Alamos Gold Inc (AGI) 2009 Q1 法說會逐字稿

Good morning ladies and gentleman and thank you for standing by. Welcome to the Gammon Gold first quarter restuls 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 queue up for questions. (Operator Instructions) I would like to remind everyone that this conference call is being recorded on Wednesday May 13th, 2009 at 10 am Eastern time.

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

Well, thank you very much. I would like everyone to our Gammon Gold first quarter results 2009 conference call and Webcast. But before I start I would like to refer listeners to the forward-looking disclaimers included in our press release that went out this morning.

Many of the figures that we released today are quite familiar with you, but I'll quickly go through them. Gold production was up 11%, to 37,000 ounces, and silver production was up 3% to 1.4 million ounces. Total cash costs reduced 4% -- 12% from $491 per gold equivalent ounce to $430. But if I take a look at normalizing to our long-term gold/silver ratio of 55-1, our total cash costs, actually year over year in Q1 reduced 22%, from $500 an ounce last year, to $389 an ounce this past quarter. Revenues are down 8%, $47.3 million, from $51.4 million; but this was largely due to the 29% decrease in the silver price realized and a 3% reduction in the gold price realized.

What's notable is the operating cash flow improved 31% or $4.5 million to $19 million, up from $14.5 million, and that's $0.16 a share. Our net free cash flow was positive, up 146%, or $2.4 million from $1.6 million last year to $3.9 million last year. If fully covered, our net operating cash flow, fully covered, are $15 million in capital and exploration expenditures. Cash increased by 658% or $21.5 million to $24.7 million from a low of $3.2 million on December 31st last year. And our net debt position was reduced 45% or $15.7 million to $19.5 million from last year's closing position of $35.2 million.

Earnings per share have gone down to $0.02 per share, but that was impacted by largely a non-cash performance based compensation awarded in December last year and one-time transaction costs associated with business development. More specifically, in production at Ocampo, gold ounces were up 24% to 28,400 ounces. Silver production was up 17% to just under a million ounces. And gold equivalency was up 8% to 42,000 ounces. And if I normalize that to our 55-1 long-term gold and silver ratio, production was actually up in gold equivalency by 22% or 46,000 ounces.

Total cash costs reduced by 14%, to $396 an ounce. That's our second consecutive quarter below $400 an ounce. That's despite the unfavorable gold to silver ratio which was 72-1 in the first quarter. Normalizing that gold and silver ratio to 55-1, we see our costs actually went down 23% from $469 an ounce to $359 an ounce. Significantly below the industry average.

A little update on Ocampo operations, on the underground, the new beat working groups is working quite well. In the last three months, we've averaged 1,230 meters per month. And we currently have employed all four jumbos, are fully crewed, and they're developing 15 phases. We also have 19 Jack-leg phases that are working on expiration and single headings, and we're building up our crews there. We have completed three kilometers of repiping, and two kilometers of recabling underground. We've completed three new vent raises and will have our fourth vent raise to surface commissioned in the third quarter.

We currently have two cut and fill stokes and three long-hole stokes, and we're focused on the down dip workings. We're currently drilling long hole, the new high grade down dip extensions of the San Juan and San Jose veins. So by next month, we'll have all three long hold drills working in six long hole scopes, primarily focusing in the San Juan and San Jose stoking areas and six cut and fill stokes. Also by year end, we'll be commissioning our paced [doctoral] plant.

As a part of our third phase mill expansion, last weekend, in fact, we commissioned the Nelson concentrator. And it seems to be moving along quite well. In fact, our first series of batches of concentrates averaged about 1.5 kilos of ton of gold and 6.8 key Lees a ton of silver. Deep leach engineering indicates that we may be able to resume stacking at 13,000 tons per day by the third quarter, well ahead of the schedule or the guidance that we gave of fourth quarter 2010.

We remain on target to commission the phase three mill expansion at Ocampo by the third quarter. In fact, we'll be commissioning later in the -- in June the tertiary crusher and be awaiting only for some cyclones. Ownership of the power line will be transferred to CFE, the government agency, and that will take place at the end of this month, and we anticipate energizing the line by next June. Things are well in hand at Ocampo.

At El Cubo production was down in gold 18% and silver 23%. And the reason for the reductions was primarily due to stoke sequencing initiatives and lower productivity of one of the major underground contractors. And that's been addressed in the second quarter with the consolidation of a lot of our contracting initiatives. Total cash costs at El Cubo reduced 4% from $545 an ounce to $525 and that is largely due to the reduced labor and power costs. Normalizing that to our long-term 55-1 gold-to-silver ratio our costs went down 16% year over year, from $561 an ounce to $470 an ounce.

On April 29, the company terminated discussions with the union, as we remain steadfast that a 7-day workweek roster is required to further improve productivities at El Cubo. The proposed schedule is the same one used by the same union at a [Pineolas] operation in Senora State. Additionally, the mill workers at El Cubo are already on a 7-day roster. We've offered above-normal salary and benefits to the union, and we believe that this roster change is required to effect a step change at El Cubo, and it is non-negotiable.

Most notably, on the exploration front, thus far this year, we've drilled over 34,000 meters and 194 holes just in the last four months. Including the backlog of 10,000 to 11,000 meters in 2008, we're currently working on 44,000 meters of drilling in 253 holes. 18 holes remained unlogged and we're still awaiting 13,000 meters in [out states]. More specifically on the surface drilling program, we completed 14,000 meters in our C drilling to the beginning of May. We've completed 7,700 meters in drill holes through the beginning of May. 46 holes have all been drilled in the [Picacho] pit. 36 of those 46 are all or grade, and half of those have mill grade intercepts.

We continue to delineate high grade pods for future mill feed, and many of them are outside of the current pit design. Presently we have two diamond drills and two RC drills focused on open pit drilling. On the underground we've completed 13,000 meters of drilling thus far this year. Presently, we have two diamond drills in the main Northeast underground area and one has resumed drilling in the [Santa Doregis]. We've discovered a new extension of the Jesus Maria vein, with hole OU448 intersecting 4.5 meters of almost 19 [grams] a tonight.

A lot of this effort has been solely due to the exploration team surface mapping and targeting underground drilling. We also had a remarkable 19 meter intercept in the [Vadavanera] vein at 4.45 gram per ton. And we've also developed 1,457 meters along the San Juan, San Jose veins, down dip, and the average face grade along that entire 1,400 meters has averaged 16.24 gram a ton well above our inferred resource grades.

Where do we go from here? We'll maintain our two RC drills and two diamond drills on surface. We currently have two dozers preparing drill roads and sites. We're currently drilling Konoko Astreya Picacho as well. We're preparing further sites in the lower part of Picacho. We have targeted about a 200-meter in depth area with high prospectivity. We've also arranged to bring a semi-portable drill rig to access the difficult surface areas. And by the end of May, this drill will be arriving to work on the Rosario, San Amado and Santa Juliana veins.

On the surface redrilling program, we already have five geologists on logging and 20 samplers. On the underground we have two diamond drills on the main mine and one at Santa Doregis. We have a team of five geologists and 17 samplers. Thus far this year, in the first four months, our total expenditures are estimated at 51 million pesos. And our entire team consists of 12 geologists and 37 samplers. Exploration in the drilling program is going forward beyond May. We have one more drill rig coming in on May 12 and two more coming in on the 20th. That will bring our total number of drills on-site to ten, and we'll be focusing on the Altagracia, [Pared Penon].

[Decacho] the Southeast extension and the Valley Fort, San Amado's. And we've just commenced worked on [La Molinas]. This is an area that lies just behind the mill -- in fact, on the other side of the hill from the new power substation. And the first initial drilling shows extremely good potential. We're seeing sheeted veinlets up on surface with some banana of vein grades coming out. And this testing coming out in the coming months.

And on the underground, we spent the first three months on surface mapping and we outlined more than six lineal kilometers of veining that remaining remain unexplored. In fact, none of these veins are included in our resource calculations. These have been projected underground, and drill stations are being put in place as we speak to test these veins.

At El Cubo, from an exploration front, over the past four months, we've defined a long extension of about 3.5 kilometers along the [Vio Pondo] vein, previously unknown. This target stratographically has preserved at depth and surfaced out crops, lie 200 meters above the favorable horizon. We also found significant extension of the [Dolores] vein to the south, about a kilometer and a half long, again, not previously known. And we found a vein parallel to the Vio Pondo vane which has been poorly explored and connects up with our Phoenix property.

The El Cubo fault area is also potentially under review right now as it's been largely unexplored. So text in steps at El Cubo as Peter Drobeck is preparing a phased exploration program for our consideration in the second half of the year. And we're pretty excited about our potential for new discoveries at El Cubo. In Guadalupe we'll be receiving the final test results in the coming weeks. Concurrent to that, we've been completing a preliminary block model, and that is almost completed, and we'll start on the open pit design work. And then Peter Drobeck and I will be working on in the coming weeks the schedule to the end of the year, which will include completing the scoping study.

So with that brief summary, I'd like to pass it over to Scott Perry, who can highlight some of the financial results.

Okay. Thank you, Rene. Well, I think our first quarter results mark another milestone in terms of delivering a number of notable milestones in terms of our business plan and the turnaround performance that we continue to improve on quarter over quarter.

Focusing first on consolidating production, gold production increased by 11% over the prior-year corresponding quarter. Equally so in terms of silver production, we had a 3% increase over the prior-year corresponding quarter. In terms of gold equivalent production, we're recording gold equivalent production of 55,000 gold equivalent ounces. But it's important to note that is at a gold equivalency ratio of 72-1.

We're all probably familiar with the metal price outflow and the devaluation we saw in the silver price back in the month of September and October of 2008. And even as we wind forward to present-day metal prices, we still see silver trading at a lower valuation relative to gold over the corresponding time period. As a result of that, we are reporting a dampening effect in our gold-equivalent production profile. In the first quarter of 2008, we'll be using a gold equivalency ratio of 53-1. This is a 36% unfavorable devaluation that we experienced in the gold equivalent exchange ratio, and this is really dampening our reportable gold equivalent production.

In Q1 of 2008, the impact of this was actually 6,000 gold equivalent ounces. So in an effort to reduce some of the noise of some of these different gold equivalency ratios period over period, we've actually been reporting gold equivalent production at our long-term gold equivalency ratio of 55-1. When you look at the result, the first quarter production result was 61,000 gold equivalent ounces, which is actually an 8% increase over the prior-year corresponding period. So I think that really illustrates a lot of the significant improvements that we're seeing in terms of productivity at our operations.

In terms of cash costs, our headline result was a total cash cost of $430 per ounce, which is a decrease of 12% or $61 per ounce versus the result of $491 per ounce that we reported in the first quarter of 2008. And as Rene highlighted, if you look at Ocampo's result in terms of the subset result there, Ocampo is reporting a -- for the second quarter in a row, a cash per ounce that is lower than $400 per ounce. Which is obviously in the lower quartile of the lower industry cost curve. The benefits of these cash cost decreases obviously reflected in the favorable devaluation that was seen in the Mexican peso. It also reflects a number of productivity improvements that we've been pursuing at all our operations. The effects of which are partially offset by the 36% silver driven devaluation in the gold equivalency ratio that I spoke to earlier.

Again to remove some of this gold equivalency noise, we reran our numbers using our long-term guidance in terms of our long-term gold equivalency guidance of 55-to-1. When you look at that our cash cost result during Q1 was $389 per ounce, which is actually a $111 per ounce improvement over the prior-year corresponding period. That really is quite a headline improvement on this key metric.

Moving on to the financial statements, and I guess, starting off from an earnings perspective. Once again we're pleased to be reporting another positive after-tax net earnings result. Net earnings during the first quarter was $2.7 million which compares to a positive net earnings result of $8.5 million in the prior-year corresponding period. As a number of key variances that are worth noting when we compare this year's results to the prior-year court responding period. I guess starting off first with the revenues. We're reporting revenues of $47.3 million, which is an 8% decrease over the prior-year corresponding period.

And what's driving that is the silver-price devaluation that I spoke about earlier. Our realized silver price realized during the first quarter of this year was $12.63 per ounce, whereas last year, we realized a silver price of $17.69. So it's quite a marked step-down in terms of our realized silver prices. That's important to note as well, silver represents approximately one-third of our reserve base. And this is also what had the impact on the gold equivalency ratio that I spoke to earlier under the production performance.

So when we look at our earnings, we obviously had lower revenues, an 8% decrease; but when we look at our expense line items, there's also a number of notable amount of items that I'll talk about as well. The first one is in terms of our G%&A expenditures. Reporting an increase in approximately US $1 million for increased stock option expenses. Now this is largely associated with the option grant we did back in July of 2008 in which we granted 1.1 million options to employees in the Company.

And of this grant, 81% were issued to our Mexican based employee group. And that was part of our core value of trying to intecentify the workforce and really focusing on the core value, where we want everyone to behave like an owner. So in terms of the stock option expense, we are now accounting for this quarter over quarter. But this was not reflected in the first quarter of 2008. So that's an important year over year difference to note.

In addition, in our G&A, we're accounting for approximately US $3 million in share-based compensation expense. And what this represents is, you may recall, back in November and December, we really were pretty transparent in terms of the effect. We really wanted to focus on preserving cash. And one of the key initiatives we focused on was in terms of executive management and the officers of the Company. We encouraged everyone to take a salary freeze. And in addition their year end bonuses, we wanted to pay their bonuses in shares versus paying these bonuses in cash. Now, this was all agreed to, and all of the executives agreed to accept shares in lieu of cash.

The share issuance required shareholder approval at the Company's AGM, which is being held this Friday. And at which point, in terms of valuing or accounting for the share based compensation expense, we value it based on the prevailing share price leading up to the AGM. As you may have noticed Gammon's share price appreciated significantly during the first quarter of 2009, it appreciated by almost 40%. So accordingly, we're seeing quite an increased accrual for this share based compensation expense in our Q1 result. But again, it should be noted that this share based compensation expense has no cash flow impact on our first quarter results. And, of course, that's consistent with our stated cash preservation objective.

Another key variance in our earnings result was the fact that foreign exchange gains decreased by approximately $2.8 million relative to the significant foreign exchange gains that we booked in the first quarter of 2008. This is largely a result of the translation of our net monetary liability in the Company's Canadian and Mexican operations to US dollars. The Mexican peso and the Canadian dollar, they did continue to weaken against the US dollar in the first quarter of 2009, but at a less significant rate than the devaluation that occurred in the latter half of 2008. The other key, general and administration cost variance that's worth noting is some onetime transaction costs that we also recorded associated with business development activities in the first quarter of 2009. And this is approximately $300,000 US.

Moving on to the cash flow statement and the balance sheet statement, and I think from a treasurer's perspective, it's highly pleasing when you look at the Company's cash-flow metrics. They really are continuing to illustrate the significant turnaround performance underway at Gammon's operations. During the first quarter of 2009, we reporting positive operating cash flow of $19 million, which is a 31% increase over the prior-year result of $14.5 million. From a net free cash flow perspective, we generated $4 million, which is a 150% increase over the prior year result.

We continue to operate as an internally funded business model in that our positive cash flow from operations was more than sufficient to fund all of our capital expenditure programs, our exploration programs, our G&A expenditures, taxes. You name it. So again, another important milestone from that perspective.

As a result of these improved cash-flow profiles and a number of cash augmentation strategies that we're heavily focused on, the Company's cash balance has now increased by $22 million to $25 million. This is versus the prior-year corresponding period, where we had cash on the balance sheet of approximately $3 million. Some of the key things to note, is during January, we had the conversion of expiring options that were in the money. That injected $11.5 million into the Company. We also put in place a capital equipment financing lease, utilizing a basket of our Caterpillar equipment at the Ocampo operation, this resulted in a net injection of $6 million.

And then as I spoke about earlier, this share based compensation expense, the mechanism that we set out there for the executives, encouraging people to accept shares the lieu of cash, that resulted in a significant cash savings. Our cost reduction initiatives they continue to deliver fruit at the operations. And also the temporary rationalization of, discretionary exploration at Guadalupe and El Cubo. And this has all really helped build our cash balance to the $25 million threshold that you see us reporting on our balance sheet.

Now our number-one objective is to remain an internally funded business, and the Company is really -- this is the best position we've been in, to do just that. I say this reflecting on the full benefits of the fully commissioned phase one and phase two mill expansion that is at the Ocampo operation. As Rene spoke to, phase III will be fully commissioned; we're targeting for third quarter of this year. And on the back of these expansions, we expect to see a significant improvement in our cash or profitability margins. And this will really expand in the quarters ahead as we continue to augment our production profile, leveraging this expansionary capital that we're very quickly putting in place.

One of our ongoing cost reduction initiatives that we're really looking forward to commissioning on is connecting the 100% to the electrical power grid network at Ocampo and we're targeting to have this completed in Q2 of this year. The most recent quarterly result marks the sixth consecutive quarter of reporting positive cash flows from operations. And I think, from management perspective, that's a key touch stone in that it continues to demonstrate the Company's commitment to operating as an internally funded business model, which going forward is only going to further strengthen our financial foundation.

More than ever in today's metal price environment we continue to fully anticipate that funding from our existing cash reserves, our operating cash flows will be more than sufficient to fund the Company's working capital requirements, scheduled debt repayments, and our underway expansion initiatives in 2009 and beyond.

So all in all, I believe this overview summarizes another quarterly milestone result for Gammon. With that, I would now like to pass the discussion to Rene Marion for his closing remarks.

Thank you, Scott. Hopefully after you've seen these Q1 results, you can understand why we've been historically steadfast that we wouldn't be doing an equity issue that we honestly believe we have a self funding business model. Seeing the cash position grow to $25 million and our net debt reduce to low $20 million speaks strongly to that result.

We're very pleased with the performance of the mill expansion at Ocampo which is now operating at approximately 3100 tons a day. We're also at the cusp of getting cheap grid power at Ocampo, and I', looking forward to getting that behind us. And the phase III mill expansion is progressing quite well. And I must say the team on the ground are pretty excited from what we're seeing thus far on the exploration front. And we continue to bolster that team by moving system of the El Cubo professionals over to Ocampo over the last week or so.

So with that, I would like to turn it over to the operator and open up the call to questions and answers.

Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. (Operator Instructions) One moment, please, for your first question. Your first question comes from Tony Lesiak from Genuity Capital Markets. Please go ahead, sir.

Good morning. First question, I guess, for Scott. Could you give us what the transaction-related costs were in the quarter?

Yes, hi Tony. The transaction costs associated with those business development activities was --

Yes.

Was approximately $300,000 US, and that's represented in the G&A expense line item in the P&L statement.

Okay. I just haven't been able to find the full financials yet.

Okay.

And I guess the question for Rene, what are the key issues being raised at the union at El Cubo against the 7-day workweek?

That is a good challenging question. There is obviously politics going on within that union currently. As you know, the head of the union is in exile in Vancouver, and so we're dealing with many different heads. The guy in Vancouver, the people in Mexico City and such. We're honestly unclear on their resistance to it. When you take a look and there's already close to 100 working on a 7-day or continuous roster in the mill and this same union is working at a 7-day workweek -- or not a 7-day workweek, a continuous roster for Paneolis and the next state to the West of us, up in Senora. So we continue to keep open-discussions with the union, an it's two weeks into it. We believe everything is fair, and I think a part of it is a miscommunication union heads to the union. So we've opened the dialogue through the media so that people can truly understand the benefits of what we've tabled as an offer.

Okay. I mean, you've indicated that your terms are non-negotiable, so I mean you're really drawing the line. How long would you be willing to kind of keep that mine operating at a reduced level before you might have a rethink there? And how many people are actually impacted by the union decision?

Well, to answer your first question, the carrying costs is about $0.5 million a month. So the payback is quite quick on that 7-day workweek. So I haven't put any time line whatsoever. [Janojuato] and the whole of Mexico is in dire straits right now. And we believe that this week and next week will be the catalyst weeks to get them back to the table. But your guess is as good as mine.

With regard to the number of people, there's 420 or so unionized people on strike. There's about 300 contractors, which don't cost us anything. We've spoken with the contracting firms and declared force at [Nijure] and they're fine with that at this point in time. And then there's about 140 staff of which close to a quarter of them have already gone up to Ocampo, underground mine supervision, engineers, geologists and such. And the remaining staff staying in the [Las Torres] facility, working on longer-term strategic designs for planning purposes.

All right. Thanks so much.

You're welcome.

Your next question comes from David Haughton of BMO Capital Markets. Please go ahead.

Yes. Good morning, and thank you. Scott, a question for you. If we wanted to see what the clean earnings were removing each of those items that you had mentioned there's the stock comp, and there's two forms about the FX and the M&A charges. What does that get us back to for clean earnings?

In terms of share base compensation expense, it was approximately US $3 million, and then the transaction costs associate with that business development transaction that did not go ahead, that was $300,000 US. So you'd want to add both of those items back.

Okay. So when you mentioned that 1.14, the stock comp, and then a separate $3 million, the $3 million included the 1.1?

No, it did not. It was exclusive. That 1.1 million, that's an indicative run rate going forward.

Oh that's the run rate going forward. So is that 4.1, then, in stock comp for the quarter?

The $1 million US, David, was a stock option expense. You will see that expense each quarter over quarter.

Oh, quarter. Okay.

The US $3 million is more of the one-off item.

Okay.

You're seeing as a result of this share-base compensation expense gain that we put in.

Right.

I call it one-off in the sense it's the first time we've had this.

Okay. Understand. All right. Looking at the depreciation rate at Ocampo, currently about $155 per ounce equivalent, when you complete the expansion towards the third quarter of this year, would we expect to see a higher depreciation rate, assuming that the reserves don't alter?

No, you would not. In terms of the modeling, David, you'd be pretty well guided if you -- like, for example, from our financial statements on page ten, we provide segmented information and split out Ocampo and El Cubo. You can take the amortization and depletion expense that you see there in the first quarter, approximately $6.5 million at Ocampo.

Yes.

Equate that to a per ounce rate, you'd be pretty well set, just modeling that going forward.

Okay. All right. That's how I got the 155.

Yes.

The CapEx of 15 MIL in the quarter looked a little bit ahead of previous expectations of annual CapEx. What could we see for the run rate for the balance of the year?

Yes. We'll be looking at about $30 million. That includes the Picacho prestrip moving forward for the last three quarter.

Okay. That 30 million, is that Ocampo only, or across the board?

Across the board.

And in addition to that, we would have sustaining capital?

That's included in it, as the exploration -- or a lot of the exploration.

I guess, David, relative to prior guidance that we may have gone you a little bit earlier in the year or 2008, obviously we have really stepped up our focus on exploration.

Yes.

In terms of reserves of resources. That's why you asked a bit more in an accelerated spend.

Okay. So that level of spend -- well, begin that you've gotten ten rigs on-site and additional geologists employed, I wouldn't envision it would drop off quickly.

No. You'll see it high in the second quarter as we finish a lot of the expansionary capital at Ocampo. The drilling rates will stay high during Q2 to Q3, and you will see things drop off quite dramatically in the fourth quarter primarily a little bit of sustaining and pre-stripping at Picacho.

Okay. Thank you. And just thinking about the impact on El Cubo, have you gotten any production coming out of the mine during the strike, or is it completely shut-in?

We shut down. We didn't want to -- we could operate, legally, the Pineolas mill, operate out of the offices and operate the Pineolas underground leases, but that would be a little too antagonistic, and we've opted not to do that. So currently the way you do strikes in Mexico, you have to go to court and name the assets that you're doing, and the only assets are the El Cubo assets that are being picketed at this point.

Okay then. So we would be foregoing production in the order of -- I don't know -- 150 ounces per day for each day that this continues?

Yes. That's a good enough number for right now, yes.

Okay. And going back to Ocampo, would we expect to see any impact on the mill during the second quarter as you're tying in parts of the gravity circuit and also your phase III?

No. The only downtime we've had is you won't see any material downtime. We have had down times with the mantle on the crusher; just regular kind of downtime. The downtime will be in the third quarter, when we primarily tie in cyclones and the new conveyors for the tertiary crusher.

The nice thing, though, about once phase III is done, the HP-500 crusher, which brings everything down to three-eighths inch, will be able to do 100% of the tertiary crushing. We have an HP-300 which is currently there. So we'll always then, going forward, always have a spare capacity to at least run around a 75% production rate -- 75% of 3,400 tons a day if any the HP-500 guess down. So there's a lot of duplication in this design for phase III.

And thinking about the heap leach, you have now undertaken a study. There's quite a bit more stacking space able to you than previously thought. What kind of stacking rate would you introduce that we'd get to during the balance of the year. Would we see it going back up to the 12 million tons -- 12,000 ton per day kind of level, or sticking more closer to the five to seven mark?

No. Our intention would be then to immediately -- once we get the engineer to certify it, then we would immediately go to 13,000 tons a day.

Okay. All right. Thank you very much. That's my questions.

Your next question comes from Kerry Smith at Haywood Securities. Please go ahead.

Thanks, operator. Hello, Rene and Scott. I just have a couple questions, just on the CapEx that David asked, the $30 million. Is that for the last nine month of the year, or was that your total CapEx for the whole year?

That's for the last nine months of the year, Kerry.

For the last nine months. Can you break that down between the various main items, like the pre-strip, how many dollars, the sustaining, and then the mill expansion?

How about if I give you guidance for the well year? Because that's the number I know. I haven't broken down the individual items.

Okay.

The phase II and phase III mill expansion, okay, both $3 million, $3.5 million. About $1.5 million to finish up the power line. Okay. And then about $4 million, $4.5 million in sustaining capital. This is all Ocampo.

Yes.

And call it $16 millionish for the Picacho pre-strip. You've got less than $2 million at El Cubo, and then the rest is the drilling program. So call -- take all of that at $45 million or so.

Okay. And the drilling, and that would give you the 45. Okay. And just roughly what that number might look like for 2010 in aggregate?

We haven't really put forward any guidance. I would anticipate diamond drilling to stay at 2009 levels. And when I think of -- we should be largely done, any pre-stripping, by the end of this year, unless we fall behind. So I don't see us having any further pre-stripping, unless we discover a new pit. And then sustaining, I usually sit down, and my rule of thumb is somewhere in the 3% to 5% of sustaining -- of operating costs as a good capital number for both sites.

Yes. Okay. Okay. And the tie-in to the power grid at Ocampo, what sort of impact would that have on a cost per ounce basis roughly?

Yes. We made that decision in Q1 of last year, based on the power rates at the time. It was about $24 an ounce, of which we're currently getting just over a quarter of already. So call it, we'll get $18 an ounce. But as of January 1, in order to support industry during this period of flux in the world, the Mexican government has reduced rates by 26%. And so that was unbudgeted. The payback on the capital program was about nine, ten months. So we anticipate getting a much faster payback than that.

Okay. So, actually, you'll get a little bit more than $24 an ounce is what you're saying.

I believe so.

Another $5 or $6 an ounce is what you're saying.

Yes.

Okay. And then, just on the non-revolver and the revolver where you're not compliant, can you just give me what the timing of the payments would be this year, then? You talk about -- I think it was $20 million or something that you had to pay or $22.5 million that you had to pay this year.

It's Scott here. The debt repayments scheduled for this year is, on June 30, we will be making a debt repayment of $7.5 million.

Right.

As you see on the balance sheet, we have a lot of cash in the Company now. That $7.5 million is already sitting in an investment management account here in Canada. So that's ready to go. On September 30, making a debt repayment of $10 million. On December 31st, we'll be making another debt repayment of $5 million. As such, that would be $22.5 million of debt repayment over the course of this year.

Right.

And then, on March 31st, we make a debt repayment for $7.5 million, I think it is, and then June 30 would be the delta -- the remainder, in 2010. So you'll definitely see us finish in a net cash position by year end.

Okay. And then that last payment would be -- the delta would be to get to the $38.4 million outstanding, right?

Yes. It's currently 37.1.

Oh, it's 37.1. Okay. Okay. And what are the covenants that you were not in compliance on? Was it something that we should be worried about, or --

The covenant that we tripped up on was in the first quarter. It was related to a coverage ratio covenant, and it's the ratio of EBITDA to capital expenditure and principal and any interest repayment that would be due in that quarter. And one of the reasons we actually tripped up, and it was as Rene spoke to and you've heard me speak to, we've really been focusing on our exploration program through the Company. So we have seen increased activity there. We do capitalize exploration costs as a result of that in spite of the capital expenditures results for Q1.

In addition, we had onetime transaction costs, which is part of the EBITDA results. We also had this share-based compensation expense which issuing shares in lieu of cash for the bonuses. Some of these transactions are actually non-cash, but the purpose of an EBITDA ratio is more to sort of gauge how well you're positioned to service interest repayments, et cetera.

So we actually -- our ratio was positive. We came in with a positive ratio of 1.04. The covenant looks for a ratio of 1.15. So obviously we've discussed this with the financiers. Just letting them know exactly why the reasons were when we tripped up on it, and this discussion took place just Friday last week. So we haven't landed on where they're at, going forward.

But I could just add to that as, well we felt it in our best interest, not to go for a waiver on it, because then that gives the Banks an opportunity to reprice, and the reality is we're comfortable with our cash position that we've got everything covered anyway.

Right, right. And would you consider putting some hedging in place to make sure you can make those payments, or are you just going to kind of go as it is?

Well, to be honest the cash that we've got in the Company right now, it's around $25 million US. That cash as it is is surplus to our requirements. One of the things you always hear. You've heard Gammon gold Management talk about it, we're steadfast in operating the business with an internally funded business model. What that really implies is whatever we do, whatever we undertake it has to be financed by our operating cash flow results.

So we have no intentions on dipping down on these cash balances other than to make these scheduled debt repayments. So that $25 million that we've got in cash is earmarked for nothing else, but making these debt repayments. So we don't see that as an issue. That gives us a lot of reassurance, so hopefully the investment community will see it from that perspective as well.

Great. Okay. Maybe just one last question, if I could. With the mills sort of running above 3,000 tons a day at Ocampo now, could yo, like in April, could you tell us what the cost per ton milled for the milling side is or was in April at that higher throughput rate, what we might sort of use in our model on a go-forward basis?

Yes. It's Rene. We didn't -- we averaged, in April -- with a bit of downtime, just under the upper end of that 3,000. From April 8th onward, we were at 3,100. But the actual cash cost per ton came in at around -- I just want to make sure I'm looking at the right number, and it came in below the $20 -- $20 a ton.

That's just for the mill?

That's just the mill, yes.

Yes. Oh, okay. And that -- and so the average throughput for the mill for that -- for the month of April was slightly under 3,000 ton a day, was it, Rene?

It was at the lower end of the range. Okay.

The lower end of which range? Sorry.

The 2,800 to 3,000.

Okay. So do you know, if I call it 2,900, then that would be sort of close, would it be?

Yes.

Okay.

And this is where you're going to see some of the benefits of the power once it's tied in, because we reallocate power costs to the mill.

Okay. That's great. That's all for me. Thanks a lot.

Okay.

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

Hi. My question is just with regards to the shutdown at El Cubo. How long do you anticipate that would go on for?

I wish I had a crystal ball. The longest time El Cubo has ever been on strike was nine days. We're at 14 days as of today. I really don't know. We'll be talking [Napoleo] in Vancouver later today to fully understand his possession. But at this point in time we're in in rush. What we've done is started stepping up the communications to local media and government officials in Juana Juato to make sure everybody is equally informed.

And are there any kind of stand-by costs right now associated with pushing done the mine?

Yes. It's about $0.5 million a month.

And any long-term impacts in terms of once you get the asset up and running again, what kinds of, , kind of lag effect should we expect to see?

I think they'll probably see -- my gut feeling with these kinds of situation, is you see a lag effect on the order of six to eight weeks to get back to a steady state. And the reason why that takes place is people have to see their first few pays to understand that indeed they do make more money and to start understanding that they have an opportunity to make more if they work any overtime.

A key thing with this, on the shift schedule, is it increases the number of days off a year, from 52 days off a year, to over 115 days off a year. So it gives them a lot more rest time, opportunity to work overtime as well. So typically I see it -- the period of six to eight weeks. And then -- and then, after that, we anticipate, as we'll be ramping up over the next 18 months and realizing the gains of productivity that we'll be going for.

And what gains and productivity are you expecting to see? Sorry, what's that?

We anticipate with, the 7-day roster, we'll be able to see, upwards over a 30% improvement in productivities? So you have to remember, the mill at Las Torres can do 2,100, 2,200 tons a day and we've historically been doing 1,500 to 1,600 tons a day. So we largely fill the mill by the time we scale up over the 18 months takes effect.

Okay. And then, just a question on the CapEx. Sorry. I missed one of those -- the last numbers. How much was it for drilling?

The drilling was the balance of -- take -- take the $45 million, subtract the $9 million, subtract $16 million, $17 million for the pre-strip, subtract $2 million for El Cubo. That's the primary area, and the difference is the exploration.

And the increased stacking rate, should you go to 1,300 tons a day on to the heap leach pad -- I'm sorry. On to the [tail links] facility, right? Is that -- how much capacity do you have there? How long could you do that for before you'd have to build another --

In fact, we're just finalizing that. I was on the phone this morning with Russell. Right now -- we initially thought we had 4.8 million tons of final capacity on the current pad before we needed the expansion, and that's why we made the decision to reduce the tonnage. We're now looking between, as of today, going forward with an additional six to eight million, so we wouldn't need the new pad until early 2011 at this point. And it doesn't change our timing. We would do the construction. We'll the engineering this year, and then we'll the construction starting early in 2010.

And that would be the construction on the new pad, you're talking about?

That's right. It's actually -- it all flows into the same pipe pond solution, and it's all still gravity. It's just up to the North and West and behind some of the knolls there.

I'm sorry. Remind me again. We are talking about the heat bleach pad, right? And not the tail link facility.

That's right. Just heap leach.

On the tail link facility you're fine.

The tail link facility is fine life of mine.

Okay. Thank you.

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

Yes. I just had kind of a housekeeping question, and it might be buried in the notes, but I couldn't quite figure it out. In terms of the number of options that got exercised in Q1, do you have that number, Scott?

Yes. It was approximately 1.7 million, from memory, ye.

And so where does -- can you tell me how many that leaves in terms of options? Not necessarily in the money, but just in aggregate?

Say it again, Trevor.

The options outstanding.

Yes, just the options outstanding at this point.

Okay. So to answer your first question, it was actually 2.2 million options that were exercised during Q1.

Okay.

That just came back to me. And remaining options outstanding, I think it's approximately around six million.

Six million altogether.

Yes.

And the reason I was -- the reason I was asking that is, there was a note -- sorry. There was a note that, in the financials, it said it looked like there was about three million stock options at the end of March 31st, but I just couldn't get the math to work out.

Yes. That's someone doing the earnings per share calculation, and we stopped including options when it becomes anti-dilutive. So when you talk about the operation, the threshold there was three million options were included in the earnings per share fully diluted calculation.

Okay. So that's how you get back to the six. All right. That's all I really had.

Okay. Thank you, Trevor.

(Operator Instructions) Your next question comes from Ron Stewart of Dundee Securities. Please go ahead.

Good morning, guys. A couple quick questions for you. And I might have missed the answers earlier. Rene, I'm looking at your underground production rate at Ocampo it is down around 500, 600 tons a day, and was anticipating a bit of a production increase there. Can you comment at all on the plans to move production higher at Ocampo underground?

Yes, I certainly will, Ron. What we did is we obviously focused on infrastructure. We're a little bit behind on our ramp-up. We've done two things. One, we stopped the long-haul drillers from blasting while they're drilling, so they can improve on their productivity. So the drill off stops.

But right now we have over 300 meters in strike length in San Juan, San Jose, which is the next 15 meters developed below the third bottom working level. That is currently being drilled as we speak. And that's why, when I was speaking earlier, by the end of -- by the end of June, we'll have about six, maybe seven long-hole scopes in production. Okay. And about an equal number of cut and fill scopes in production. And I'd say about half of that is San Juan, San Jose. And then, during Q3, we'll be bringing online the down-dip extensions of [Ananas] and [Vavonera].

So, so a go-forward basis here for Q2, should we be thinking about something in the order of 600 tons a day, and then having it jump up to -- I think you were targeting to exit 2009 at 1,100 or 1,200 tons per day?

Yes. I'd say I think we shift the ramp-up by about two months, and so we're still anticipating, in the current reforecast in the mine, hitting 1,500. But instead of the beginning of Q4, toward the end of Q4.

Okay. And another question on Ocampo, looking at the numbers heading through the mill, looks like both recovery on gold and silver dropped somewhat from previous amounts to gold under 90%, maybe 80, 89% and silver off a little bit as well. Is that because of the higher throughput rates, and are those kind of silver -- gold and silver recovery numbers in the mill indicative of what we'd expect going forward?

No. First of all, you've got to remember, we reduced the grades in March considerably in the mill. So you won't get the higher recoveries on that lower grade. March was very much of a month of kind of narrowing down on the grind, the P-80 grind. Okay. And that's why we lowered the grade. We didn't want to lose too much out to the tails.

Where we are prior to getting the Nelson in last weekend, as gold recoveries have come back up to 92, 93%. Our target is 96 with the Nelson in, and our silver is in the low -- mid 70s to high 70s. Okay. And our target there is to get it back into the high 80s. And that's all a function of the Nelson.

Right now, the one issue is that we've got one new bank of cyclones, and the original bank running. So half of the feed to the Nelson is not of the appropriate grind size that we're looking for. So once we get that second bank in at the end of next month, we'll really start seeing how the Nelson is improving. But right now, it's improving quite readily in the last four or five days. But we fully anticipated that, because that's why we accelerated the phase II expansion. And when we did the math, it was tonnage beats out recovery, and the payback was quite worthwhile, so --

Sure, I understand. But that -- that explains the drop, and that's okay . The last question I've got for you, is, on a regional exploration basis, there were some really intriguing targets mainly to the South, a large anomaly to the South of the entire system. Have you guys been out there and collected any samples? Do you have anything that you can share with us on that target that's to the south of the entire Ocampo vein system?

Well, Peter and his team have didn't down there and have started mapping and collecting samples. I don't have them here in front of me, to be honest with you, but they were anomalous to -- anomalous grades to ore grades up on surface. They continue to map that area. Our priority has been in all honestly, Ron to the North, above the undergrounds and up towards the state of Colorado. And once that is done, then Peter and his team are going to shift back down to the South and try to get all of this done before the rainy season comes in in the latter part of June.

Sure. Well, good luck with that, and thank you.

Okay. Thank you very much, Ron.

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

Yes. Good morning, guys. A quick question on cash flow. Investing activities, you have $7.2 million in proceeds on sale property plan equipment. Is that the lease-back to Caterpillar?

No. Yes, hi, Steven. You're exactly right. So we did that sale on lease back transaction. That's the gross proceeds that we received, $7.2 million US. However we had to put down a margin of collateral. So in terms of the net injection to the company, it was the US $6 million. But what you're seeing in the item was the gross proceeds received on the equipment.

Okay. What was the reason for doing that?

It's all part of our cash augmentation strategy. So if you recall back in October, November, December, there was a lot of concern in the investment community regarding cash balances, regarding discretionary expenditure programs. Last year we were managing the business, with under $5 million as a working capital flow. Now that all that expansionary capital is behind us, we're heavily focused on building cash in balance sheet. We saw this as an ideal opportunity to take advantage of a basket of Caterpillar equipment that we had on-site that we fully owned.

Great. Okay. And based on their lease charges, any impact on operating costs?

No, impact on operating costs. And the other thing as well, Steven, is we're pretty cognizant as Rene spoke to in his commentary, we don't dilute shareholders or anything like that. So we thought this was a great way to monetize some equipment, get cash into the Company and keep moving forward to the existing outstanding share capital.

Okay. Great. And on SG&A, the $9.5 million, can you just break that down? Do you have a split between how much of that is head office and how much of that is site SG&A?

I don't have that split with me at the moment.

It doesn't include any site G&A. It would include some of the Chihuahua G&A.

Right, sorry that's what I meant, Chihuahua versus Canada.

Yes, that's what I thought you meant. But typically, I'm trying to -- yes, Steven. I really can't break that down for you right now. I don't have all of the internal reports in front of me.

Okay. And what about on an ongoing basis I know some of that was stock-based compensation. It's obviously impossible to predict where the stock goes, but is that going to be a quarterly thing, the stock-based compensation?

If we assume the share price stays where it is right now, then going forward, the indicative run rate in terms of G&A will be around $5.5 million. But obviously in terms of valuing the shares, they will -- we do have to value them against the prevailing share price. So it could move up. It could move down. But at the moment, it's all valued on a share price of $8.30 Canadian. So I'd like to think, when you look at our historical trading ranges, it's pretty fully valued at the moment.

Okay. Great. That's all I had.

Your next question comes from Dan Rollins of UBS Securities. Please go ahead.

Yes. Good morning. Just two quick questions. One just on the stock based comp, on the stocks -- I guess the compensation for the workers in Mexico. You said they're currently priced at 8:30. How many are outstanding?

The share-based -- the number of options outstanding that this Company has outstanding is around six million options outstanding.

Yes.

What I was referring to was, back in July of last year, we issued 1.1 million options as a special grant of which 81% went to employees based in Mexico. And so what you're seeing in our G&A expense is you're seeing for the first time, stock option expense accounting on that grant. Whereas you were not seeing that in the corresponding Q1 period of 2008. That's why I reference that.

Okay. And, well, did you grant another load set to workers again this first quarter?

No, we did not.

Okay. So basically it was a one-off thing?

That was a one-off. But you will see that the stock option expense going forward each quarter.

Based on the share price?

Yes.

Okay. And just quickly on the covenant that you're in breach of, how is -- is it the coverage ratio, or how is it actually calculated?

The ratio of EBITDA, earnings before interest, tax, depreciation and amortization, the EBITDA result as a ratio to capital and any required principal repayments or interest repayment in the period that the ratio is being calculated.

Okay. That's just a quarterly EBITDA; that's not a rolling 12 months?

No. That's quarterly.

Okay. And it has to be at the end of the quarter, that you can't show them what it was say at the end of April and say we're actually now in compliance, if the banks come back to you?

Yes. I mean the banks are incredibly supportive of what we're doing. So obviously it's a very transparent, interactive process. We only did our covenant calculations last week when we finalized our Canadian GAAP results. So, we've been discussing them with the banks, they understand the impact in terms of I think a few one-offs that drove the coverage ratio, as I spoke to earlier, transaction costs and business development, ramping up exploration, et cetera. They understand that and they're just digesting it at the moment, and they will revert back in short course. But -- so I can't really report on where they're at.

Okay. Thanks. That's all I have. Thanks.

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

Good morning, guys. Just a couple of questions. First of all, on the drilling program that's in place and concentrating on the open pit portion of the drilling, can you maybe just expand a little bit on the direction of that program? And where I'm leading is, are you really focusing on the zones of mineralization that have been identified before that need infill? Are you looking at extensions to known mineralization? And then where that ultimately leads, is, how do you see this current program converting resources ultimately to reserves?

On the latter point, I wish I could do block model every week, because I'm just as anxious as you, but we haven't done that, Wendell. About -- obviously we're focusing on finishing at [Kanako Estreya] and working up Picacho. Picacho represents 51% of our current open pit reserves and definitely the better grade of all of the pits. And the key one there is, we're targeting the resource pit at this time. And that will largely be done in the coming months.

The area that we're starting to refocus on is down at the Valley Floor on Picacho which is outside of reserves and resources. We've got 200 vertical meters that look like it could well be mineralized. So we're focusing on that starting next month. We'll have two drills down there. And the only reason we couldn't do anything about it until now is Russell is pre-stripping up above. And, geologists and drillers don't like fly rock. They'll be in a position where they'll be protected from that activity. So we'll have those two drills going down there in the coming weeks.

We have one drill that we moved from Altagracia temporarily while we established drill stations there over to an area behind the mill called La Molinas. So about over half of our drilling program is kind of new areas, La Molinas, Altagracia. Hopefully by the end of the year, get the drills down to the South, that Ron has mentioned earlier on. And then some of these drills that come in at the end of this month that can be broken down and pioneered in some of the tougher areas.

So that -- so that zone at depth at Picacho, that would potentially fit into a pit plan?

Yes, that's right. It carries right on to Altagracia. So it's a phased way of keep on moving to the southeast.

Right. Okay. Maybe just a little bit on production guidance. Anything -- anything change there? I don't think there's been any commentary on that.

Nothing at this point in time. We want to see El Cubo get back into -- into production. Things are panning out fairly well at Ocampo at this point. So we don't have any comment really on revising guidance or anything like that.

Okay. And I don't know if I missed it or not, but there was some discussion on pad expansion, construction starting in 2010. Was there a capital number that was thrown out there?

The engineering has just been awarded this week to Vector Engineering, but our internal cost estimates were $10 million to $12 million for 2010.

That's great. Okay. Thanks very much.

Thank you.

We have time for one more question, and it's coming from Tony Lesiak from Genuity Capital Markets. Please go ahead, sir.

Yes. Just a follow-up on the covenant issues. Scott, Rene, you don't seem too concerned that your lenders could come back to you and demand immediate payment. I mean, could you have not avoided the covenant breach by slowing exploration or CapEx in Q1 when you knew you were going to have some mill downtime? It just seems surprising that you didn't follow the ratio more closely in the quarter.

Tony, as Rene said, once we knew that -- I guess Rene made the point before. We could actually go to the bankers and formally request a waiver for the breach of that EBITDA coverage ratio. There's a large number of covenants in this facility that we need to meet. And during Q1, we met all of them. It was just one specific covenant that we tripped up on in terms of this financial coverage ratio. And if we wanted to avoid the issue, we could have gone and asked the bank for a formal waiver request. But the risks with that, given the state of the current credit markets, both respective banks would have to go to the credit committees to seek approval. They might want to come back and reprice the facility against current market conditions. And what that would result is an increase in our interest rate and our effective cost of financing going forward.

As you heard Rene say and myself say, we don't believe we need this debt facility. We're not relying on it. We don't need to make drawdowns. We're not worried about the capacity that is still above on this facility. We're in the going to utilize it going forward. We have $25 million in cash, making positive operating cash flows. So we sort of rightly or wrongly made the decision. Let's leave it as it is and move on. We don't want to in terms of our shareholders incur unnecessary costs to get this facility regularlized in terms of the one specific covenant that we did not meet. So to be honest we're not one bit concerned about it.

Okay. But I mean there is the possibility, however unlikely, that the banks could come back and demand immediate payment?

Yes. Of course, there is that possibility. But I would consider that extremely remote. Our bank -- members of the syndicate have been very supportive of our business. You would have seen back in October of last year, when we did restructure the facility, we chose the worst moment in time to try to restructure and facility in terms of the state state of the current credit markets, and. And our bankers have been to the site, they've done their technical due diligence and they came forward and they restructured it for us. So, I definitely consider them a number-one stake holder, but also a very supportive stakeholder.

Okay. I mean, have you at all looked into alternative fall back options in case demands are made?

To be honest, I haven't. But what I can tell you is I speak to our bankers' representatives very frequently. And one of the things that I did speak to them about was, before coming onto this conference call I wanted to make sure any discussion I entered into, I could feel comfortable that the worst case scenario you're proposing, I wanted to feel comfortable there was no chance of that eventuating And I can tell you, based on my discussions, I felt comfortable enough to come to this call and talk about it. So, I really don't see it as an issue at this stage.

Great. Thanks for the clarification.

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