Alamos Gold Inc (AGI) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen; thank you for standing by. Welcome to the Gammon Gold second-quarter results conference call. At this time all participants are in 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'd like to remind everyone, this conference call is being recorded on Thursday, August 13, 2009 at 10 a.m. Eastern Time. I'll now turn the conference over to Mr. Rene Marion, CEO of Gammon Gold. Please go ahead, sir.

Thank you very much, operator. Good morning. My name is Rene Marion, I'm the Chief Executive Officer of Gammon Gold and I'd like to welcome everyone to Gammon Gold's second-quarter conference call and webcast. I'm joined today by Scott Perry, CFO, and Russell Tremayne, COO from our Ocampo mine. But before I start I would like to refer listeners to the forward-looking disclaimers included in our press release. And after the call we will open up the session to Q&A.

Let's talk about the second-quarter highlights. Cash operating -- cash from operations, $13.7 million or $0.11 a share, our seventh consecutive quarter with positive cash flow. Earnings before other items $0.03 a share. We finished Q2 with $22 million in cash and our net debt of $21.5 million is down almost 40% from year end 2008. And we've also renegotiated the $50 million credit facility by restoring full access to the facility in a waiver of the Q1 covenant breach.

In carrying on with the highlights, consolidated production of 31.1 thousand ounces of gold and 1.1 million ounces of silver for 47.1 thousand gold equivalent ounces at a total cash cost of $453 per gold equivalent ounce. The key drivers to the production shortfall during the second quarter, it was essentially the 67 to 1 gold-to-silver ratio over the previous year's 52 to 1. And had we received 52 to 1 it would have been a production profile of 52,000 gold equivalent ounces.

The El Cubo strike, which was positively resolved at the end of the quarter, resulted in a shortfall of 13,000 gold equivalent ounces. And the underground at Ocampo, as we mentioned in the May Q1 conference call, is two months behind and more than accounted for the remainder of the shortfall in production. Underground operations at Ocampo are currently ramping up with production thus far this month averaging 730 tons per day and it is continuing to increase. I will elaborate on that in a little bit.

Cash costs, as I had mentioned, were $453 per ounce, within our guidance provided on July 22 of $445 to $465 an ounce. This has decreased in total cash cost of 10% despite the fact that the gold equivalent ratio was adversely affected. Had we compared it to the same gold equivalency ratio as last year our cost would have reduced by almost 20%.

If you look at our cash cost for Q2 taking silver as a byproduct credit, as many of our peers do, our cash cost would have been $198 per gold ounce, down some 17% from last year for the 31.1 thousand ounces of production.

We are currently poised to see some significant cost reductions moving forward throughout this year; particularly at Ocampo we see a significant reduction in contracted services in the coming months. As you know, we connected on July 15 to the main grid seeing a 50% reduction in our power cost, saving us some $20 to $25 an ounce moving forward.

Our heap leach costs will continue to reduce with the economy of scale as we resume ramping up our production profile there to 10,000 to 12,000 tons per day over the coming months; in fact, yesterday we placed 9,400 tons per day.

Improved open pit productivity is beyond our internal forecast. We're currently averaging some 93,000 to 94,000 tons a day, some 15% improvement over our forecast this year and that's allowing us to accelerate the pre-stripping activities on our fifth pit, the Picacho pit at Ocampo.

In the processing economy of scale, Russell and his team are currently commissioning the third phase, final phase 3,300 to 3,400 ton per day mill expansion. As he fine tunes the grinding and the Nelson concentrator he will then start increasing the tonnage to the plant. And indeed our underground costs will continue to reduce as we see positive ramp up in production moving forward.

And then at El Cubo, we've already reached our Q1 productivity rates and we're currently in the process of training and raising the productivity gains that we anticipate with the continuous work schedule as negotiated with the union.

A bit more specifically at Ocampo -- underground a 105% improvement in lateral development rates for 6,700 m year to date. We currently have 34 development headings all manned, all active. We've replaced almost 3 km of air and water services throughout the mine. We're currently producing in eight longhole stopes with eight more coming into production within the next month.

All three longhole drills are fully manned, in fact we're training new crews for two more drills that are coming in by the end of the month. We have longhole drilled inventory of 17,000 tons ready to blast. We also have 47,400 tons that are being drilled currently and another 69,000 tons that will come online in the coming month or two.

On the capital program we've virtually done all our capital expansionary programs that we embarked upon some 18 to 20 months ago. As of July 15 we tied into the main grid. We'll have one more day of shutdown later on this quarter when Pinos Altos ties in, but we are enjoying the savings as we speak.

The Phase III mill expansion, as I mentioned earlier, is completed. We've had Nelson on site fine-tuning our gravity concentrator and we're currently commissioning the screens and crushers associated with that expansion. That is some twofold expansion in throughput over 2007.

The heap leach stacking overland conveyor is commissioned and performing quite well, thereby removing the grasshoppers off the face. And the engineering work completed during the second quarter indicates that we can defer the Phase III heap leach expansion to 2011, one further year out, and adding an additional 10 million tons capacity on the current heap leach pad. And as I mentioned, we are currently ramping up to full capacity of 10,000 to 12,000 tons per day.

The capital for the year is forecasted at $65 million, higher than planned, but for good reasons. First of all, the exploration program; we added a $12.3 million exploration program at Ocampo and a $1 million exploration program at El Cubo. Productivities in the open pit at Ocampo are going much better than planned which has accelerated, as I mentioned, the pre-stripping at Picacho by about 15%. And in fact, Picacho will be in production in the fourth quarter, approximately one quarter earlier than planned. In addition, our exploration development underground is above plan because of the 100% improvement in productivities.

On the exploration front, indeed at Ocampo it's moving along very well. We currently have drilled as of the end of July almost 73,000 m or 60% of our 123,000 m drilling program. The near pit drilling program is 74% complete. The Santa Eduviges drilling program is approximately 55% complete. The main Ocampo underground drilling program is 48% complete and new targets, true grass-roots targets, is about 50% complete.

We have drilled 397 holes already this year and 73,000 m of drilling. And we're focusing on mineralization to the north, east and south of all our current operations. We continue to have a team of 60 professionals, including three geologists, working on reinterpretation including all this drilling so that we remain on target to provide reserve and resource update for Ocampo by the end of the third quarter.

And our exploration focus or grassroots focus is quite exciting. On Las Molinas we have completed our drilling -- first phase drilling program there and have delineated a high-grade open pitable resource for the heap leach. In fact our best hole, Hole 751, was 65 m of 1.88 g a ton gold equivalent.

At San Amado, we've just started drilling there finally; we've established an access road. The result from the first of two holes drilled there, Hole 758 intersected approximately 1 m at about 10 g a ton. And this hole is quite interesting because it lies 100 m above the previous holes announced last fall that were in the order of 80 or 90 g a ton, but also 200 m further along strike.

Our drilling program at Picacho is very exciting. It appears to us in the work that we've done that the whole region is tilted to the southeast, which means we had a target for Picacho and we're adding reserves and resources there with every single drill hole. Some of the highlights include Hole 677 of 7.5 m at 3.92 g equivalent -- gold equivalent; Hole 664, 4.5 m at 13.34 g per ton of gold equivalent; Hole 659, an astonishing 31.5 m at 2.41 g a ton gold equivalent; and Hole 604, 4.5 m at 7.55 g per ton.

Our drilling program is ongoing at Altagracia and we continue to intersect multiple veins and are currently working on some sub horizontal drill holes to assist us in the interpretation of the area.

And one of the most exciting grass roots projects this year is Santa Librada. This is a 700 m long anomaly discovered from our aerial survey and it lies to the south of all our current open pits. Surface samples during the month of June/July (technical difficulty) and some were as high as 28.86 g a ton and our drilling program there will commence in the fourth quarter.

So as the 18 month Ocampo capital expansion program is largely complete, the Company can begin to leverage the benefits of this strategic and innovative expansion program. The positive impact the expansion program has already had on our operations is evident in the improved cash cost reported in the second quarter.

Using our long-term goal equivalency ratio of 55 to 1 and in spite of the lower production achieved in the quarter and extraordinary costs incurred related to the El Cubo labor disruption, cash costs have reduced a further 18% from the same period in '08 and are almost 50% of what they were the year prior to that.

Additionally, we are confident that the processing capacity available at Ocampo will be supported by the ongoing ramp up of underground and, when combined with the return to normal operations at El Cubo, we fully expect that the improved production and enhanced cost structure will be achieved during the latter part of 2009. And with that, ladies and gentlemen, I'd like to pass it over to Scott Perry, our CFO.

Okay, thank you, Rene, and good morning, everyone. I just want to spend quickly 5 minutes and just walk you through some of the key second-quarter highlights looking at our financial statements and associated results.

So I guess starting off with second-quarter production, official metal production was, in terms of gold, we produced 31,000 ounces of gold which compares to 43 ounces in the prior year corresponding period. In terms of silver production, we produced 1.1 million ounces of silver which compares to 1.5 million ounces in the prior year corresponding period.

Now typically Gammon is due to the gold equivalent producer and so one of the key variables that comes into that calculation is the gold equivalency ratio, the silver price devaluation that we saw in the fourth quarter of last year and continues to preside today. The Gold equivalency ratio that we're using in our conversions was 67 to 1 whereas last year we were using a conversion ratio of 52 to 1. So as Rene spoke to, that really did penalize us in terms of our gold equivalent production result.

So in Q2 we're reporting 47,000 gold equivalent ounces and that compares to 71,000 gold equivalent ounces in the prior year corresponding period. And just to recap on the key variances that -- the key root causes of that variance as Rene spoke to -- by and large we were impacted by the seven-week downtime associated with the El Cubo industrial action.

We're two months behind in terms of ramping up on our underground production profile. We incurred 13 days of downtime associated with putting in place of the overland conveyor system at the Ocampo heap leach facility. And there was some other downtime here and there associated with tying in various items of infrastructure for the Phase II mill upgrade and associated debottlenecking and what have you.

Notwithstanding the lower production versus the prior year corresponding period, our total cash cost per ounce result of $453 per ounce was a pretty strong result, and that compares favorably to the result of $501 per ounce in the prior year corresponding period, that's a decrease of about 10%.

What drove that improvement was largely improved productivity, focused attention to a lot of the cost management initiatives that we've been updating you on in the past, and we did benefit from the de-valued Mexican peso. In Q2 we're largely translating our operating expenditures at a Mexican exchange rate of around 13.3 whereas last year in the corresponding period we were utilizing an exchange rate of 10.4.

Now notwithstanding those favorable items, total cash costs per ounce, again they were negatively impacted by that unfavorable gold equivalency ratio of 67 to 1 versus 52 to 1, because obviously that has a dampening effect on our reportable gold equivalent production. And that has an inflationary impact on our cash cost per ounce result.

Going forward though we do believe that our cash cost guidance is very well balanced. You'll recall that our full-year guidance is cash cost in the range of $410 to $445 per ounce and I think there are a lot of things that really put us in good stead going forward. Obviously there's the increased production profile that we're forecasting to Q3 and Q4. Now that we're fully tied in to the CFE electrical power grid we are expecting a lot lower electrical power cost. Our open pit unit costs are outperforming our prior expectations. And again, with the Mexican peso exchange rate and where it's currently trading at, we do expect that to favorably underpin our cost structure going forward.

So looking at first half costs, we're currently sitting around the $450 per ounce mark; I think we are positioned very well to meet our full-year guidance.

Moving on to the earnings statement, starting off with revenues. Revenues from operations was $43 million in the second quarter of this year and that compares to $64 million in the prior year corresponding period, that's approximately a 33% decrease. And really there are two variables driving that -- obviously the lower production result that we realized in Q2 of this year, but it's also important to note the realized silver price.

Our realized silver price in the second quarter was $13.71 and that compares to $17.08 in the prior year corresponding period. So that was almost a 20% decrease associated with that devaluation in the silver price that we saw in Q3/Q4 of last year.

In terms of earnings from operations and before other items, we're actually reporting positive earnings of $3.4 million which compares to $9.7 million in the prior year. If we look at the bottom-line earnings result, earnings after tax, we're actually reporting a loss of $7.6 million which compares to restated positive earnings of $4.8 million in the prior year.

So I think it's important to note that we do have a large $7 million foreign exchange loss in our earnings result that's largely associated with the translation of non-US denominated future income tax liability. We saw a strengthening in the Mexican peso exchange rate in Q2 and also a strengthening in the Canadian dollar exchange rate, and that did impact us in terms of foreign exchange losses and its associated impact on our income result.

In terms of G&A cost, relative to prior-year period G&A cost actually reduced by $1.1 million. By and large that's associated with lower travel expense and lower legal fees and consultancy fees. And also in the prior year period there was actually a provision expense booked for VAT receivables that were deemed uncollectible. Also when you look at our effective tax rate or when you look at the tax expense line item, it does look high compared to the income before tax result. And again, that largely reflects the non-deductibility of a lot of our Canadian domiciled expenditures.

Moving on to the cash flow statement. As Rene mentioned, cash flow from operations was positive and this actually marks the seventh consecutive quarter of positive operating cash flow. The official result was $13.7 million and that compares to $24.3 million in the prior year corresponding period. Now obviously that variance there relative to last year, that's largely due to the reduced revenue that we're seeing which is, again, associated with (inaudible) profile and the lower realized silver price that I spoke about earlier.

In terms of capital expenditures, it was a heavy quarter in terms of capital expenditure commitments. All in all we spent $21.1 million on capital. That capital expenditure for Q2 predominantly represents capital associated with underground mine development, the open pit pre-stripping activities taking place at Ocampo, our exploration program, but also some expansionary infrastructure projects such as connecting to the CFE electrical power grid and the various mill upgrades, predominately the Phase II mill upgrade that's now being fully commissioned at the Ocampo processing facility.

In terms of financing inflows, we had a net inflow of $4.6 million in terms of cash flow from financing activity and this was primarily due to the exercise of in-the-money options. So all in all the net cash flow result is a negative $2.7 million for the consolidated company.

One of the -- I guess the philosophies or the mantras that we tend to operate by, we want to operate as a fully funded firm. So having said that, we want to always be internally funded. So in terms of how we manage our business plans and the business, we predominately ensure that whatever we're generating in terms of operating cash flow is more than sufficient to finance our capital expenditures be it exploration development and also G&A commitments and what have you.

When you look at Q2, our net cash flow result was a negative $2.7 million -- this may be the first quarter in a while that we weren't fully funded internally. But notwithstanding, it was only [minorly] a negative result.

Again Q2 was very a heavily weighted period in terms of capital expenditures. I think going forward, as Rene spoke to, you will see our capital expenditure commitments really start to taper off. A lot of the expansionary infrastructure projects are now complete and commissioned and really the key capital requirements going forward are just completing our exploration programs and activities and just ongoing development in the underground and pre-stripping activities at the Ocampo operation.

Moving on to the balance sheet. In Q1 you may recall we reported cash of $25 million on the balance sheet. Well here now in Q2 as at June 30 we're reporting cash of $22 million, so we continue to maintain a pretty good cash balance relative to where we've come from in 2008. The drawn debt balance in terms of our syndicated credit facility, the draw debt balance as at June 30 was $37 million and that's no change relative to Q1, there was no drawdowns on any of our debt facilities because, again, as we say, we typically rely on operating cash flows in terms of dictating what we take on in our business plan.

So if you look at the net debt equation and if you allow for the capital lease that we put in place in Q1, we're now reporting net debt of $21.5 million which has a ratio to equity or market capitalization of very low gearing.

Also on the liquidity front, as Rene mentioned in his intro, we did successfully regularize the credit facility or received a waiver for that default that was reported in the first quarter of this year. So as a result of that we now enjoy full access to the remaining undrawn portion on the revolving line of credit. I think it was a pretty successful renegotiation in that there was no cash settlement required for repricing the facility to current credit market conditions.

In addition, we were successful in removing all production and cash cost covenants. There was no financial coverage ratios in terms of covenants for the second quarter of this year; there was no cash sweep provision. And in addition to that we're able to accommodate more flexible repayment terms for the remainder of the term loan. So all in all it was a very successful negotiation and one that really incorporates a lot more flexibility going forward.

One thing to note in terms of subsequent events, on July 2 we did make a net $7.5 million debt repayment on this credit facility, so as at July 2 the drawn balance on this facility is effectively now $30 million and in terms of our cash balance, the $22 million we're reporting at June 30, cash balance today is obviously a lot closer to the $12 million to $13 million mark.

We always target to be an internally funded business model and I really think it's important to note that that philosophy of only taking on what we can afford to finance with our internal cash flows, that's what really has allowed the Company to execute in excess of $100 million of sustaining and expansionary and exploration capital expenditures in the last 18 months, almost the entirety of which has been totally funded from our internal cash flows.

It's important to know that that's during a period where we continued to reduce that outstanding debt balance such that when you look at today's outstanding balance of $13 million, which is really quite a low balance, that's actually lower than 2007's year-end balance. So I think that's a pretty good result and talks well to our cash discipline when it comes to cash management. So that really wraps up the Q2 highlights, so with that I'd now like to pass you back to our Chief Executive Officer, Mr. Rene Marion.

Thank you, Scott. We'd like to move it over to the operator and Q&A.

(Operator Instructions). Ron Stewart, Dundee Securities.

Good morning, Rene; good morning, guys. A question for Scott. You mentioned that you made a debt payment on July 2 that was about $7.5 million and that you would have a cash balance as a consequence of $12 million to $13 million. In your press release it says that July 2 you made a $15 million debt repayment. Can you answer whether I'm reading that wrong or have something wrong there?

Ron, you're reading that correctly and in my presentation I said we made a net debt repayment of $7.5 million. So just to reconcile that for you, in terms of what actually took place is we actually repaid $15 million of our term loan facility as at July 2. But in terms of funding that $15 million repayment, what we did is we utilized $7.5 million of our existing cash reserves and we drew down on the revolving credit facility to provide the funding for the other $7.5 million. So we took $7.5 million of our own cash, $7.5 million from the line of credit which gave us $15 million and we paid that down on the term loan facility.

Okay. That's simple and I get that. The second question I've got is in respect of your underground operating in the go-forward plan. The guidance was that you'd exit 2009 this year at about 1,000 tons a day. Are you still on track for that? Are you going to be able to pull up the underground rate to about 1,000 tons a day sustainable by the end of 2009 as per your original plan?

We'll pass that over to Russell who is on the line.

Hi, yes. Look, we're pretty -- no, we're not pretty confident, we're totally confident in this. We've got drill tons waiting to be blasted, we've got another 47,000 in the process of drilling. In the next couple of months we've got another 70,000 stoping areas, 70,000 tons ready to drill. And by a slightly longer term, but before the end of the year, we'll have about another 55,000 coming online.

What we've done is we steadily and [disciplinely] set up our development and increased our development; you saw -- I already told you we've doubled our development and we're carrying on in that thing so we have a good bank of stopable areas in reserve. At the moment looking forward to the end of the year we're going to have something like 200,000 tons available for drilling. And that is not counting the ongoing development which we'll be doing between now and the end of the year.

So I think we're very well-placed. But the whole point is, yes, we're a bit late, but we're doing it in a disciplined manner, we're not going into it and rushing it, we're drilling like we're drilling the stopes off completely before we start blasting, this is more efficient for the drilling. It's just -- yes, we're a little bit late, but I'm totally confident that we will be there and we're certainly much better placed now than we were at the beginning of the year. I mean, we have a lot of tons prepared and locked out to drill and blast.

And the last question I have for you this morning is, in the open pit plan you continue to send certain of the mineralized material to waste. How long do you expect to continue to do that mining where you reclassify a certain amount of material as waste and waste it during the operating period?

Well, Ron, not for very much longer. The main reason we did it because of the volatility in the metal prices, gold was -- or silver was down to $9 and gold was below $800. Things seem to have settled down in the $[9.20] to $[9.60] range and silver is quite strong. So we'll be preferentially sending the better grades obviously to the heap leach and maintaining access to that lower grade material and put it on the heap as time allows. So I'd imagine if this trend in stability, metal prices continues then we'll start doing that probably in the fourth quarter.

Okay, thank you.

David Haughton, BMO Capital Markets.

I've got a couple of questions; maybe, Scott, financial ones to begin with. I can see that you've got adjusted numbers of $3.4 million compared to net loss of $7.6 million. I didn't notice in the discussion anywhere, how did you get from one to the other? I can see the $7 million of foreign exchange loss, but what else is there?

Yes, I guess probably the best document to look at, David, is the income statement. Really the key items -- there was a foreign exchange loss of $7 million; also in terms of net interest expense, paying interest on the credit facility offset by interest income on the cash balances, net interest expense was around $700,000 negative. And then also you'll notice we had tax expense of around $3.2 million. So if you add up all those items that's what gets you from the $3.4 million positive earnings before other items to the net loss after tax of $7.6 million.

And why would the net interest in the tax be considered abnormal?

I wasn't referring to them as normal. If you look at our financial statement there's a line item called Earnings Before Other Items. And so that's what I was quoting was earnings before other items of $3.4 million.

Oh, I see. All right. What was the stock option expense for the period?

That's a good question. Stock-based compensation expense in Q2 was around $1.2 million.

Okay.

That compares to around $800,000 in the prior year period.

Right, got it. The other thing was that I recall in the previous quarter the debt was moved from long-term to short-term because of the covenants, etc., and a prudent measure in that regard. It seems to me, just a cursory look at the balance sheet, that there's still quite a lot of debt still in the short term. Perhaps you could explain that and also what your forecast repayment schedule might be given the new arrangements?

Okay, sure. The majority of the debt is classified as short-term debt. And the reason for that is we're planning to fully repay this loan by the end of this year. So as I spoke to you on July 2, we made a net -- we made a $15 million repayment on that term loan facility. The capacity of that term loan facility is $30 million. So we've paid off $15 million, we're going to be paying down another $7.5 million on September 30. And then on December 31 we'll pay down the remaining $7.5 million.

So that term loan will be totally amortized before the end of this year. All that will leave us with is a revolving line of credit of which the capacity is $20 million and that's -- obviously that's what we look to roll over each and every year with the syndicate. So that's the reason that it's classified as short-term borrowings. And I think in answering the question I've also given you the repayment profile going forward.

Yes you have, thank you. Perhaps over to Rene. Just thinking about this new profile for the heap leach given that you have found the extra space and can defer the proposed expansion of the pad. What sort of grade profile should we be looking at for the balance of the year? Will we be looking at a 0.7 plus kind of profile or something below that?

Yes, moving forward -- well, as we ramp up you should probably be looking for a 0.7 and a 0.3 -- or a 0.7 and a 30 to 35 g a ton gold and silver.

Okay.

And then that will increase somewhat as the underground ramps up, David, and our cutoff grade to the mill in the open pit increases.

All right. And what are you expecting now into 2010?

2010 is, as per our discussions throughout the period, I don't have it immediately right in front of me. But the 2010 plan has not really changed too much with the exception that instead of starting at 10,000 to 12,000 in Q4 it will be throughout the year. So it will be that 0.7, 30 to 35 g gold and silver throughout the year.

All right. And what about for the profile of the mill production? I presume that we can expect to see improving grade through the balance of the year and into the new year given the plans that you've got with the long hole stoping, etc., in all of the areas that Russell had discussed. Is that a right assumption that we should be looking at gradually increasing grade, perhaps even getting into the 3.2'ish kind of level back end this year/beginning next year?

As long as you're talking --

Gold only.

-- gold only, yes. No, absolutely. And we're seeing it right now. When the underground tonnage is low, almost 50% of that tonnage is development and the development is down to 2.5, 3 m width so it's heavily diluted, and the stoping we bring down to -- downwards to 1.1, 1.2 m in width. So as the stoping tons come up, as we're seeing so far this month, the grade underground is coming up. And as the tons from underground go up the tons from the pit then have to go down and we do that by raising the cutoff grade.

So, yes, you're very correct and bang on there. And you'll see the grades should be coming to the plus 3 g and in the plus 130, 140 g, even north of that depending on the sequencing.

All right, great. Now to something different. Guadalupe, what's the status of that?

Okay, with Guadalupe itself, one of the conditions in our loan agreement is there are only a certain amount of funds we can spend on it. What we've done is in the fourth quarter we'll resume the engineering work on the standalone. But as you know, we've ticked up about over 30,000 hectares to the northwest and actually, yes, I can get a drawing for you that kind of shows that.

But the thing that's encouraging about that is the reason we did that is there's a 200 m wide -- in the range of over a kilometer long [stop work]. And we've, through a whole bunch of channel samples that we've taken just prior to acquiring the land, we're talking picking up over 2 m sample intervals, 14.5 g and 100 g silver in one channel sample, another 1.85 and 5 g, another one in the 1.12 and 2 g kind of ranges. So just right up at surface.

So we went back and did a bunch of panning in a lot of the -- in the rivers nearby and we got more representative samples from there. And so the guys are out mapping it and we'll be looking at, hopefully by early next year, drilling that to see how it would tie in to our development plan. It lies directly on strike to our Rosario vein, okay, to the north northwest and looks quite promising. We have mapped some of the major faults in the area and we're following up on that.

All right, thank you very much.

[Brent Stratton], [Robby & Kempt Investors].

Good morning, gentlemen. I've just got a couple just comparisons that myself and my team have done comparing you guys I guess with Alamosa and El Dorado, two great companies. I guess I looked at their numbers and looked at your numbers as far as your production. You're showing anywhere 150,000 to 160,000 ounces of gold, they're in the 160,000 ounces of gold.

Looking -- and I don't really know their total cost and I just -- I don't know what your updated total cost would be. But looking at their market cap, they're up near or over $1 billion, you guys are in the $800 million range. And then I see that you guys also have an I guess extra 8 million ounces of silver going through there. So I guess that one first, do you have any comments on that, Rene?

Yes, Brent. You're indeed correct. We do, like many of our peers, we're forecasting 150,000 to 170,000 ounces not any different from Alamosa. And if we did the same and took our silver as a byproduct credit we'd be in the 190,000 to 240,000 range. So that coupled with the much larger gold reserve than Alamosa has. We view that as the opportunity gap that exists out there. And they've done a very good job in this market and so has El Dorado and we believe that if people do take a look at gold only and do those comparisons they'll see that large value gap, Brent, and that's the opportunity for shareholders.

Yes, and I guess the El Dorado one is even more I guess -- stands outs a little more. You guys at the 160,000 ounce, although they're in the 340,000 ounce range, about twice. But the market cap, again you guys around $800 million, they're at $3.8 billion, 3.5 times more.

Well, absolutely. And if you look at next year we'll be doing approximately 200,000 ounces of gold at call it $750 an ounce taking byproduct credits, that's less than half their current cost structure. So we're working hard on getting the market to recognize that and move forward.

Like I said, we've been doing this in and out for a long time and just kind of looking at a point to jump back in a little more aggressively and just looking at you guys being oh so undervalued, the market not really recognizing this kind of thing. Do you see you've got yourselves catching up in the next couple quarters or where do you see it coming?

Absolutely, now that we've finished all this capital program, especially at Ocampo and gotten everybody back to work at El Cubo, now we can bed down and fine-tune the assets. Russell is probably the best one to answer this, but I'll put words in his mouth, that he sees continued improvements in production profiles as he fine-tunes everything, there's no more movement involved. And cash costs in parallel will start going down. I don't know if you want to add anything to that, Russell?

No, I concur with that. I mean, our focus now is we've done the major capital items, the major interruptions, now it's fine tuning and cost cutting. And cost cutting is a real opportunity.

Just a quick question. What are you guys projecting for your gold production for 2010?

Gold production is staying the same as what we had previously announced, 200,000 to 220,000 ounces of gold in 2010 and sub 150 cash cost assuming a 55 to 1 gold to silver ratio.

So that's the total, that's the equivalent (inaudible)?

No, that's just gold only and taking silver as a byproduct credit.

Okay, yes, because of looking at their numbers for 2010 on El Dorado now, they're looking at comparable numbers, not more, but with their market cap at close to $4 billion there's a real, real big -- I guess big gap there. I just wanted to point that out. Hopefully you can see it closing up.

Our team is focused on that, Brent.

Okay, thank you very much. Good luck in the third and fourth quarters. Take care.

Anita Soni, Credit Suisse.

One of the questions was asked by David about reconciling that $0.03. My other question was can you just go over the CapEx? Did you say that you increased your guidance for the year with that?

Our CapEx guidance for the year is $65 million-ish, that includes about almost $15 million in the various exploration, $12.3 million at Ocampo, about $1 million at El Cubo, about the same at Guadeloupe and then business development and working on this new area that we've got from the north -- northwest of Guadalupe.

We also are projecting about the pre-strip at Picacho approximately $19 million US, there's some about $6 million in underground development. In fact, we just -- Russell told me that they finally hit the San Amado vein underground. So that gets capitalized as we develop along that vein. The rest of it is the heap leach sustaining and some of the expansionary capital in the powerline.

Okay. And how much has been spent to date?

I'm sorry?

How much has been spent to date?

What's the total? 21? 36, so about 60% of our total.

And where are the major areas to remain to be spent?

The major areas is about -- right off the top of my head $6 million to finish up the drilling campaign at Ocampo; the $1 million at El Cubo for exploration; there's about $300,000 in capital additional to that at El Cubo changing out a few pieces of analytical equipment and upgrades in the mill. Development -- if I go off the top of my head, I think there was about $5 million or $6 million left and then just regular sustaining.

So $5 million or $6 million left in underground development, but the budget is $6 million?

Well, when we were taking a look at it, I'm just going by the recast, I don't know exactly in the $36 million how much was development. I don't know if Scott's got it there.

Yes, do you want a bit more of a reconciliation on the Q2 capital expenditures do you, Anita? I guess if you look at the first half in terms of our development expenditures, and this is companywide, we've capitalized around $6.5 million on exploration. And in terms of both open pit and underground development or pre-stripping we've spent around $18 million year-to-date.

Okay. And then -- I think actually that's it for my questions. Oh, no, sorry. In your 1,000 ton per day target for the underground by the end of the year, what should we use for a run rate for 2010?

Russell?

Yes, 15.

Average?

Yes.

Okay.

I mean, we're building to that. This is why we put the focus on the underground development. I mean ideally I would always like to have in excess of three months in hand ready to go and I'd really like to get to the stage where I've got three years blocked out. So it's going to be a while before I get there, but if I can do that then I have a great deal of confidence both in the grade and the reliability of the blocks.

What's the maximum capacity of the underground? I mean I have in my model I think it was 1,500 total, so I'm just --. That's a pretty steep ramp up if that's the case.

Yes, the ramp is not a problem, we can haul up it. But what we'd be looking for in time to come is to get that shaft working and that gives us a lot of logistics there. It takes all the transport off the ramp and delivers it direct of the mill, so it also saves a lot of logistics on surface -- transport logistics on surface.

So ultimately what's the maximum capacity of the underground?

I'll know better when I've done a lot more development. I'm quite happy with 1,500 now. Narrow vein you go beyond 2,000 it starts to get difficult.

The one opportunity, Anita, though is we do have two drills in Santa Eduviges and are getting in some positive results on that. So we might be able to have an opportunity there to have that second source of production maybe by 2011.

Yes, I'm sorry, but that's one thing I missed; I was focusing on Ocampo. I mean Santa Eduviges is directly opposite our primary crusher, it's a ramp that's capable of taking 40 ton articulated trucks. Some of the drilling we've got down there now but not bullish is extremely encouraging.

The other one that you can look at which is also very prospective and long distance is the Las Molinas. While it's an open pitable probably on surface, there are certainly underground targets there and that is also very, very convenient to our facilities and as the infrastructure and is a separate unit. So if you're going to take it as one extra unit or two extra units then there is considerable upside on the tonnage.

Yes, I think I was more driving at what is the (inaudible) the hoisting capacity, what's the limiting factor there right now?

Well in Ocampo or in total?

At Ocampo.

It's a ramp, I mean we could probably push that ramp to 2,000 but it would be pretty busy, which is why I would like to get this sometime in the future. We're doing some engineering studies now on seeing how we can utilize the ramp.

Okay, thank you.

Trevor Turnbull, Scotia Capital.

Hi, guys. I wanted to ask about the drop in the head grade at Ocampo that wasn't attributable to the gold and silver ratio. I heard you address the issue underground as it pertains to the higher development work. But if you talked about the open pit I missed it. And it looks like those grades, like just looking at gold grade alone, is also off about 25% relative to last year. So can you speak to that and give us a sense of guidance going forward?

Yes, it's reconciling quite well with the sequencing moving forward. Last year we were in a different part, Plaza de Gallos primarily, I think that was 90% of our production. The mill feed ore grade from the open pit is indeed lower, Trevor, because instead of providing the mill with only 50% of the capacity it's providing in excess of 80%. So we do that by lowering the cutoff grade. And you can see, if you remember in the bucket drawings in our presentations, we were always planning on sending mill ore to the heap leach -- well, we just reverse that and send it the other way.

So that's coming along. And the heap leach grade is pretty well in line to what we had planned for the lower tonnages. So things are performing well, I think Russell right now, in Conoco he's got some 30,000 tons of -- it looked like in the photo to me anyways, of mill grade material. So strictly a sequencing issue. I don't know if you want to elaborate on that, Russell?

Well, as you say, it's sequencing issue. We've got some good ore in Conoco and as we get into -- in the fourth quarter as we get into Picacho, what we know is there already from our model and the impacts (technical difficulty) drilling very optimistic -- confident shall I say.

So, yes, as you bring the underground up to that 1,000 ton a day run rate later this year, that's going to actually follow through into the open pit with less need for open pit ore, and so all the grades should come up. So maybe looking into 2010 when everything is running the way you like it, are we looking for grades like just pure gold grade from the open pit destined for the mill north of 3 g again?

Yes, if you go back to last year when we are at 1,500, 1,800 it was pretty consistent in the 3, 3.5 g and 140-ish kind of gram a ton for silver from the pit. So it will be the same kind of ratio.

Okay, great. Thank you.

[Marco La Casio], Equinox Partners.

Good morning. I wanted to ask a bit about the unit costs or per ton costs at Ocampo. Could you give me a sense of what you're seeing right now in terms of mining cost from the open pit and the underground and then also the processing cost for the heap leach and the mill? And especially as it relates to the underground, how do you expect that to develop as the throughput increases?

Yes, the unit costs we've provided to many people, all the analysts and that. We're coming in considerably lower on the unitary costs than the $1.40 a ton we gave guidance on. On the heap leach we're coming in range of the tonnage that we were saying and we anticipate going back to 2008 unitary cost there as we ramp back up to the higher tonnage. The milling costs are coming down as we speak -- just looking at July's costs and they're well below 20 and they'll continue to reduce once we have a full month on the power.

Administrative is about 31% below budget. And the underground we always said we'd start the year in the mid-60s and end the year with -- probably in the mid-30s. So as we see the tonnage increase in August and onward we fully anticipate seeing the cost underground go down significantly.

So given those metrics, just going back to the material from the open pit that was wasted in the quarter, it seems like if I just run the metal prices you realized and the grade in that material that that rock is worth something like $12 to $13 a ton. Why isn't it worth stockpiling that material as opposed to wasting it?

It's called real estate, I don't have any. When we stockpile the 0.5 up, okay, there's 250,000 ton stockpiled just across the street from the primary crusher. We try to segregate the lower grade material so that we could pick it up later on, but it was much shorter haul to put waste there and do that.

Once we're up at the higher tonnage then we get that 250,000 ton stockpile moved on to the heap, that frees it up then to -- if we need to stockpile -- if the heap leach is going full tilt and it can't take the lower grade we'll stockpile the lower grade material there. So that's why I said that if we look to stockpile it by the fourth quarter we'll start trying to do that.

If I can just but in there. One of the things we're doing is we're now -- made a waste pile near the crusher because it's about 300 m from the main pit in Refugio at the moment, we've altered the roads and shortened them considerably. We're now making that into a big stockpile. What we'll end up with there is a huge pad therefore (technical difficulty) low grade in the future, any low grade that we take out of Refugio Conoco [can be] stockpiled in that which is very, very convenient for the crusher; it's like 200 m from the crusher.

Okay, thanks very much.

Steven Green, TD Securities.

Actually all my questions have been answered. Thanks, guys.

[Gary Blandford], [Smeeger Investments Inc.].

My question is -- a couple of questions, one for Rene and -- a quick one for Rene and a quick one for Scott to finish up. I didn't know I was going to be the last guy, but sorry for that. Our company basically concentrates on silver, Mexico being a silver play, I often think Gammon is more a silver play than a gold play.

One of your earlier calls talked about valuations, but I mean I'm the big player in Silver Wheaton and Silver Wheaton will sell all -- they're not a producer but they do sell 16 million ounces of -- estimate 16 million -- at your ratio. You said it earlier in your call, Rene, 65 to 1. If I use that ratio they'll be selling about 16 million ounces of silver. And their valuation is four times, almost 4 times yours. So my question to you is, are you going to do 16 million ounces of silver this year? And what's your guidance for 2010?

Well, yes, our target for this year of pure silver is in the order of about 6 million to 6.5 million converting your gold then, yes, you would be in the 15 million to 17 million ounces of silver equivalent at a 65 to 1. And our cash cost would be in the industry norm, in the $6 range. Next year we'd be looking at about 9 million ounces of silver and that silver equivalent, you'd be looking at the plus 20 million ounces of silver equivalent with cash costs reducing further down below 5 ounces of silver equivalent.

So people tend to forget our leverage to silver out there. Prior to the collapse of the silver price in September onwards last year it represented about 45% of our revenue stream and in Q1 when it was down to a very dismal price it was representing less than 30% to 35% and of course it's rebounding quite a bit.

So we are quite leveraged to silver, Gary. And you're right, if you look at us as a silver company or silver equivalent or whichever the case may be, there's a lot of disconnect between the valuation of other silver companies. Even if you just look at the 9 million ounces of silver and took gold as a byproduct you'd be looking at negative cash cost, so the margins are huge.

Yes, so I'd like to say for my corporation where I'm looking for leading indicators to buy or sell, that's one. And thanks for clarifying that for me. Scott, on the other leading indicator, I'm always watching what executives are doing, buying or selling stock. I wanted to -- can you give me a quick thumbnail of what went through the last round there and what the executives' pay was, what they bought and what they didn't buy?

Yes, sure, Gary. You may recall, one of the key things we did back at the end of 2008, obviously number one strategy was cash preservation. So the senior executives of the Company, they agreed to take shares in lieu of cash in terms of their year-end bonuses. And most recently you've seen that we had the annual general meeting and the shareholders approved that overwhelmingly because obviously it really aligns management with the interest of the shareholders.

And so what you would have seen recently is, in terms of the executives' CD profiles, those shares have been credited to their account. But all executives do continue to hold those shares and we think it's a great initiative for the Company. Obviously from the Company's benefit it significantly conserves funds. Really, to be honest, the executives have a lot more skin in the game now, so definitely aligning them with the shareholders.

I think it's also a long-term retention initiative as well in terms of creating some additional handcuffs on the management team and ensuring that they're going to be here to see this through and really deliver in terms of unlocking a lot of the hidden value within the Company. But by and large I think all in all it was 700,000 shares that were issued and I think this was a great initiative in terms of ensuring that the executives really only do profit when the shareholders profit.

Well, it's good to see that you guys are finally -- you guys are into believing this thing and I know that you guys have been working hard at straightening up a few of these problems. What I can see is 2010 being a good year for you finally and hopefully you'll get there, guys. Best of luck.

Well, thank you very much.

Mr. Marion, please continue with your closing remarks.

Okay, well thank you very much, ladies and gentlemen, for participating in the Q2 conference call. And we look forward to the Q3 conference call. And with that I'd like to end today's call. Thank you.

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