that our 2007 reconciliation was positive; 12% on tonnage, 3% on gold, and negative 7% on silver. This 2008 drilling allowed us to tighten up on the high-grade mill feed ore [entripulation] and confirm that we do, in fact, have well more than six years of mill feed available. This work delineated approximately 4.1 million tons of mill feed grade, averaging 2.51 gram of ton in gold and 105 gram a ton silver.

Total reserves at the Ocampo pit are now more tightly drilled, as you can see this in the 22% increase in proven reserves after mining depletion. In fact, that is in excess of six years of proven reserves. Our high grade is more tightly constrained and with the increase in metal price, the reserve tonnage increased in 2008 to 54 million tons from 49 million tons with the inclusion of lower-grade ores that came into reserve. As a result, the reserve grade has declined to 0.62, and 24 gram a ton for gold and silver respectively and further improves our tonnage and grade reconciliations.

At Ocampo underground, we focused on drilling the down dip extensions for drilling inferred ores. This allowed us better to guide the placement of the main declines headed towards the 1500 level. As I highlighted earlier, by year end the drill spacing on these inferred resources remained of a density that did not allow us to upgrade them to indicated status. As such, the underground reserves were depleted by mining and show no net change.

But having said that, production in the second quarter will be coming from these inferred resources as we are developing and advancing our sub drifting for converting these resources to long hole scoping methods. At El Cubo mine after mining depletion, we added to reserves at the Contra, Maculada and Tuberous veins. However, this was offset by the reclassifications of some Las Torres [Cupee] reserves to infer.

With that summary, I would like to hand things over to Scott Perry, our Chief Financial Officer, for a financial discussion of 2008. Scott?

Thank you, Rene. As Rene explained, 2008 really was a milestone year for the Company. And I think the results released yesterday evening were nothing short of transformational. When you look at the results, some of the key features you do see is the Company in terms of Gammon's evolution is reporting record production levels, record cash cost per ounce results an inaugural year in terms of positive earnings, an inaugural year in terms of positive operating cash flow. And probably most important from my perspective from the treasury perspective, it really did demonstrate the underlying ability of the Company to operate as an internally funded business model which goes well in hand with strengthening the Company's overall financial foundation.

Due to the productivity initiatives and on the back of the expansion program launched at Ocampo pro -- despite the unfavorable gold to silver equivalency ratio Company-wide increased by 15% over the prior year to 251,000 ounces. This was despite the unfavorable gold to silver equivalency ratio realized in 2008 which was some 13% unfavorable relative to the prior year period. This has a penalization effect on our reportable equivalent production of approximately 15,000 ounces.

Now attributable to the higher gold equivalent production results and the realized benefits from our numerous cost reduction initiatives, cash cost per ounce decreased year-over year by 22% to $525 per ounce. This is a very notable result despite the unfavorable gold to silver equivalency ratio that I mentioned earlier, which again was some 13% unfavorable relative to the prior year period. And it resulted in an inflationary impact on our reported cash cost result of gold to an ounce of $28 per ounce, so important to note.

The strong operating performance resulted in the Company generating full-year earnings of $30.2 million which was favorably impacted by foreign currency translation gains, the partial reversal of the Q3 net realizable value mark-to-market valuation adjustment, and a significant tax recovery credit; each of which I'll discuss a little further now. The Company has always maintained that we are well-leveraged to the Mexican peso and you saw that in our full-year results. The Company recorded foreign currency translation gains of approximately $9.3 million which is largely associated with devaluation and the year-end Mexican peso exchange rate and its impact on the US dollar translation and consolidation of our Mexican subsidiaries.

Those familiar with the Company will note that at the end of Q3 2008, the Company had recorded $6.1 million in non-cash mark-to-market inventory evaluation adjustments predominantly on our heap leach inventory. The reason for these adjustments that we booked during the first nine months of 2008; it all coincided with the third quarter of this year when the economic volatility that we saw worldwide really started to resonate and that had an adverse impact on gold prices and especially so on silver prices. This led to a situation where the inventory values that we had recorded in our balance sheet was valued in excess of the values that we could realize at that point in time, based on the prevailing spot metal prices. As we saw at year end, gold prices recovered significantly. And silver prices also recovered as the Mexican peso devalued. We quickly found ourselves in a position where our inventory value had reclaimed a lot of that lost value.

In this fourth quarter as a result of the strengthened commodity prices, the Company actually recorded a reversal of a portion of the net valuation adjustments that were originally posted in Q3. This amounted to approximately $2.9 million with $2.3 million related to actual cash costs of goods sold and the remaining $600,000 related to amortization and depletion expense. I do want to point out our current inventory values on our balance sheet, we believe they are well valued in the current metal price environment, and particularly so since we have increased the cutoff rate strategy for assessing what type of ores are eligible for heap leach processing. With the current commodity price environment, we do not foresee any inventory accounting evaluation adjustments going forward.

And lastly, the Company's consolidated earnings result also benefited from a $10.3 million future income tax recovery credit; the majority of which was recorded in the fourth quarter of 2008 and was attributable to latest assessment of Gammon's ability to utilize its carry forward tax losses. The most recent reassessment was facilitated by better clarification from the Mexican taxation authority and also (inaudible) with our third-party advisors as to exactly how the Mexican [plat tax] systems will impact Gammon's tax base in the future. It also provided improved certainty on our taxable income positions over the next two to three years and just how we can utilize these tax losses going forward.

From a treasury perspective, the Company's operating cash flow result of $55.9 million is the biggest testament to the Company's improved foundation, and represents on improvement of $90 million over the prior-year results. This improvement is largely attributable to the improved operational performance that Rene spoke to at length, and also this year's higher realized metal prices.

Gammon's fourth quarter earnings results were equally impressive and do frame set the performance levels that one could expect in future periods, as we benefit from the mill expansions at Ocampo. On the back of this expansion program launched at Ocampo, the Phase I expansion in Q1, the proven gold production increased by 35% over the prior year corresponding period to approximately 65,000 ounces. Again I want to point out that this is despite the unfavorable gold to silver exchange ratio realized in the fourth quarter of 2008 which was down 40% unfavorable relative to the prior year period. Again, this has a penalization effect on our reportable equivalent gold production of approximately 8,500 ounces.

Relative to the prior year period, cash cost per ounce decreased by 43% to $384 per ounce, which is a record cash cost per ounce result for the Company. The significant decrease was attributable to the higher equivalent gold production results, the realized benefits from our numerous cost reduction initiatives, the devaluation in the Mexican peso, the partial reversal of the noncash mark-to-market inventory evaluation adjustment that was originally booked in Q3 '08, and then the -- all of which was the favorable impacts. But the effects of which were again partially impacted by the adverse gold equivalency ratio and its inflationary impact on our reportable cash cost for gold of proven ounce.

In terms of earnings, benefiting favorably again from the operational turnaround, and lot of these items that I just discussed, the Company generated $21.8 million in earnings in the fourth quarter of 2008. Again, this is inclusive of foreign currency translation gains of $5 million associated with devaluation in the Mexican peso. It includes the fourth quarter tax recovery credit of $9 million. The effects -- the positive effects of which have been partially and unfavorably offset by significantly lower realized silver prices in the fourth quarter relative to last year. The lower realized silver price actually resulted in lower silver revenues of approximately $6.5 million so also another important variable to take in to account. Again, operating cash flow was a positive $10 million in Q4 of 2008 and that now marks five consecutive quarters of positive operating cash flow generation for servicing the Company's capital and explorational investment programs. Again, I think it's a better indicator than any of the Company's improved operating performance.

Moving on to the balance sheet and in reviewing our year-end balance sheet, some particular items of note in terms of our working capital position. Again, those familiar with the Company will recall back in late November, the terms of the Company's credit facility was restructures, such that under this revised agreement the Company has access to a $50 million credit facility, comprising a $30 million non-revolving term credit facility and a $20 million revolving term credit facility.

At the end of 2008 and even as of today, the Company has a balance of $30 million outstanding on the non-revolving facility and the Company has withdrawn $7.13 million against the revolving facility. That's a total of $37.13 million outstanding against its $50 credit facility. In terms of the available capacity going forward, we do have capacity of $12 million still available for drawn down, but in terms of our current business plan we do not see any need to access this facility.

The other important development in early 2009 and Rene did speak to this at length, is the significant increase in the Company's available cash reserves, whereby in early 2009 the Company really did benefit from the exercise of in the money options that injected approximately $11 million into the Company. In addition to that, we also established an equipment capital financing lease that was -- that quickly injected $6 million into the Company and allowed us to monetize some of our mining equipment that we had in service at Ocampo. In addition to the positive operating cash flow that we've been seeing over the last few months, we very quickly built up our cash reserve balance to just shy of US $20 million.

From a treasury perspective that obviously gives management a lot of comfort because again, those familiar with the Company would have noted that throughout the majority of 2008, we were managing an aggressive turn-around plan, but also an aggressive expansion plan with no more than $2 million to $3 million in working capital flow. Having $20 million going forward certainly does give us some comfort and reassurance, given that that cash is not earmarked for any particular purpose. Much like we demonstrated in 2008, the Company's operating convention continues to be that we will operate as an internally funded business model, and that will only further strengthen our financial foundation.

In closing off I just wanted to say that in today's metal price environment, the Company continues to fully anticipate that the funding from our existing cash reserves, operating cash flows, and even the in-place credit facility will be more than sufficient to fund the Company's working capital requirements and anticipated growth plans in 2009. With that said, I would now like to pass the discussion back to Rene Marion, our CEO, for Rene's concluding remarks.

Thank you, Scott. We delivered on a number of initiatives in 2008. We put in place a management team that I'd hold up against any other in the industry. We accelerated our expansionary programs. We brought forward our production growth profile and are now targeting productions levels in 2009 that are similar to our original 2010 forecast. We have dramatically improved our cash cost profile. And we really built on tightening up the front end of the reserves. In other words, increasing our proven reserves by 22% so that in 2009, we could focus on resource conversion.

In 2009, it is promising to be another exciting year for Gammon. Production in the first quarter will be impacted by the increased downtime for the early commissioning of the Phase II mill expansion at Ocampo as I mentioned earlier. But we anticipate production during the quarter being in line or slightly above Q3 of last year, but at significantly lower costs; costs more in line with Q4 excluding the market-to-market reversal. The downtime for the Phase II commissioning was considered for the second quarter internal plan, so we remain confident that we will achieve our previously announced 2009 production guidance.

Later this year, we expect to complete the Phase III mill expansion at Ocampo, increasing our through put tonnage to 3300 to 3400 tons per day. The connection to the main power grid is expected to be completed in early May. The two transformers are installed at site. Eleven out of the 19 transmission towers have been erected already on the 4.3-kilometer [Asachi Giasora] line. 95% of the clearing has been completed on the 17.8 kilometer Giasora to Ocampo line. And 48 of the 68 transmission towers are erected. The total project remains under budget.

For guidance, we are maintaining our January 12th production guidance for this year of 185,000 to 205,000 ounces of gold. This represents 20% to 30% increase over 2008 or a 50% to 70% increase over 2007. Our silver production is forecasted to be 8.17 million ounces to 8.95 million ounces in 2009, a 41% to 55% increase over 2008 production levels or a 62% to 78% increase over 2007.

Cash costs are forecasted to decline further to $410 to $445 of gold equivalent ounce, but that is assuming a 78 to 1 gold to silver ratio and an 11 to 1 peso. Even with those considered assumptions, that represents a 22% to 15% improvement over '08 and a much more significant improvement over '07. Although it is still early in the year, our cash costs have benefited from a more favorable move in the gold/silver ratio already and the peso exchange rate. And that is why even with lower production in Q1 this year, our cash costs are coming in line with Q4.

I want to emphasize that this guidance is on Gammon Gold stand alone basis, and subject to change pending the outcome of our recently announced intention to acquire Capital Gold. As such, we will not be in a position to update our three-year guidance until the Capital Gold acquisition outcome has become known. And we have said earlier in the press release, we currently have letter of intent signed between Capital Gold and ourselves, and we are working to have a definitive agreement by Tuesday next week. With that, I would like to go back to the operator and open the floor to Q&A.

Thank you. (Operator Instructions). Your first question comes from Tony Lesiak of Genuity Capital Markets. Please go ahead.

Good morning, Rene.

Good morning, Tony.

Can you discuss the impact of the switch to long hole in the Ocampo underground as it pertains to through put, operating costs and dilution?

Yes, absolutely. A lot of the new areas that we're opening up are brand new. They are below the lower levels that you would be familiar with.

First of all, we currently have three long hole drills operating. Two of them are pretty well on their own. The third one is a new crew. What we're seeing right now is a steady growth in production with the long hole. By the second half of the year, long hole should represent north of 75% to 80% of our production profile. With the long hole scoping, we have been able to reduce mining width scenarios to as narrow as 0.8, 0.9 meters with minimal dilution. We've seen the impact on that on dilution going forward currently.

In fact, this month to-date, the grades have performed quite well underground. What we anticipate is where historically we're mining by drift and fill methods which would have inherently upwards to an 80% to 100% dilution, we anticipate reducing that to the 25% to 40% range intrinsically by tightening up on the pattern. The performance to-date in all veins except for one which was [Manimas], we have been able to hole the walls quite well.

On top of that Russell's already got the engineering completed, switching over to pace backfill system since we made [pace] curtailments. We're currently placing the surface holes where we can put down this pace and that will allow us to cycle silts much faster which will have a positive impact, both on operating costs and dilution. Because dilution increases with the time it takes to fill the scope. When we're looking at cost structures, we see the costs going down throughout the year, down to the mid-20s to high 20s in dollars per ton, and grades slowly improving throughout the year with that lower dilution.

Okay. How do you see the through puts going over that period if you could give us a quarterly snapshot.

Our plan was to start off the year to allow us to do all of this water and air reticulation at 600 tons a day, increasing to 650 in February, 700, 800, 900, all the way up to 1500 in the fourth quarter. It is a fairly linear basis. January and February came in perfectly on line. We're making good progress in March. And it's -- the backbone of this whole thing was not only improving the air and water and ventilation, but really breaking out the way these guys are working into [beats].

In other words, jumbo operator stays on the drill. That has been largely successful so far this year. In fact, where we always ran a deficit on meters of development, this month we are already 10% ahead on development. That's what's really allowed us to open up 450 meters on the San Jose and San Juan scopes -- veins, just in the last 10 weeks. That's quite a bit of meterage just for those two veins.

Okay. Thanks for that. Wanted to talk to you quickly as well about the mine grades from the open pit. Obviously you are mining well above reserve grades right now. Can you give us a sense of what gold and silver grades to expect -- available to both the heap leach and the mill over the next couple of years from the open pit?

Yes, certainly. First of all, Q4 gets masked by a couple of things. First of all, we wasted some of the low grade -- 127,000 tons of extreme low grade so you have to add that back in. We also kicked off the selective mining method in the open pit, using a backhoe. Okay? That was done in October and November. We saw a grade spike because of that. It reduced the tonnage considerably, but by both 50% of the high grade, but increased -- we had grades upwards to 10, 11 grams a ton.

When we look at the pit, okay? This year itself, we'll continue on stockpiling the low-grade material. We're looking at stockpiling in 2009 about 1.1 million tons of 0.4 gram a ton gold, and 20 gram of ton silver. To the heap, the grades change throughout the year. As underground tonnage increases to the mill, obviously open pit tonnage to the mill has to decrease. Therefore, tonnage to the heap leach has to increase. The grades very quite a bit.

To the heap throughout the year, the grade will very between 0.65 and 2.6 gram a ton. We're probably averaging about 1 gram a ton gold. And on silver, it will range from 30 to 100 gram a ton, averaging 50 or 60 throughout the year. The the overall average, we will be in that one to -- 1 gram gold, 40, 50 gram silver. That will stay constant for the next seven quarters pretty well.

To the mill, obviously the grades are lower at the beginning of the year because our cut-off grade to the mill is lower from the pit. At the beginning of the year, we anticipate 3 gram, and 120 gram for gold and silver, but that increased throughout the year to as high as 8 gram and 350. But as an average, r or 5 gram for the full year to the mill from the pit and 180 to 200 gram a ton in the silver side. To give you an idea of how the pit is performing right now, as of the 24th of March, it produced 65,500 tons of mill feed at 2.5 gram and 113 gram, so pretty well in line with the numbers I just gave you right now. That's with the mill running at 2800 tons a day.

Okay.

And going forward -- to continue on with that, the gold grade in 2010 goes down to about 3 -- just call it 3, 3.4 gram a ton and 120, 140 gram a ton for gold and silver to the mill. And then the silver grades drop a little bit. Then the following years, pretty flat, and then they go up again, just as a sequencing thing. Pacatcho is some of our better high grade, but we're just doing the pre-strip right now.

Okay so 2011 is going to be the year where you are going to see the grades really start to move back to -- closer to the reserve grade?

Yes, it will be actually -- let's take a look. 2009 are higher. They're lower in 2010, flat to 2011, higher in 2012, and then they reduce. In other words, for much of the life of the high grade and we have about 6.5 grams of high grade material that comes in the front end of the pit life. Okay? Most of that will keep the grade the grades fairly high. And then in the latter four years of the pit life, you would go down to heap leach material.

Now having said that, there's about 3 million more tons of inferred material. Okay? That lie within the 850 pit, just not enough drilling on it. And that material itself is -- it's quite significant. It's about 3 million tons. Okay? And the grade -- if you can just hold on a second. You are looking at a grade that's around a 3.5 gram and an 85 gram. That's the stuff we're working on now to drill. We want to bring in balance the high grade and the low grade lives of the pit to be about the same, 10 years.

Okay. Great. Thank you very much for all of that.

Thank you.

Your next question comes from Adam [Melnick] of Canaccord Adams. Please go ahead.

Hi, guys. Just a quick question. Rene, you mentioned the 2008 reserves were calculated at $720 gold and $13.50 silver. I'm not sure if you mentioned, but what were the 2007 reserves calculated at?

$580 and --

Sorry $580?

$580 gold.

Yes.

I have to back calculate the silver. I think it was $13 even.

Okay. How much of the decrease in reserves that we saw from 2007 to 2008 is accounted for from tighter drill spacing? I'm just wondering if you could break down that decrease for us.

Yes, that's -- there is so many moving parts. The -- a small portion, not much, is a reduction in the tightening up the interpretation of the high grade. Probably the majority of it is -- and you see it in the distribution of the grades. The silver went down a lot more than the gold grade, right? It was the fact that we used that reconciliation for 2008 previously to sit down and readjust how we [interpolate] and projection silver versus gold. I would say a good chunk of it is the reduction of the influence or the search distance on silver. And then of course, the grades go down further because we're bringing 8 million tons of low-grade material.

Okay. Thanks.

You're welcome.

Your next question comes from Andrew [McKitchick] of Thomas Weisel Partners. Please go ahead.

Good morning. All of the questions I had on the grade have been answered. Just two shorter ones. You have been very careful on what you said on Capital Gold, did you -- obviously intentionally. Is there anything you else you can add to what you are expecting or are guys going to wait until you having a agreements in place?

This is Rene, Andrew. We are intentionally being somewhat quiet until we get a definitive agreement out there. But Capital Gold has announced themselves that they had a plan to grow 70,000 ounces. We did our technical due diligence. We saw opportunities there. We liked the management team, and we believe it was a good fit.

What we're going to do after the definitive agreement is completed is we're going to be look at converting some of their resources to reserves over the next quarter or two, or however long it takes us to close and re-do their mine plan and tie it into the Ocampo. Because there are synergies with regards to equipment and such. That's where our focus is going to be on the closing period, besides around filings and all that with the SEC. For now, we're going to be fairly quiet. Upon closing the definitive agreement, we will be out on the street marketing and telling a bit more about the story.

Okay. And just back to this peso, can we just get some more comments on what portions of your costs are directly linked? Obviously the labor -- and Mexico would be able to provide a lot of input cost in pesos as well, I would assume. But it -- can you give us some sense of sensitivity or how we should think about that?

Hi, Andrew. It's Scott here. What we typically notice in terms of our Mexican subsidiaries that they are typically denominated around 60% in Mexican pesos. Largely, the delta there -- the other 40% being US dollar denominated, generally speaking. The key items you typically see in terms of Mexican peso denominated expenditures is labor and supplies and what have you. It's really -- the three Ps, people, procurement and power for largely denominated Mexican pesos. With that split, you can then pretty quickly derive the sensitivity, depending on what assumptions you are modeling.

Okay. That runs me out of questions. Thank you for your time.

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

Morning, gentlemen. Couple of quick questions. Can you give some guidance on the strip ratio expectation at El Cubo 2009 and '10?

Yes, it is Rene. In 2009, we don't include in the strip ratio the prestrip of Pacatcho. Pacatcho will be prestripped throughout the year and that's about 15 million tons. What we anticipate for 2009 as an operating strip ratio is probably going to be in the high -- just below 4 to 1 for the full year -- high 3, call it 4. Next year, we'll see it decrease significantly, closer to the -- in 2010, closer to the life mine three and then reducing beyond that.

Okay. And then just on the recoveries in Q4, could you elaborate a little on that? They looked a little lower than I was forecasting.

Metallurgical recoveries?

Yes.

Yes. In the mill or heap leach or both ?

The heap leach. You can touch on the mill if you want, but mostly the heap leach.

On the heap leach, we have put into our disclosure the recoveries assumed for the low grade to medium grade. Right? It depends on whether or not you have secondary of tertiary costs. We forecast and model recoveries as such. And basically, we put the tons and the grades into our leech recovery model, okay, every single month. Where we track right now is on a cumulative basis, starting right back from the first ton ever put on to the heap leach, within 1, 1.5% on gold to the theoretical and within 2, 2.5% on silver to the theoretical.

What we're seeing is it's definitely about a 12-month leach period for the gold to get the full recoveries in our model and about a 24-month period for silver. We do see, Anita, a marked change, obviously during the rainy season when your solutions get deleted. But also in the winter months, January a February, where it drops down. That's why you have to model this carefully when you are doing this. But it is coming in fairly accurate to our disclosed overall recoveries on a cumulative basis.

Could you just remind me on what the recovery rates should be for the higher grade and the lower grade on both gold and silver?

I don't even know if I have the AIF. 83% on gold, 59% on silver. That's for the high grade.

Yes. And then the low grade?

It's -- in the footnote in the AIF, right after the reserve table. Unfortunately I don't have that number in front of me.

Footnote after the reserve table. Okay. Also you were come going to comment on the mill recoveries.

The mill recoveries have historically been 96% on gold and 88% to 90% on silver. As we increase the tonnage, we have lowered that recovery down to about 90%, 92% on gold. And silver is coming in in the 84%, 86% range. Having said that, once we get the [Nelson] concentrator in with the Acacia cell, test work shows that we get 45% of our gold out in that, 25% of our silver out in that gravity cup. That will improve on our residence time in the leach circuit, and increase again, our recoveries. We anticipate getting gold back up to 96% and silver in the high 80s or low 90s by mid-Q2 when the cells are installed.

Okay. Thank you very much.

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

Just a few questions for you. Start with DD&A, you had a big reduction in the latter half of '08. Was that entire impact in the fourth quarter?

Yes. One of the things, David -- Scott here. One of the things bringing that down in is the NRV reversal, the mark-to-market valuation adjustment that we booked in Q3 on the heap leach pads. During that inventory -- in that inventory evaluation we do have non-cash costs, such as depletion and amortization. Then of course, when we book that credit in the fourth quarter that does reduce DD&A on the income level. And the other reason for lower DD&A in the second half of the year is the lower production overall. As a rule of thumb, around 60% of our asset base is amortized and depleted on units of production methodologies. Lower production in the second half of the year did derive a lower DD&A charge on the income statement base level.

Right. Can you give us some kind of indication what 2009 will look like in terms of total or per ounce?

What I would look at is the non-cash cost per ounce that we're effectively representing on the income statements throughout the calendar 2008, And that's what you should see going forward. Obviously you would have to recalibrate it a little, just for the latest reserves and resources that have been announced. The other thing that we have spoken about at length today is the exploration investments that are part of the budget. We also will be looking to increase our exploration program going forward. I would like think you will quickly see the production depletion in '08 quickly replaced in '09. I don't think you will see a material impact in terms of DD&A per ounce going forward.

Okay. Great. And wanted to touch touch on underground through put. You are talking about a mill expansion to over 3,000 tons a day and yet your underground is under 1,000, and you are looking to get that to 1,500. But clearly, you are not going to be anywhere near the 3,000, so you intend to keep on making up 50% of the mill through put from the open pit?

This is Rene. No, absolutely. Our strategy is pretty clear. We want to let Russell sleep at night, so we want to drill five of six years of open pit material to a proven level, 25-meter by 40-meter spacing and identify 4.1 million tons of high grade material that it would be feeding the mill.

That's not to say that there is not further higher grade. There is higher grade. Another 3 million tons of inferred material, as I mentioned earlier, that is very high grade. That's what we have got to drill now.

Our focus has been let Russell sleep at night and let's grow our reserves and resources. When we take a look at the southeast extension of the Pacatcho pit on the other side of the valley, there's a lot of material there that could possibly be brought in to reserves later on this year or into next year. It was a clear strategy and you lock down six years; we got 10.

Let's marry up the high grade and the low grade so that the two go in parallel. Don't forget, we have got definitive [Regis] decline that's down below the pit. We'll resuming drilling there shortly. I have to take the drill out so that we could ahead of the decline from the Ocampo underground. And that will have the high grade carrying on down as well. Remember, they mine there historically. That will be a second underground source, I'm sure by 2010.

Okay. What is your eventual target in terms of through put for underground?

Right now, we are saying 1,500 tons a day until we see what side of the Regis pans out with -- on the drilling program over the next 18 months. Because it has a totally separate port hole. In fact, they drilled the port hole so that we could bring in our surface haulage trucks, the 40 tonners underground and have a high productive haulage level. It's runs independent on the other side of the mountain, totally independent of Ocampo underground. When we refer to Ocampo underground, we envision that sticking around the 1500 ton a day range until we see otherwise. Now if exploration along the Santo Mado vein proves quite promising later on this year, well, maybe that will increase.

Okay. Given the fact that you will continue to bring the higher rate pit material to the mill, we can probably assume that recoveries on the pad will be close to the assumed recoveries from low-grade ore. Is that right?

Yes. When you look at page 18 on the AIF, we show the fine crush at 82% gold, 72% on silver. Okay? That's anything that goes through tertiary crush. It's not that sensitive to the head grade. When we go to the course crush which is material less than 0.7 that recovery drops down to 60% and 35%. Our cut off grade to the heap leach -- or our grade to the heap leach keeps on changing on the cutoff grade to the mill. In the latter part, we'll be getting those kind of recoveries even on the high grade that we end up sending to the heap leach.

Right. What percentage of your ore to the pad is tertiary crushed then?

On tertiary crushed, it is -- I can tell you right now. It is the majority of the -- right now 0.3 -- we have got about 20 million tons of 0.74 and 28 gram, that would be tertiary crush. And 29 million tons of 0.2 and 10 gram that will be just secondary crush.

Okay. Great. Thanks. My final question relates to reserves. Ocampo, you had a decrease in total proven or probable 400,000. And yet depletion was only 180,000 so that's a pretty significant difference. Can you explain where the other 220,000 went?

You've got to look -- I look at grades in ounces of gold and silver. When I look at the pit, we depleted by 3.5 million tons of 0.96 and 37 gram. Right? Okay. That gets marred a little bit, because we were hand picking in the high grade. We tightened up a little bit on the high grade and reduced the silver. Okay? The -- how far we could project silver. We were carrying it in parallel with the gold. Our reconciliation said we should tighten it up a little bit. We added 8.2 million tons of lower grade material on top of that. And including the reduction a little bit on the high-grade material, the reduction in the -- how far you project the silver, we added about a 0.15-gram of gold, but overall silver went down.

It's not apples and oranges, right? The way I look at it is where did you start off? What did you deplete? What are the other changes? And that's where it all gets smeared in along with metal prices and all that good stuff.

All right. That's all I had, guys. Thanks.

Your next question comes from [Trey Lauser] of Pilot Point Partners. Please go ahead.

Hi. Just quickly for Scott. I think I got distracted and maybe missed this. What is your forecast of cash flow for 2009? And also your CapEx and sustaining capital requirements? I got -- you said it was all going to be covered, but did you actually give some figures here?

One of the things we do here at Gammon Gold is we do provide guidance for 2009, but our guidance is on metal production and our cash costs per ounce target. In answering your question on potential cash flow going forward, it's not official Company policy to provide that guidance. But if you look at our guidance range, 290,000 to 320,000 ounces and our cash cost target is basically in the low 400s.

Let's call it $425. If you are assuming a gold price of around $825 dollars, that's an operating cash flow margin of around $400 per ounce. Very quickly, you're talking about $120 million in operating cash flow. What you would have to then deduct from that is taxes which is around 17.5%. You would have to deduct out annual G&A which is around $18 million to $20 million. And then you would have to deduct our capital expenditure budget. That was one of your questions; what is capital expenditure for '09.

And depending on what your assumption is for the Mexican peso, it looks like it's going to come in around $40 million to $45 million for '09, total capital expenditure budget. I'm helping you build the answer to your question, but we don't officially provide guidance on cash flow metrics.

Okay. Very good. And then for Rene, can you add any color at all to the Capital transaction, just from the standpoint of where you -- where you maybe see things standing in Mexico and any potential further consolidation just within the industry in general, not necessarily specific to future plans at Gammon.

I think I said enough about Capital. But with regards to business development opportunities in Mexico, I think there is huge opportunities on the exploration front, on the advanced development front and existing operations out there that could indeed be -- see expansions in production and reserves resources. We currently have seven CEAs signed and we're doing due diligence on them all. We picked Capital Gold, because obviously we viewed it as extremely accretive to Gammon. The Capital Gold management team saw it accretive to Capital's shareholders.

We'll continue on running all of the legs of our business plan, including adding to reserves and resources, but also looking at increasing the profile of the Company, to solid mid-tier. Like we said at [BEMO], striving to be the next million ounce producer.

All right. Thank you.

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

Good morning, Rene. Not to beat a dead horse on the reserves, but taking a look at some of the grade profiles, I just wanted to get a sense of -- you have done a lot of drilling it sounds like that has not been incorporated in to the 2008 reserve statement. I wanted to get a sense a bit for what you finding. And the reason I ask the question is we're looking at some of the guidance you were giving earlier in the call, relative to the grades moving to the heap leach from the open pit. Talked about grades averages at least in the coming year around the 1 gram mark on gold and 50 to 60 grams on the silver. We also were looking at the components going to the mill. Again from the open pit, it sounded like average grades, sometimes well above 3 grams, but certainly above the 3-gram range and then 120 to 140 perhaps on the silver in 2010 and '11.

Where I'm having a bit of trouble is when I look at that -- those -- even the heap leach grades are significantly or -- yes, significantly above where you are at on say, proven and probable average grades. I can understand that there is definitely high grade in there which is getting sent to the mill, but I would have thought that perhaps what was going to the leach would be lower than reserve grade. Otherwise, what it looks like is after a few years, you've delineated very closely over the next six years your high grade feed and all of that. But are you finding higher grades in your new drilling that would indicate that reserve grades are actually going to increase over the open pit from where they have historically been?

Thanks, Trevor. First of all on the modeling front, you've got to remember that 75% of last year's production was Plato des Guayos and about 90% of 2006 and '07 was Plato des Guayos. We take what we learned in Plato des Guayos and we apply it elsewhere. That's all we got. What we did is we readjusted the modeling, obviously the shapes and all that to normalize Plato des Guayos.

Now our 2008 reserve model over 2007 shows a not nice flat reconciliation of flat on tons, flat on metal. Okay? And then we apply that everywhere else and what we see everywhere else then is Pacatcho which represents 51% of our future reserves is up 12% on tonnage, neutral on grades so higher on ounces, right? And we see the same thing over in Conoco.

As our drilling progresses, we're definitely seeing a lot of the high grade material and we're tying that down. It's hard to say whether or not we're seeing more high grade unless you recalculate it every time. But you do have the 4.1 million tons of 2.5 grams and 101 grams locked and loaded. Okay? And the majority of that is in proven. Okay?

What we're seeing is a further 3 million tons in the inferred category that comes into measuring indicated for -- pit that we're targeting on drilling now. And that's why when you take a look at our inferred grades, we have got -- it gets smeared in with a bunch of other stuff, but there's a high grade core of 3 million tons of 2.4 gram and 85 gram so fairly solid high grade core that lies down there. It just needs to be drilled.

When you take a look at what is going to the heap leach, you got to be careful there because, A, we're currently wasting on a temporary basis, the 0.3 to 0.5 material. This is where you get a disconnect between SEC rules and using backwards looking metal prices and what you want to do in an operations standpoint. We're actually wasting that. That was 127,000 tons just in the last two months of the year last year.

And on top of that, we stockpiled quarter of million tons of the 0.5 to 0.7 so you don't see that going to the heap leach either. And that's why you see the higher grades going to the heap leach. We're running the heap leach at a 5,000 to 7,000 ton a day range so we could deter our capital into 2010 for that expansion on the heap leach. Then we'll take that stockpile and put it on the heap leach, starting in the fourth quarter.

By the fourth quarter 2010, we'll have somewhere between 2.2 million and 2.5 million tons of 0.4 to 0.7 stockpiled within 100 meters of the crusher ready to go to the heap leach. And we'll be accelerating the placement on that when we resume going three shifts -- or on two shifts a day on stacking. It will sit there and be ready to be put on the pad. Meanwhile, the grade is higher for the next seven months -- or seven quarters, sorry, going to the heap leach pad.

Okay. And then maybe a quick question on Santa Eduviges. That project started quite awhile ago. I understand work hasn't been necessarily steady state ever since that portal was first put in. To the extent that work has been done there, is Santa Eduviges actually starting to contribute to the resource statement? Are we seeing some of the high grade that you have been referring to in the inferred category, is that actually related to Santa Eduviges? Or is that not really a factor yet at all on the resource statement?

A small portion is Santa Eduviges, but we've only drilled a few holes and then I pulled the drill out in the fourth quarter to drill ahead of the declines. We're getting a third drill in the coming weeks to get back into Santa Eduviges. We have got three drill stations cut and ready to drill and just sitting there. Santa Eduviges is considerably lower rate -- the main decline is considerably lower than the pit floor. Really what we need to do is drill off at depth so that we can sit down and do a trade-off study on the pit and on the underground.

The 3 million tons of that higher grade material that I mentioned earlier, call it 3.5, maybe 5 gram, that lies partially within the 850 pit and goes down a little bit. But depending on the conversion on that, the pit floor will take some of it, all of it, or maybe will move up, and we'll take it from the Santa Eduviges. It's really an 18-month trade-off study at this point. But long answer short, the 3 million tons doesn't include all of the Santa Eduviges opportunity that is there.

Okay. And then I just have one last question, and it's more almost a strategic question related to El Cubo. We haven't seen -- we have seen operational improvements there that are quite significant. We haven't seen a lot yet on -- in terms of increasing the resources. I'm not sure that through put is -- you certainly don't seem to be guiding towards extensive through put or output increases there. Is that something that's what you see is what you get, in terms of production these days? Or do you consider that to be something that has opportunity to grow? Or is it maybe something that is almost non-core given it's high cost structure and minimal contribution?

That's a good question, Trevor. We kicked off at the beginning of this year is regional exploration plan. This is the first time that this area (inaudible) has been totally consolidated. Right? The team before, led by John [Dryer], who is -- basically his entire career at [Pennisquito] and such -- are sitting there doing regional mapping and really setting out new target generation. We have already mapped out the [Vio Pondo] vein extension, 3 kilometers up on surface. And what their target was that by mid-year, you got to find me some new targets. Right? That is moving along quite well.

Now what we're working on with the union, we're starting our collective negotiations -- our negotiations of the collective agreement in April because it becomes due in April with the union. What we're tabling with the union is going to a seven-day work week so that -- if we're successful in getting that seven-day workweek, that provides the guys 35% more time at the face. And therefore, an opportunity to increase our tonnage to the Las Torres facility from 1500, 1600 tons a day to 2100, 2200 tons a day. There is an short-term opportunity to increase production while we do regional exploration. We're pretty cautiously, but pretty optimistic.

Great. That's all I have got.

(Operator Instructions). Your next question is a follow-up from Adam Melnick of Canaccord Adams. Please go ahead.

Hi, guys. Just circling back real quick on these reserves. Scott, you mentioned here in the Q&A that you are looking to increase your exploration budget. And Rene you talked briefly about bringing resources into reserves either this year or next year. Just wondering if you guys can wrap some more specific numbers around those in terms of exploration budgets, and also in terms of when we should expect to see the reserves up to 2007 year-end levels.

It's Rene. The original budget put together for exploration back in November last year was approximately $9 million, $10 million, including some underground exploration. I haven't seen the final number yet, but I'll probably guess it will be another -- excluding Capital Gold, about another $5 million at Ocampo. Really at the end of the day, we have only explored what 20% of the Ocampo ground. It is already is one of the largest gold/silver deposits operations in all of Mexico. We're just being methodical.

We're securing our five -year timeframe. We have 10-years of heap leach material. We're working on the conversion of this high grade material and then stepping out to the southeast expansion of Pacatcho. We're taking clear methodical steps on growing those.

We'll probably update our -- we naturally have to update our life of mine plans, concurrent to the closing of this El Chanate or the Capital Gold deal. Probably at that time, we'll include the results of the new drilling when the deal closes for Capital. We could come out with better guidance, both on life of mine, three years out on production profiles, and where we are on reserves and resources at both El Chanate and Ocampo.

The $15 million exploration budget in 2009? That's what we should expect?

Yes, across the board.

And no specific guidance at this point on the conversion of resources to reserves?

When I take a look at being able to -- how successful we were on the proven and probable side, increasing to 54 million tons from 49 million, I think there's good success potential there on the existing pits. Keep in mind, these resources in the pit area lie within the pit; the 850 pit, and the 1544 pit.

Okay. Thanks, Rene.

Okay. With that, I would like to close this conference for everybody. I would like to remind everybody that Ocampo is a world class deposit. The new management team has been quite methodical on how we have tackled Ocampo, not only on the turnaround strategies, on the expansionary strategies, on the strategies to firm up shorter term and medium term ores. I think the results speak for themselves. We look forward to 2009. With that, I would like to say, thank you very much and hand it back over to the operator.

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