Alamos Gold Inc (AGI) 2009 Q4 法說會逐字稿

Good morning. My name is Michelle and I will be your conference Operator today. At this time, I would like to welcome everyone to the Gammon Gold fourth quarter results conference call. At this time, I would like to welcome everyone that joined. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session. (Operator Instructions) I would now like to introduce Rene Marion, President and CEO. Mr. Marion, you may begin your conference.

Thank you very much, Operator. Welcome to our Q4 and 2009 conference call and webcast. The reasons for today's format of a webcast for the results followed by a series of presentations thereafter is that obviously there's considerable information disclosed this morning with the three press releases, MD&A and other documentation, so the format that we'll have today is we'll go through the Q4 2009 followed by a Q&A. Following that there will be a few minute break while we switch over and listeners will be able to go to the webcast that is placed on our press release today. So before we start, I'd like to refer everybody to the forward-looking information and I encourage the readers to review this at their leisure at a later time.

So I'll give a brief overview of Q4 and 2009 operational overview. I do encourage everybody to have cell phones off and when we do get to the Q&A period I'd ask people here in the King Edward to stand up to the mike, introduce your name, and followed by the questions so that listeners on the line can follow the conversation. After a few questions from the floor, then we'll turn it over to the Operator. This conference call will be over at 11:00, and then we'll make the necessary changes. The presentations that ensue afterwards will be approximately 30 minutes long followed by 10 to 15 minutes of Q&A. We do have a tight timeline and therefore we've allowed time after the webcast for the people in the King Edward to meet the executive management team and further discussions as we move along.

Joining me today is Scott Perry, our CFO, Russell Tremayne, our Chief Operating Officer, Chris Bostwick, Senior Vice President Technical Services, Peter Drobeck, our Senior Vice President of Exploration and Business Development, Dana Hatfield, our Senior Vice President of Finance and of course Anne Day sitting at the back.

So just a quick overview on financial performance. We had an extremely good and strong financial performance in 2009 and in the Fourth Quarter. We seen a significant increase in our operating margins in the Fourth Quarter at $615 an ounce, or some 56%. Our quarterly revenues are up 41% to $68 million from Q4 2008 and earnings before other items up 300% or $0.16 a share for the quarter. Primarily due to ForEx volatility net earnings are down 50% to $0.10 a share in the fourth quarter, however cash flow, a key metric for us from the operations are up some 217% to $32 million and our Q4 represents our best quarter ever for net free cash flow at $9 million and we ended the year with a strong balance sheet. The strongest balance sheet in the history of the Company at $129 million and we currently have available funds for business development of upwards of $153 million.

Our strong production and cash costs during the quarter and the year. Well, Q4 represents our best quarter ever, or sorry, in 2009, and at 55:1, Ocampo's average total cash costs were indeed below $400 an ounce. Some $87 an ounce from last year or down 18%. Also at El Cubo, at 55:1, our average total cash costs were below $600 an ounce or some $23 an ounce or 4% down from 2008 and this is all despite the additional costs incurred with a seven week labor dispute during the Second Quarter and obviously the ramp up in the third quarter.

On a consolidated basis our total cash costs at 55:1 were $430 an ounce. That represents an $82 an ounce or 16% reduction over 2008. And finally let's just look at gold. Q4 production of 37,000 ounces came in at $35 an ounce for gold, a margin of $1058 an ounce or 97% taking silver as a by-product credit.

Our expansionary program is nearing completion. As you all know, we self-funded a two year, $121 million capital program including exploration for the first time in five years. The mill Phase III expansion has been delayed and we have disclosed that and is now scheduled for Commissioning in early Q2. Since the installation of the three remaining cyclones was completed in mid March and since that time, the mill at Ocampo is running at 3100 tons a day already and with the installation of the new associated pumps in early April we anticipate slowly ramping up to our targeted 3300 tons per day. Our focus on the underground operations is showing itself very well. It has showed us to ramp up our run rate in March to over 1500 tons a day, so we continue to have strong underground performance at Ocampo, and let us not forget, we tied into the main grid in July 2009 thereby realizing our $20 an ounce reduction in operating costs associated with the cheaper power, and on top of this, in 2009, we launched really our first exploration program since 2004, expanding the initiative Companywide in 2010 this year and we'll be given a full presentation on that later on.

Let's look specifically at the underground. Underground averaged in December over 1400 tons per day and into Q1, we're currently running at over 1500 tons per day. We have currently 210,000 tons fully developed with 25,000 tons ready to blast. That's over a half month of inventory ahead of us. Long hole mining now represents 90% of total stoping and grades are moving to reserves grade as the proportion increases. And importantly too is Santa Eduviges. Santa Eduviges is not in reserves. We just finished completing our mine development plan and submitted an AFE to the Board of Directors last week for approval of its development and that indeed started development in mid March, soon to be our second underground operation at Ocampo.

So let me tell it you a little bit about Santa Eduviges. Well, in the second half of 2009 and well into 2010 we focused on a lot of the drilling on the first of five Clavos. Santa Eduviges actually lies to the North of the open pits not quite below the open pits and there was the historical mining there on the five different Clavos. We advanced the drilling far enough that we decided since we had delineated 360-meters by 240-meters in longitudinal that it was time to model, put together a development plan and start executing on it and in fact we've already ordered much of the equipment for it and have crews dedicated over there currently. The current plans are to develop Santa Eduviges over the coming quarters with initial production coming through in the second half of this year, contributing 250 tons a day in the second half of this year and expanding to 500 tons a day next year, just on the known Clavo itself. In addition, we'll be pushing ahead on exploration activities, we're just currently putting in the infrastructure required and we'll commence drilling again in the coming weeks.

Over to the open pit, Q4 and Q1 tonnages were adversely affected through mining of historical voids at the Picacho pit. These voids were known and some of them were quite substantial and on the bottom right hand side, on slide 10, you can actually see the voids in the open pit and in fact we are indeed below them. The voids are known to end at 1846-meter elevation and we're currently below 1820, but mining through that during the last two quarters has been slow. Some of these stopes were 25-meters in width, quite large so it slowed down mining rates, slowed down access to mill grade ore and as a result, we reduced our cutoff grade to about 1.6, 1.8 gram a ton, and that material went to the mill. Currently, we are also doing the laybacks on Refugio and Plaza de Gallos, the final laybacks, and that gives us security and two years of access to heap leach material going forward. Since being below the voids, Picacho, our overall mining rate this month alone has increased to 108,000 tons a day and Plaza de Gallos and Refugio and Picacho will be connected during the latter part of the Second Quarter thereby reducing the haulage rates by upwards of three kilometers for Picacho. Currently at Picacho, much of our ore gets hauled out from behind the hotels and that will cease into the second half of this year.

Over to slide 11. I'll just had a section here showing the Picacho open pit and indeed, during the Fourth Quarter and the First Quarter, we're higher up and as you can see here, quite a bit of waste in between the agile area and Picacho veins. Well currently we're at below 1820 and you see the confluence of the three main veins and Russell's team is seeing that right now with access to both ore mill grade and heap leach and as we descend, the benches become greater and greater with regards to ore liberation. So things are moving along quite well. It was a tough four or five months for the operating group but the difficult area is behind us now.

On to the Ocampo Mill. Slide 12. While Q4 productivity as we mentioned earlier was reduced to about 2900 tons a day excluding the three week period where the Mill 3 was down. And the reason for this is that the engineering firm that designed the expansion to Phase III had undersized the cyclones. Russell's team quickly sourced the five bank cyclone s, flew in two and had it installed by mid December, the remaining three were installed in mid March and since that time we're running at 3100 tons a day slowly ramping up. The larger pumps that will support these cyclones will be installed early in Q2 so we have full confidence that the large bottlenecks we had ahead of ourselves in Commissioning the Phase III back in the Fourth Quarter are now largely behind us, and with these cyclones ore tonnage can also increase but also silver recoveries can improve due to better classification on our growing size.

Our theme for 2010 is all about consistency. There's one thing that we in all honesty we have struggled with. Our 2000 initiative is to add redundancy in the processing plant in thickening, in leaching, filtering, and full automation. We'll have one thickener installed in operational within the next six to eight weeks, an additional CCD tank installed and operational by the end of the Second Quarter and the third and fourth filter which will provide us up to 33% redundancy will be installed by the end of the Third Quarter, all of this coupled with the automation on floculents addition, we believe will allow us to provide consistency on performance moving forward.

Over to slide 13 I'd like to discuss briefly the heap leach operation. Obviously in late 2008 we made a decision to cut back production to the heap leach, stockpile low grade, in order to conserve space. We retained a firm called Vector Engineering in early 2009 and reengineered the entire facility to a valley fill and in the past three quarters we've been affecting that change. As you can see in the top right hand photo we'll be installing or we have installed four wells and we'll be moving the whole heap forward into the Preg Pond area and this is only achievable because during 2009, we constructed and commissioned an emergency storm water pond around the corner and that will serve the same purpose as the Preg Pond. Of course, we would only be sending up Barron solution in rainy season and balancing our water needs accordingly. Also some additional things we did was to increase the crushing capacity such that 100% of our feed to the heap leach could be crushed through our three stage crushing facility down to nine millimeters. That improves leach kinetics and timing for recovery. All these changes allowed us to add an additional 10 million tons of storage capacity on to the current heap leach at $0.17 a ton. We're quite proud with that number because typical heap leaches would cost you $0.80 to $1.00, $1.10 for such an expansion and this allows us to move the capital requirements for the heap leach facility, Phase III expansion into 2011, 2012. So things have come along quite well and with the increased access to heap leach material by having access to three operational pits in the coming weeks, months, we're certain that our capacity to the heap leach pad of 10,000 to 12,000 tons a day will be met.

Over to the El Cubo Mine. Well, Q4 represented a record quarter for daily production of over 1876 tons per day. Of particular note, that's not only a 20% improvement over the First Quarter of the year but we've never mined in the history of the Company at this rate. Our strategy for 2010 is pretty straightforward. Eliminate the mining of backfill, increase the rate of in situ mining and mine at a rate that will fill the mill which can do 2000 tons a day, so our target is to get the in situ mining rate of 1850 or plus by the end of the year. What are we doing about the excess capacity in the processing plant? We signed a two year contract with Penoles, a subsidiary for custom milling of the ore and we've already custom milled a significant tonnage in both January and February trying to keep the mill running at a consistent 2000 tons it day. The revenue on that milling taken as a credit to operating costs going forward.

In addition at El Cubo, in September last year, we launched an aggressive exploration program, the first exploration program in over a decade and we've already had a lot of exciting results coming through there. We're focusing on 10 priority targets with three being worked on currently. We currently have three drills and I do believe we'll be moving in the forth drill shortly and again we'll be discussing that in much greater detail later on this morning. At Guadalupe y Calvo, well, 2009 as everybody knows expenditures were restricted and then by the end of the year, all covenants related to Guadalupe y Calvo were removed. It has a potential for an open pit underground mine. We are kicking off this month our drilling program once again. We are working on our stoping study. We have submitted five more composite samples for column testing and our idea is to try to get this stoping study completed by the third quarter of this year so we can tool it into our organic growth profile. In addition, Peter will be outlining later on today some of the exploration targets that he has on the expanded land position of 54,000 Hectares. That concludes my section and I'd like to pass it over to Scott Perry, our Chief Financial Officer, for a financial overview.

Okay, thank you, Rene.

As Rene touched on the Fourth Quarter results did represent our best metal production result in terms of gold metal production and silver metal production during the Fourth Quarter. We produced 36,829 ounces of gold and just shy of 1.5 million ounces of silver so that equivalency ratio of 55:1 came in with a gold equivalent production result of 63,500 ounces which was the best production quarter of 2009. This is a noteworthy result because it wasn't, there were three operational issues that impacted us during the Fourth Quarter and they were totally unanticipated. The first one was we received an unseasonal rainfall event during the month of October that really hampered operations across the site, most notably was the impact we have in our open pit production but also in terms of our heap leach production, and in terms of the heap leach facility itself, it really hampered leaching kinetics and we saw a five week impact in terms of the metal production we're realizing from this facility. We also had the issue of the underengineered cyclones at the mill facility that had to be changed out and also as Rene touched on at Mill Number three we had to take the mill off line at a 20 day period to change out the pinion gear there following a (inaudible).

So again, despite these unforeseen events we did come in with our strongest production quarter for full year 2009. All of these improvements we saw across all unit operations. We saw ramped up productivities, we saw improved cost efficiencies and all of this was underpinned largely by the various expansion initiatives that we had under way in 2009. I think two of the notable milestones were in the Ocampo underground operation in the month of December, we had ramped up productivity to a level we realized 1434 tons per day, as a monthly underground mining rate. This is actually in excess of 20% above our stated target for Ocampo, so that reinvestment program we embarked on in nearly 2009 is really delivering the targeted benefits and we're seeing that carryover into 2010 where these productivity continues to improve and this month most notable, we are consistently averaging around 1500 tons per day.

Likewise at El Cubo, we saw significant improvement in underground productivity which reflects workforce being converted to a seven day continuous work schedule and also implementation of new production incentive bonuses and as I mentioned across all unit operations at Ocampo we are seeing a significant improvement in our unit cost structure so that taken into account with this chart here on the bottom left hand corner, on the revenue side we're realizing record prices on our metal sales as well especially on gold, you can see during the fourth quarter we realized a gold sales price of $1093 per ounce so really generating very strong margins which is flowing through into the bottom line in terms of the amount of operating cash flow that we're generating so our capital expansion program is nearing completion and as you heard Rene mention this has been a program that we've been able to successfully fund internally. Moving on to the next slide, slide 18, these strong metal prices we realized that I spoke about as the gold price we realized was a 37% improvement over the prior year corresponding quarter and likewise in terms of the silver price it was a 75% improvement over the prior year corresponding quarter, so when you look at the revenues on our financial statements, total revenues for the quarter was $68.2 million which is a 41% improvement over the prior year period. This saw us in Fourth Quarter report a record profitability margin of $615 per ounce across our operations which also implies a 56% profitability margin as well. It was actually our sixth quarter in a row so sixth consecutive quarter of generating stronger and expanding profitability margins. Our earnings before other items, this is really the key metric we look to in our financial statement, when I reference other items that's your interest expense, interest income and foreign exchange gains and losses we typically like to look at the earnings result before those items and for the Fourth Quarter we're reporting earnings before other items as $0.16 per share which is at almost a fourfold increase over the prior year result of $0.04 per share. In terms of our cash flow metrics for the Fourth Quarter we're reporting record operating cash flow of $31.6 million and in terms of our capital expenditures we are seeing these begin to taper off throughout the year and that was definitely notable in the Fourth Quarter such that we reported a record net free cash flow result of $9 million.

In terms of bottom line result it was net earnings of $0.10 per share and some important aspects to take away from the balance sheet and our financing activities in 2009, most of these took place in the Fourth Quarter. Most of you will recall that we conducted an equity rate in October of 2009 and that equity financing generated a net $108 million so that recapitalized the Company on its balance sheet and also we restricted our credit facility and we have syndicated that facility such that it's syndicated between Scotia and Society Generale and that new facility has a capacity of $50 million of which the utilized portion is only $27.3 million so we still have a lot of available undrawn capacity there as well, and then I think most notable what I'd draw comfort from is on the balance sheet in terms of available cash reserves we finished the year with $129 million.

Moving on to the next slide on slide 19, in terms of the full year results, the 2009 earnings result was our second consecutive year of positive earnings, so definitely taking a lot of reassurance from that in terms of this two year turnaround program that we've been embarking on. We're seeing significant cost reductions across all unit operations particularly so at Ocampo and as I mentioned, that really is resulting in improved margins both because of the reduced cost structure but also being concurrent to a rising metal price environment. 2009 had some of our best ever annual financial performance metrics, particularly so in terms of the cash flow metrics. In terms of cash flow from operations, we generated a positive $78.2 million in 2009 which was a 40% improvement over the prior year period. In terms of our net free cash flow metric, it was a positive $1.4 million which is a $12.3 million improvement over the prior year and then again, referencing that metric that we look to earnings before other items, we generated a result of positive $0.22 per share in earnings which is a $0.11 per share or almost 100% improvement over the prior year period, so be it cash flow or be it earnings, you can see that the inherent profitability within our business model really has improved year-over-year. The strong cash flow that we've been generating the last two years has seen us fully fund all of our capital expenditure programs and it has been an aggressive capital expenditure budget especially given the various expansionary projects and the augmented exploration program. In the last two years we've funded $121 million internally.

And then lastly, just in terms of our G&A expense, you'll note that in this years result that there is a high number there in terms of G&A expense. Important to remember that there's approximately $8.4 million in that number that's associated with the restructuring that took place at our Board level and the severance cost for our previous Chairman who retired. Going forward, we are going to see that G&A number come down very significantly. We're expecting it to average approximately between $5 million and $5.5 million per quarter and we're pleased to see that presently taking place in the First Quarter of this year. Again, in terms of those balance sheet highlights there in the bottom right hand corner I think I've spoken to each of these but in terms of the year-end Balance Sheet finishing the year in a very strong position with $129 million in cash and as was mentioned undrawn capacity on our credit facility so really do have a lot of strong financial footing behind us.

Just moving on to the next slide, slide 20, just wanted to again just touch on the cash flow profile. It really is proving very robust at present, both assets are positively cash flowing at present and we expect this cash flow to continue to improve in terms of this profile going forward, especially so that largely, especially so given the Ocampo expansionary program is largely complete so a lot of the implicit capital expenditure requirements that come with that have really tapered off. If you look at the bottom half of this slide, just prepared a waterfall chart just to try and break down our cash flow statement and just illustrate the cash flow profile that we're reporting in 2009. You can see that we began the year with $3.3 million in cash and that was typical of the position that we were in during 2008 and the way we're running the business, we typically only had a working capital float of anywhere from three to $5 million so not a lot of room for error.

In terms of cash flows generated from both Ocampo and El Cubo, both those sites generated operating cash flows of approximately $110 million. We then had some various cash injections of say $19 million from in the money options that was converted throughout the year and had drawdown on our debt facility and we put in place two leaseback capital lease transactions that together injected around $28 million and then if you look at these red decrements, they illustrate how we appropriated those funds. In terms of capital expenditures, our capital budget for the year was a cash outflow of $63 million. In addition we applied $14 million to our nearly ramped up exploration program. In terms of G&A and other items and interest cost financing that was a cash outflow of $32 million and then again, we were pretty aggressive during the year in terms of paying down our debt facility and that was at decrement of $21 million, so if it wasn't for the equity financing we would have finished the year with approximately $21 million in cash but then as you can see on this waterfall chart back in October and what we thought was the most opportune time, we time the market in terms of what was our 52 week high at that point in time and our share price and also what was a record gold price window and we conducted that equity raise and that saw us really recapitalize the Company on our balance sheet as well and again finishing the year with $129 million in cash.

So from a leverage point of view, that cash balance represents approximately close to 10% of our market capitalization so in a very strong position and I guess just wrapping up, as I mentioned, our assets are both positively cash flowing at present and I think with this equity capitalization, we really are boasting a stronger financial position that this Company ever has been in and I think going forward we really have the ideal platform for executing our business strategy and for growing the Company. So, with that, I'll pass you back to Rene Marion, our President and CEO.

Thanks, Scott. Over to slide 21. I'd like to summarize a little bit on our strategy for this year. Starting up at the corporate level, we currently have a majority independent Board. We are recruiting new members to the Board including a new Chairman. This will be announced in April prior to the proxy going out in the circular, and the new Board members will be affected come the AGM. We're busy on business development opportunities. There's a lot of opportunities out there that need to be worked on and there's definitely one of the reasons why we move the executive office to Toronto and we've really expanded the exploration program Companywide to be above $30 million most recently announcing the acquisition of a new property.

For 2010, at Ocampo, the Phase III mill expansion will be commissioned in Q2 2010. Well, we are already installed the cyclones, we're already at 3100 tons a day, we're just affecting the last 7, 8%. On the underground we're targeting 1500 tons per day by the end of this quarter. Well, we're there we're at 1500 tons per day plus during the Second Quarter during March. Santa Eduviges in production by the second half of the year. Well, we started development in the first half of March and anticipate being -- developing ore by May. Picacho Phase II high grade ore access by the Second Quarter. Well, we've arrived there. You saw earlier in one of the slides that we're at the confluence of the three main veins there and that will continue ahead of us throughout this year. The heap leach expansion Commissioning by the beginning of the Second Quarter. We've largely completed all of the construction and we're moving steadily forward on expanding on the stocking rate now. The mill redundancy program will be fully affected by the end of the Third Quarter. Most importantly though, the thickener will be commissioned in the Second Quarter, the additional leach capacity commissioned in the Second Quarter, the mill automation commissioned in the Second Quarter, so the lion's share of all of the redundancy program will be completed this quarter with only the fourth filter to be installed and commissioned in the third quarter. I'd like to highlight to the audience and listeners here that that filter just provides us 33% excess filtering capacity. It is really designed so that we can do maintenance on our filtering plant without affecting production.

Over to El Cubo. The target is to hit steady State in situ mining of 1850 tons per day by the end of the year. In the meantime, custom milling or toll milling Los Chorros ore during the first half of the year and into the second half of the year. And overall, on Guadalupe y Calvo, we'll be moving that as fast as we can for completion of the stoping study by the end of the Third Quarter and we'll be reviewing the impact of that study with the markets likely early in the Fourth Quarter. We're busy mobilizing drills, we believe that the first drill will be turning within the next week to 10 days and the metallurgical test work continues on at Guadalupe.

So before passing it over to the floor, because we have an audience both on the phone and on the floor, I'd like to remind everybody that we have a microphone here in the King Edward on the floor. We'll go to the floor first for Q&A. I'll ask you to introduce yourself first and then pose the question, and after some Q&A here on the floor, we'll then turn it over to the Operator to take questions from the phone. After that, then we'll set up so that we can do the webcast for the additional presentations. So, with that, I'd like to conclude by opening it up to the floor here in Toronto and the Management team is available to answer questions with regards to the Q4 and 2009 results.

Good morning. It's Tony Lesiak from Genuity Capital Markets. A question for Scott. In terms of the reserve reduction, can you talk to the changes in depreciation for the next few years?

Yes, sure, Tony. Currently, we're recalibrating our budget models for next year but obviously you are going to see a reduced mine life at Ocampo in terms of the open pit operations and you're right, there's a large portion of assets that are amortized or depleted on a units of production basis so in terms of that non-cash cost per ounce typically we've averaged around $180 per ounce and I think going forward, I'm just shooting off the cuff here, I'd have to go back and look at the models but you probably will see a 15% increase in that number.

Are there any tax implications?

No, there is no tax implications, no.

Okay. And I guess a question for Russell or Rene. In terms of the underground grades at Ocampo, can you talk to what you've seen over the last few quarters, maybe talk to what the grades were in Q3, Q4, and what they look like in Q1 if you can?

Certainly, Tony. As the scoping increased, if you take a look at the first seven, eight months of last year, I'd say about 80% of our production was from development so the grades were naturally quite low. As we ramped up production in the fourth quarter and into this year, come very very close to last years reserve grade, we're looking at about an average of anywhere from 13 to 18% dilution which reconciles well to our modeled 15% average. We will be discussing later on today on the reserves, the reserve grade does go up on the underground and it's really from our exploration program underground this year so you'll see continued grade improvements in the underground through 2011 and onwards.

Just a final question on the reserves. Actually more of the resources, for Santa Eduviges. Could you give us a break out of that in terms of tonnage and grade?

We'll be doing that shortly. Currently it is not broken out as a resource. It's not in reserves as well. If I recall off the top of my head, there is about a quarter million tons in one of the veins and we can't disclose at this point because it's not in that 42.101 compliant any of the grade but we'll be coming out with that to give you an idea. There's a series of six veins there and our AFE submitted to the Board was just on the one vein that we're currently developing and that had a double digit rate of return.

Okay, thanks very much.

Thank you, Tony.

It's Dan Rollins from UBS. Just going back to what Tony was talking about on the reserve mine life. What type of write-off are you expecting to take in Q1 because of the fact that you're going to basically write-off a portion of the open pits, give another decreased reserve life?

Yes, one of the external audit requirements is you have to do impairment testing on an annual basis and so obviously we conducted that impairment review at both Ocampo and El Cubo and on a property wide basis there is no impairment sensitivity at Ocampo or El Cubo and at Ocampo we still had significant head room.

Okay, thanks. Just on the open pit reserves, the open pit shell has actually moved up versus usually when you see higher gold prices usually moves down. Looks like it's about an aspect of you drilling in deeper and finding the reserve grade, the grades not enthused to be included in reserves, how much of the open pit trend have you actually drilled off consistently right now or are you expecting maybe as you drill farther off into other pits you haven't drilled that you're going to have a similar occurrence next year?

I'll answer the first part and then I'll pass it over to Chris. Chris is probably in a better position. Yes, indeed the pit did shrink but then a lot of what was modeled as waste came in as ore. Naturally a lot of the low grade and a lot of the waste was converted. What we saw in a lot of our drilling is that the further we were projecting away, the tighter the wire frames were getting and the lower grade was getting downdip, so that's what drove the pit floor up but to answer your second part of the question I'll pass it over to Chris.

Yes, we more or less fully drilled off the pit to 25 by 40 meter spacing in all areas and we saw there's one diagram in the package that we're looking at later on where we're seeing the pit floor raise up a little bit. That's not across the pit in other areas in the PDG, we've actually seen a deepening of the pit but that was just one section through Picacho.

And then just quickly on the underground, it seems like last year was the sore spot and this year it's now become the bright spot running at over 1500-ton a day. Russell, how comfortable are you that you're going to be able to maintain a level above 1500 and are you sort of targeting a new level beyond 1500?

What we're looking at is maintaining 1500. I'm totally confident of that in Ocampo, we're looking at maybe 200, 250 tons a day coming out of Santa Eduviges, and then next year 500 tons a day so we're looking sort of longer term of going to 2000 tons a day and I'll go into it when I do my little bit. We've got various options there but we're looking at building in contingency. Great, thanks.

Yes, hi, it's David Haughton, BMO. You touched on a little bit of a question I had. Santa Eduviges is an addition to your 1500-ton target from the underground?

Yes.

What sort of grade are we looking at for this? Is it going to be consistent with what you're getting from the current underground or is it more or less?

Slightly lower.

And what sort of CapEx--?

One thing on that though, Tony. It's slightly lower but it does lend itself to bulk mining. More so than the rest of Ocampo. Consider we're doing very successful long haul in the narrower stuff, this does seem to be a lot wider.

Okay, so long haul stabilizing?

Oh, definitely.

But wider width so it's much easier than what you've currently got?

Yes, more productive.

So what are we talking about three, four, five meters in width?

Three to eight meters.

One thing to highlight as well is that Santa Eduviges is located right in front of the crushing facility. You won't see the rehandle costs that are associated with the Ocampo underground, so Ocampo gets hauled to surface, put on the patio, and then it goes through grizzly and then it gets picked up again, some of it goes to the crushing plant, some of it goes to the mill, a lot of mish-mash handling but none of that will happen. We'll have our trucks go straight to the crushing plant.

What sort of CapEx is required to bring it on stream by mid this year?

I think the AFE was just over $2 million if I recall correctly.

Just for additional mining equipment and the capitalized development will be minimal, we're just driving our ramp down to the first horizon.

I presume once we move into the longer looking section, we'll be talking about CapEx and where that all fits so I'll save it for later. Scott, for you, getting to your $0.16 adjusted, I can see from the discussion how to get to $0.14 so you had your net earnings of $0.10 you had an FX impact of $0.01, you had your future tax of $0.03 that gets to $0.14, what's the missing $0.02.

So if you look at the financial statement, David, there's a line item in our profit loss statement called earnings before other items and it's simply that result divided by the applicable shares outstanding for that time period.

But how do we get to that result?

So you take the net earnings result, you add back the current tax expense and add back future income tax expense, you'd add back net interest expense and then you'd add back the foreign exchange gain and loss.

Oh, okay so net interest then?

Yes.

Okay, and I'm not quite sure whether it's now or in the next session having a look at Guadalupe, scoping, they're saying that there's potential for it to be open pit and underground or smaller scale Ocampo effectively. What sort of start up time frame do you see ahead of us here?

That one will be detailed obviously in our scoping study and we're still unclear whether or not we could have it up and running by the end of 2012 or 2013, so at this point in time, we've deferred it to 2013 pending the result for the analysis. The key one with the open pit side, you're looking at a two to three year open pit life so we would be actually just contract mining it and it really depends on the availability of contractors in Mexico at that time. That would allow us in two to three years to ramp up the underground.

Okay, and at El Cubo, you currently have some total milling coming through. What sort of size of dollars are we talking about as far as the credit here? Is it a couple of million, tens of millions?

No, no, it's about $1 million.

And do you expect that that would just drop off and you'd be able to lift the ore throughput from the underground to be able to fill?

Yes, our strategy is to try to get to 1850 plus tons of day of in situ ore. The strategy, if we're accelerating the toll milling of the Las Torres ore is then to try to establish a stockpile surface to backstop the operations once the Las Torres ore is finished and that gives us time then to continue the ramp up of in situ. Having said that there is more than 50,000 tons of Las Torres ore available that would require further negotiations with Penoles and it's really dependent on where we're at on our ramp up at El Cubo.

Okay, thank you.

And with that, perhaps I'd like to pass it over to the Operator to take some questions on the phone.

(Operator Instructions) I have no questions at this time.

Okay, well how about if I put it back over to the floor?

Okay, so it's Anita Soni from Credit Suisse. Just a quick question on your 2011 guidance. What's the main source of production reduction? I can see your heap leach is down about 2000 tons per day from last years guidance, but that accounts for probably about 25,000 ounces of the reduction versus the 75,000 or 60,000 ounces I'm seeing?

Yes, the primary reduction is the access of high grade in the open pit, okay, which goes both to the mill and to the heap leach. So when you take a look at that presentation that Russell will be going through in detail, it's totally in effect of grade to the mill.

Okay.

Good morning, it's Trevor Turnbull from Scotia Capital. I just wondered given that you seem to be having success increasing reserves underground at Ocampo, grades are coming up, reserve tonnages is also increasing. At the same time, the mine life is getting a bit shorter in the open pit. Can you speak a bit to the longer term strategy, the mill has been increasing capacity over the last year or so and the emphasis looks like in terms of mine life increase it's going to come more from underground so how is that going to mesh going forward? Are you looking at expansions beyond the three year guidance you've given for the underground capacity or what should we expect to keep the mill full?

Yes. It's a good question, Trevor. First of all on the exploration front, we're pretty excited with two potential open pit targets in Santa Librada which lies to the South about 800-meters to 1000-meters of the main PGR trend and Peter will be talking about that. Also up to the Northwest, at Sierra, Colorado we've got three large targets up in that area so we obviously have time to work on finding additional mill feed grade with existing open pit targets. Meanwhile, this year, Chris will be identifying and discussing a little bit more on the underground reserves but we're pretty excited. When we started two years ago, we were looking at Ocampo underground being restricted to six veins and about an 800-meter footprint. We've now extended quite a ways to the Northeast, Southeast and due South and the fact (inaudible) which has come back with spectacular widths and grades has headed due south to the Picacho Southeast area which looks like it might have underground potential as well, so obviously throughout this year we'll be working on those new targets of underground and be looking at expanding perhaps underground production into the future. Right now we've kept life simple, 1500 tons a day the main underground, 250 in the second half of the year Santa Eduviges. Having said all of that, we do have the shaft that has never been commissioned and we do have the pace backfill facility that we'll be looking at commissioning by the end of the year and that will lend itself to higher productivity, eliminating a lot of the haulage up in the decline and reduced congestion, so as I always said that I would only listen to Russell's request of commissioning the shaft if he gave me two subsequent quarters of over 1200 tons a day so he's getting close to the cusp of it so I've got to prepare my Board and I might have to go talk to them again for that capital project. Operator? Is there anybody on the line?

No, there still are no questions at this time.

Well, with that, ladies and gentlemen, I'd like to conclude today's Q4 2009 year-end conference call, and we will be moving to our webcast part of the agenda. We have three presentations, the first one on reserves and resources by Chris Bostwick, three year guidance by Russell Tremayne, and exploration by Peter Drobeck. Each presentation will last 20 to 30 minutes followed by a 10 to 15 minute Q&A, and we really hope that we can make this interactive. Obviously the whole purpose to the team being here is to be able to delve into any detail either subsequent to the presentation or after the whole presentation is completed. The Q&A will be restricted to the floor here. We do have to make a few changes in the coming minutes as we switch over. Listeners on the conference call can go to our website and get the access to the webcast from our press release. And with that, if we don't mind, I'd like to adjourn for two or three minutes while we make the necessary changes. Thank you very much.

Okay, this concludes today's conference call. You may now disconnect. For those on the webcast, please stay connected and the Analyst Day presentations will begin momentarily.