Alamos Gold Inc (AGI) 2010 Q1 法說會逐字稿

Good morning. My name is Tracy and I'll be your conference operator today. At this time I would like to welcome everyone to the Gammon Gold first quarter results conference call. 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). Mr. Rene Marion, CEO, you may begin your conference.

Thank you very much operator and welcome everybody to Gammon Gold's first quarter financial results. Before we begin, I'd like to remind everybody that this presentation does include forward-looking information, and I encourage all of the readers and participants to look at that forward-looking information statement. To start off, I'm joined today with Scott Perry, our CFO in Toronto, Russell Tremayne, our COO in Chihuahua and Anne Day, Investor Relations Director.

I'd like to start off by saying this morning we did file a restatement for 2009. There was a positive statement, approximately $6.5 million positive on earnings. It deals with a four-year legacy item, dealing with the ForEx adjustments made with regards to the acquisition in 2006 of Mexgold and Scott Perry will be expanding on that during his discussion. It does not have an impact on the pre-adjustment earnings or operating cash flow. I'd like to stress that this is something that's been missed for 16 consecutive quarters by management, but also by the auditors and unfortunately, this is a similar situation that many firms are experiencing at this point in time.

With that, I'd like to move over to our production and cash costs. As everybody knows on the call, Q1 was impacted by the voids at Picacho. Those are largely behind us, there's no material voids ahead of us and we can see that with our productivity. In fact in the open pit at Ocampo, we averaged over 105,000 tons a day in the month of April and that's largely due to the fact that the voids are no longer there. Our total cash costs for the quarter were $490 an ounce, despite the lower production. And I'd like to remind everybody on the call that a large portion in excess of 50% of our cash costs are fixed and that's largely the reason behind the increase in cash cost.

On an operational highlight, I would like to stress as well at the underground at Ocampo, it is performing at 1500 tons a day in March and continued on in April and into May. Things are going quite well with regards to the productivity in the underground. The mill expansion, the installation of the cyclones was completed. We're currently just ramping up into the 3300, 3400-ton a day range at Ocampo, averaging so far this month just under 3300 tons a day. The heap leach reoptimization is completed and we're currently ramping up between 9,000 and 10,000 tons a day on to the heap leach. With the installation of a new gear box, we'll be ramping up beyond that, and we are well on our way on our mill redundancy program and I'll touch base on that a little bit later.

At the corporate level, we have appointed four new Board members here in Montreal approved by the shareholders. Four new independent directors bring a little over 125 years of mining industry experience, so really it bolsters the Board side. We've also announced recently the options on Venus which is a property north of Ocampo and west of Pinos Altos, having some really good surface samples along that and demonstrating the potential extension of the Pinos Altos belt. And as well as the Mesquite project and Zacatecas in the Camino Rojo and Penasquito belt down there. We finished a lot of work already and we'll be starting to drill within the coming weeks. And we're well under way on our exploration program that's Companywide.

If I go over to slide seven, just as a quick financial overview, Gammon continues to operate with strong margins, well over $600 an ounce. We have a strong operating cash flow, positive $17 million for the last quarter. It's our tenth quarter of positive operating cash flow. Unit costs remain extremely strong. Despite negative adjustments on ForEx we are on a unitary basis beating our own projections. We'll be leveraging that on our cost per ounce basis as we start ramping up our production profile. Revenues have obviously increased substantially, 16% over the same period in 2009. We had revenues of about $55 million. Earnings of $0.09 a share or $8 million, up 174% over the same period last year. Our net earnings were $1.8 million and that was negatively impacted by a $3.9 million increase in income tax expense and a $5.2 million change in the foreign gains and losses. Cash position is $125 million. We remain at $23 million undrawn on our Credit facility and we have a extremely strong balance sheet.

Over to slide eight. The underground is performing extremely well. We averaged 1377 tons per day, 157% increase over 2009 same period. March was 1525 tons per day, continues to perform well into April and again into May. We remain with over 200,000 tons fully developed. We're operating in 12 stopes, of which 10 are long hole and long hole represents approximately 90% of our stoping production. In fact, our seven long hole drill has arrived on site and is being deployed as we speak. We'll be able to increase sustained and perhaps increased production going forward.

We're currently developing Santa Eduviges. We're approximately 350 meters in since the Board approved the development of Santa Eduviges. We'll be in ore developing by the end of this month, targeting a production rate of 250 tons per day by the second half of this year and increasing by a further 250 tons a day next year so averaging about 500, 600 tons a day in 2011. We'll also be working our way east on Santa Eduviges, going for our second [clavos] which is Madonna. This month also with the success of our drilling program at Belen and Santa Juliana, which we released already to the market. Those are currently being developed. We're approximately 20 meters away from both, from Belen and Santa Juliana. And we anticipate being on ore early next month, and be developing and exploiting those new discoveries in the second half of this year.

Over to slide nine. On the open pit side, things are going extremely well. I mentioned earlier, the voids are behind us now at Picacho. We're at the confluence now, the three main veins. A significant percentage of the bench itself is ore now, over 30% of the Picacho, Adularia, and San Ramon veins. In the first quarter, we averaged 94,000 tons a day. April, as I mentioned earlier, 105,000 tons a day. Russell and the team are targeting being in excess of 110,000 tons a day this month. The pre-stripping is quite advanced at Picacho, [Conoco] and Refugio. We're about 2.2 million tons ahead of plan already this year. At Plaza de Gallos, final layback has been completed. We're in ore there. At Picacho, we anticipate finishing the pre-stripping and Phase I and II by the end of this quarter.

Our operating strip ratio continues to decrease. As you all are aware, our strip ratio life of mine is 2.3. Our operating strip ratio was 1.9 this past quarter, down from 3.67 in the same period of 2009. Plaza de Gallos' access road is being worked on. We anticipate having that completed in the second half of this year and that will reduce the halls going forward for Picacho.

Over to slide 10, on the mill. The Phase III mill expansion work is completed. The cyclones and pumps have been commissioned. We've been ramping up production from the first quarter average of 2900 tons a day, which is in fact a 28% increase over the same period in '09, but we're running at just under 3300 tons a day. Recoveries are performing well. And with the commissioning of the CCD7, the thickener, at the end of this month, we anticipate getting our silver recoveries back up to where they historically were. Our leach tank, which is in addition to our circuit, will be commissioned by June with mill automation and the fourth filter being completed in the third and fourth quarter respectively. We're pretty pleased with how the commission is going now on this expansionary work and we are really pleased with how the mill redundancy program is moving forward. Extremely important with regards to Picacho, as we've gotten past those voids and we're getting more and more access to mill grade material, extremely important that we coincide these modifications to the mill with that increase in grade.

Over to slide 11 on the heap leach at Ocampo. The construction work is completed. We've moved the stacker down to the lower end and they're working on filling in the preg pond area. You can see that in the photos on slide 11. We're currently just under 10,000 tons a day, averaging in the first quarter at 7300 tons a day. And we anticipate by the end of this month being able to get to our target range of 10,000-12,000 tons a day with the addition -- or with the installation of a new gear box.

Over to El Cubo. We averaged in the first quarter 1400 tons a day and the reason why it was lower than the fourth quarter, two reasons. One, we had with the collaboration of the University of Guanajuato we kicked off a mine site safety training program. We did a couple thousand hours of training with our miners, very similar to what we have in Canada in the common court. That blitz took place. Also in March and into April, we've eliminated one contractor, the largest contractor that was doing mining for us. It was this firm was the most expensive contractor. We've hired on 155 of his employees, terminated the contractor, had to do the induction and training of our guys and redeployed them in Peregrina. Already in April, we are back to 1700 tons a day and that continues on this month as well. We remain steadfast in targeting the 1850 tons a day by the end of the year mining in situ ore.

During the ramp up of production of in situ mining at El Cubo, we have this toll milling agreement again with Penoles, where we have access to 50,000 tons that we top up the mill for 2000 tons a day and take the total milling fees as a credit to operating costs. I'd like to highlight that at our Board meeting two days ago, the Board approved the development and exploitation of the Capulin Dolores deposit, the discovery made in the latter part of last year, early this year. It has a 58% rate of return and we're currently looking at ways to even accelerate the development of this new discovery.

Right now, it looks like it will be in the latter part of the second quarter of 2011 that we will be seeing consistent ore feed to the mill. We are looking, with Russell's team, at trying to accelerate that by a quarter or two. But pretty exciting that the first exploration target at El Cubo is quite positive, very robust economics and adding to it. Already in the last three or four months, we've made the decision to develop things like Santa Eduviges, things like Dolores-Capulin, and Santa Juliana, all these new discoveries outside of reserves and outside of resources. With that, I'd like to pass it over to Scott Perry, our Chief Financial Officer for him to review the financials.

Okay. Thank you, Rene. Good morning, ladies and gentlemen. Just starting off on slide 14 in this presentation deck, as Rene mentioned, today, early this morning the Company has refiled and restated its 2008 and 2009 financial results and associated statements, and management discussion and analysis materials. The root cause of this restatement was the original acquisition accounting treatment that was established on the Mexgold acquisition back in August of 2006. There was an error in this original acquisition accounting and this was discovered during the most recent quarter. When we look at its flow through impact, the impact is being deemed material which is what's necessitating the refiling of these financial statements.

As Rene mentioned, this is obviously very disappointing for current management who were not on board in 2006, and also due to the fact that the 2006 financial statements were subject to the standard statutory external order process, during which time and subsequent years this area had never been identified until most recently. This area as I mentioned -- this area is associated with original the acquisition accounting. And we have since determined that the future income tax liability arising on the acquisition of Mexgold Resources was not appropriately translated into Mexican pesos at the time the transaction occurred. The entry itself was recorded in Canadian dollars, as the purchase occurred in Canada. These balances were subsequently translated into US dollars. The future income tax liability arising on the acquisition was not appropriately translated into its Mexican peso equivalent at the time of acquisition, but rather it was recorded in a Canadian dollar equivalent. The error was in the original acquisition entries only.

All subsequent accounting treatment has been correct since. What we're looking at in terms of the error is really the differences in the exchange rates between the Canadian dollar to the US dollar and then the Mexican peso to the US dollar over that time period since August 2006. We have corrected this error with these restatements. The cumulative error over that time period has resulted in a $14.1 million increase in our 2009 year-end retained earnings and a corresponding decrease in the Company's future income tax liability account on the balance sheet. Put differently, in terms of the most recent full-year 2009 earnings results, the revised statements now reflect a $6.5 million increase in full-year earnings and a corresponding decrease in the full-year non-cash foreign exchange losses. I must urge participants on this call and users of our financial statements to please note that these changes are of a non-cash nature and they do not impact the Company's cash position, earnings before other items or operating activities.

Moving on to slide 15, during Q1, during the first quarter, as Rene mentioned, the Company produced just shy of 52,000 gold equivalent ounces. And as Rene mentioned, Q1 was a quarter where we were impacted by the historical voids in the Picacho open pit. As a result of these voids, were more significant than what our geological model was projecting and that had an impact on volume and grades. And as a result of that, we had to reduce our cutoff grade in terms of classifying what material gets routed to the mill or the heap leach. And that subsequently impacted our production results for the quarter as well. The good news is that these areas of historical mining activity have now been fully mined out so we're now conducting mining activities on that horizon or elevation, such that we do not expect to encounter any voids going forward. It really was a first quarter specific issue that is now behind us.

As Rene mentioned, the number of milestones during the quarter, the Ocampo underground is now being ramped up to a sustained mining rate of 1500 tons per day. The open pit operations continue to perform extremely well, we've been averaging productivity in excess of 100,000 tons per day. I think also an important milestone on the capital expenditure front is that we've now fully funded out Ocampo capital expansion program to be at the Phase III mill expansion or the capacity expansion in the heap leach.

In terms of cash costs for the quarter, we came in at $490 per ounce as a cash cost. Again, we are generating significant margins and that's really being underpinned by the significant unit cost reductions that we're achieving in most unit operations at Ocampo. It really does demonstrate that the operations are running efficiently on the back of these capital investment programs that we have put in place. The one adverse impact during the quarter was the strengthening of the Mexican peso; 60% of our operating costs denominated in Mexican Pesos, so this is a sensitivity for us. During the quarter, the average exchange rate that we realized was 12.7 pesos to the US dollar. And that compares to an exchange rate of 13.7 in the prior year corresponding period so that did have an adverse impact and that actually inflated our cash cost by approximately $22 per ounce during the quarter.

Moving on to the next slide, on slide 16. In terms of the bottom line financials, it was a strong quarter. We again generated our tenth consecutive quarter of positive operating cash flow and we actually generated positive earnings of $0.01 per share. The key metric that we look at is our earnings before other items, which is earnings before net interest expense, foreign exchange gains and losses and future income tax expense. When you look at our earnings before other item result, we generated a positive $12.6 million, which represents approximately a four-fold increase over the prior year corresponding period. The operating cash flow result was a positive $17.1 million. Again this demonstrates that our internal cash flows continue to remain robust. So much so that since the first quarter of 2008, the Company has fully funded capital expansion or its capital expansion programs and ramped up exploration programs. In the last five quarters alone, we've fully funded $90 million of capital investments.

One of the items that we've been targeting going forward is a reduction in our corporate G&A costs. And participants who are familiar with the Company will know there's been a lot of restructuring work that's been embarked on in that regard. It's pleasing to see that our G&A expense during the first quarter has been reduced by $3.9 million versus the prior year corresponding period. In terms of the balance sheet, from a Treasury perspective, we remain in a very strong position. We finished the quarter with $125 million of cash on the balance sheet. In terms of our one standalone credit facility that we have in place, there has been no draw downs on this facility. And in actual fact, we still have $23 million of available capacity on this facility.

Moving on to the next slide on slide 17, just begin on cash flow. As I mentioned, cash flow from operations was a positive $17.1 million. It does represent the tenth consecutive quarter of positive operating cash flow and we've seen very strong growth in our margins. That does reflect the conscious decision on the Company's behalf. We remain fully unhedged on gold and silver and we think that's a good position to be in at present, given the long-term fundamentals that we see for precious metals pricing.

The robust cash flows and inherent cash flow margins, obviously this has been achieved through the improved operations. We're seeing very good productivity, very good cost efficiency in all of the unit operations at Ocampo. That's obviously on the back of all these capital investment programs that we've now fully executed on. Our cash flow profile continues to internally fund all of our capital expenditure requirements and also our expanded exploration program. The Ocampo expansion program is completed as now. And as a result of that, we expect these margins to be well underpinned going forward. This, together with the strong production growth profile that we're targeting for this year and into next year, places us in very good position given that we already have $125 million in cash on hand and undrawn credit capacity. Our debt to equity gearing level is a key metric that we focus on. Presently, our debt to equity gearing is less than 5%. Again it's a very strong position and I think ideally we created a very strong financial platform to now continue executing our business strategy, but also in terms of pursuing growth opportunities going forward. With that, I'd like to pass you back to Rene Marion, our CEO and President.

Thank you, Scott. I'd just like to briefly update everybody on the exploration program that we've embarked on this year. It is in the order of 15% of our revenue at $26 million to $30 million. We're pretty excited about it and it is progressing quite well. Over to slide 19. At Ocampo itself, we've got a pretty aggressive plan going on. From surface, we're drilling Santa Juliana, Santa Lebrada, and two other targets. It's progressing quite well. Underground we're focusing currently on Santa Amado, Belen and developing Santa Juliana. We're working on the Las Molinos pit optimization this quarter and hopefully put that into our development strategy later on this year.

We've also made a new discovery that we're currently working on. We have one drill on it. That's Las Molinos Southwest. That's an underground target that's looking quite positive and we're really encouraged with that. We've gotten quite a few more holes back on Belen, confirming some of the previous results that we've announced. We've got several hundred meters of strike in several hundred meters of dip delineated now in Belen. Preliminary resource estimates developed and as I mentioned earlier, we currently are only about 20 meters away. All these projects are outside of reserves and resources this year so we're looking forward to moving these along.

Over to slide 20, over to El Cubo. I mentioned earlier, the Board approval for the development exploitation of Dolores Capulin, very first target that we attacked last year, positive results. We are really excited about that. We continue to progress La Cruz, Fenix and Puertocito. But Puertocito, lying to the north of our current operations, brand new discovery, extremely high grade. We finished now I think four fences of drilling and we continue to extend the deposit along strike and down dip. We anticipate being able to finish at least our first drilling pass by the end of this quarter and then make a decision on in-fill drilling and try to progress that into reserves later on this year and into our exploitation plan.

Over to Guadalupe y Calvo, we've got five new composites in for metallurgical test work, bottle rolls and column tests, that's ongoing. We currently are drilling focusing on the down dip extension of the underground Calvo that we discovered two years ago, working along strike and we'll be working up in the San Luis Northwest concessions as well later on this year. We remain on target for completing the scoping study by the end of the third quarter of this year, so we're pretty excited about how that's progressing along.

Over to slide 22, which is Mesquite. Peter Drobeck and his team have finished some of the geophysics on the project. We're currently finalizing the drilling contract and we anticipate later on this quarter, commencing drilling on our two main targets there. We're really excited about it because when we were initially on the site, we came up with two strong targets, gold, zinc, lead, very anomalous to the GoldCorp. assets with Penasquito and Camino Rojo. We're very optimistic that this is going to be something quite exciting to talk about in the coming quarters.

And then finally, we just announced last week, the Venus property. It's about 4500 hectares, lying immediately to the north of Ocampo. We've been on and off the property for several years, but most recently, identifying quite a few new structures with extremely good grades, great output surface. I've shown some of those on slide 23. Again, we've assembled a team there. They are on site. They will be doing the geophysics works and trying to lay out a drilling program on some of the priority targets that we have. Really excited about it because again, it hosts a lot of the Northwest, Southeast structures that we see at Ocampo and up at Pinos Altos. We're quite optimistic that the geochemistry will prove some solid targets and with the follow-up on drilling, we think we can move this along quite quickly.

Over to slide 24, we list out here our key strategies for this year. Obviously strengthening the Board was a priority and we've done that, and the shareholders have voted positively in favor. We've completed the Mesquite Venus acquisition, or option agreement and we continue to be opportunistic with several other things. We are busy looking at accretive business development opportunities. In fact having several dozen CAs signed and working towards that. In fact, we've just recently appointed a Vice President of Corporate Development.

On the production improvements, getting Ocampo underground up to 1500 tons a day which is what we've done, sustaining it, keeping it there, augmenting it, with Santa Eduviges to go beyond 1500 tons a day. Developing Belen and Santa Juliana, really trying to see what kind of impact these veins will have. They are much higher grade than our reserves and we really want to understand the extent of these new discoveries over the coming quarters. We have had successfully gotten past those voids in the Picacho pit. We are at the confluence of the three main veins at Picacho. We're starting to see grade improvements and associated recovery improvements in the mill and heap leach as we move along.

We remain on target on the mill redundancy program. As I mentioned earlier, our CCD7 will be commissioned later this month. Our newest leach tank will be commissioned in the latter part of Q2, with the new filters and mill automation in the second half of the year. At El Cubo, we've successfully taken over from the largest contractor there, hiring 155 of his team, redeployed our equipment, starting to see productivities go right back to where we were in the fourth quarter or the latter part of the first quarter, and continue to target 1850 tons a day by the second half of this year. Just to highlight the elimination of the contractor will allow us to start realizing significant savings on our operating costs in the order of $25 to $35 an ounce in the second half of the year. Exploration pipeline continues to move along quite well, quite aggressive on that front. GYC or Guadalupe y Calvo scoping study remains on target to be completed at the end of the third quarter and we continue to work on additional targets on our entire portfolio.

With that, I'd like to say that Gammon is well-positioned for realizing the improved production going forward. Our costs, unitary costs on a per ton basis, are what I'd classify as world standard and well online if not exceeding our targets and will position us well to see further cost reductions on a per ounce basis in the coming quarters as we ramp up production. With that, I'd like to pass it back to the operator and open it up for Q&A.

(Operator Instructions). Your first question comes from the line of Adam Brooks from Sidoti and Company. Your line is open.

Good morning. Could you just give us a sense, as you move beyond the voids, of what we could see as far as grades at the Ocampo open put as we move through the year. To go back to where we were last year, still a little bit lower, just maybe a little bit of a sense of where that could ramp up to?

Hi, Adam. It's Rene. What we anticipate is now that we're past the voids is raising our cut-off rate from 1.6 grams per ton of gold equivalent, back out as fast as we can to 2.5. Then that will obviously augment the underground and then you'll see the corresponding increase in grade on the heap leach. That's conceptually the target and that's how we've modeled the second half of this year.

Okay. Looking at depletion costs, a little bit higher than I was looking for in this quarter. Could you maybe give us a sense of per gold equivalent ounces. What type of range you're looking for 2010, and maybe even 2011?

Adam, it's Scott here. In terms of depletion cost per ounce, in the quarter at Ocampo it was approximately $200 per ounce and at El Cubo it was approximately $220 per ounce. One of the things you need to bear in mind is that our reserves and resources we just issued revised inventory back on March 30. We did see a decline in reserves so that's what's inflating that depletion cost per ounce. What you're seeing in Q1, that's what you'd be best assuming going forward in terms of your modeling.

Okay. Thank you.

Your next question comes from the line of Anita Soni from Credit Suisse. Your line is open.

Good morning. Was the first caller asking about the grades of the underground or the open pit? My question is with respect to the grades at the underground. I'm not quite sure if that was already asked.

Yes, Adam was asking about the open pit, Anita.

Okay. My question is then on the grades in the underground mine, I think are a little bit lower than what you were guiding for -- is a three-year aggregated grade of 3.23 on the gold side. The silver was okay, but just wondering what you expect to get to over the course of the year?

With regards to that, Anita, obviously there's a cycling and sequencing issues. You will see an increase in the latter part of Q2 and into Q3 on grades as we are developing some of these new areas. As an average, we remain on target for what we provided for 2010, 2011 and 2012. And it's strictly a sequencing thing, so pretty well average -- getting to average grade pretty quickly.

Okay. By the end of 2010, what gold grade do you expect to see?

You should be looking at three grams and around 170, 180.

And then with respect to the heap leach, could you answer the same question, what grade by the end of the year? I'm sorry, the open pit, not the heap leach.

I honestly can't recall on that. We can get back to you, unless you've got it, Russell.

Not at hand.

What was put out on March 31 -- was the average grade for the year to be on gold 0.8 and on silver, I think was 20 grams per ton.

Yes. The 20 is, we're ahead of that obviously. On the gold, as we're coming in on the various veins like Agilario and Picacho, the gold itself improves and it does change which bench we're on. We remain -- if I take a look at where we're at this month, I think we're around 0.7, so it seems to be coming back into line.

And then just with respect to the tonnage that's going through the open pit, what did you do in April for tonnage on the open pit?

We averaged 105,000 tons a day in April and we're targeting -- getting closer to 110,000 over the next couple months. We've got the last couple of trucks that need to be refurbished or overhauled -- rebuilt. And once they get redeployed, our tonnage will come back up. In fact our new Cat 992 arrived two days ago I think.

Okay. All right.

Yes. It should be operational by tomorrow.

Okay. Thank you.

I think the other thing you have to mention there is that we get another rotary drill for the pit so that gives us a 20% advantage and the two small RC drills will be on site. The last one will be on site by the end of this month so we'll have those up and running as well.

And then once you get the open pit operating tonnage-wise, you should be able to catch up on the stacking on the heap leach?

That's correct.

Absolutely.

All right. Sorry. And then just on stacking, can you give us the stacking rate in April?

Yes. The stacking rate was just under 9,000 tons a day in April.

And so far in May?

Russell?

We're running just on 10,000.

Okay. Thank you very much.

Your next question comes from the line of [Brian Christy] from Desjardins Securities. Your line is open.

Good morning, guys. Just a couple of quick ones. Two for Scott. Just wondering on the G&A if we're going to see further reductions going forward and what's a good number for the year. Maybe you can just remind me on the credit facility, total size and the term. Then Rene, did I hear you correctly that Guadalupe drilling is underway?

I'll answer that one afterwards, Scott. Yes, the drilling is underway. If I recall correctly, there's one drill on site right now with the second one mobilizing shortly.

What's the size of that program?

I'll have to get back to you -- because I don't recall the meters.

Rene, it's 5,000.

Okay. Thank you.

Thanks on that.

Scott?

Brian, in terms of G&A, our stated objective at the beginning of this year is that we want G&A -- we anticipate G&A averaging between $5 million and $5.5 million per quarter. In Q1, we came in at $5.6 million so we're just outside that range. But going forward, in terms of your modeling, it would be a range of $5 million to $5.5 million. Then on the credit facility, Brian, it's a $50 million capacity facility and the current drawn balance is approximately $27 million and the facility expires in November of 2011. There are no repayment obligations, other than a bullet repayment on maturity. There are no operating or production covenants, or what have you so it's a very flexible facility.

Great. Thanks guys.

Your next question comes from the line of Steven Greene from TD Securities.

Good morning, everybody. I think you answered my questions on grades from the pit and underground, but can you be specific on grades going to the heap leach, so stacking, stacked grades?

Russell?

Yes, what's going to happen here is a bit flexible. As we go into the confluence of the [San Ramone and Andalaria] and Picacho, our cutoff grade, as Rene said earlier, will increase and that will allow us to stack the remainder on the heap leach. I can't give you the figure off hand. One thing that will happen is that we will stack as much of we are able to, so there will be some of the lower grade which would have been stockpiled. That may well find its way on if we have the capacity.

Steve, ignoring that we've got about 90,000 tons stockpiled ahead of the crusher right now, but year-to-date including April, we're above 0.35 gold and 21 grams silver and that will start moving upwards now because we're past the voids, closer and closer to our target which is around 0.6, 0.7 and 28 grams.

Okay. Great. Can you tell us approximately what you seen so far this quarter to date in terms of stacked grade?

Yes. This quarter to date, it is moving up quickly. Yesterday it was substantially higher grades, as an example. It does vary quite a bit on a day-to-day basis. We do have that 90,000-ton stockpile that's the buffer in between. I look at it more like on a month-by-month basis and we are seeing higher grades this month than we did in April which was higher grade than the previous quarter.

We might expect something closer to 0.5 grams on the gold side?

Yes. We just finished the recast sequencing for the second quarter or the detailed plan, sequencing plan and we're showing a significant improvement.

Okay. Great. One more question on the leach pad. The Q4 was quite a good quarter, in terms of stacking ounces and that obviously showed a little bit in Q1. Do you expect, given the delay in leaching, that Q2 will be a bit weak since Q1 stacking rates were quite lower?

Q2 is actually -- sorry, not taking your thunder, Russell, but Q2 actually is coming out extremely well. We made a change last month. As you know, in the Merrill Crowe, we can process about 22,000 cubic meters of solution a day. We were only pumping on to the pad about the same amount. We've increased that solution to about 33,000, 34,000 cubic meters going on to the pad. We've got a circulating load that's about 10,000 cubes. What that does is that increases the grade substantially in the solution. We've seen a marked improvement on the performance of the heap leach pad just in the last month.

I think if I may interject on that one, it also was coinciding with the finishing of the extension. We had a limited capacity for solution. Now we don't have a limited capacity so it allows us -- yesterday, for instance we pumped 35,000 to the pile. That's a key factor.

Okay. Great. That's all I had, guys. Thanks.

Your next question comes from Anita Soni from Credit Suisse. Your line is open.

Just a follow-up with respect to that, the 90,000, sorry. Was it 90,000 tons that you had stockpiled?

Yes. There's 90,000 tons in between the pit and the crushers.

And what's the average grade of that on silver and gold?

I'd have to look at our daily reports. Do you have any idea, Russell?

Yes. It's running -- equivalent, it's running at about 0.7.

Okay.

I can't give you the gold/silver grades off hand, but it's running at about 0.7.

And then just wanting you to whip out your crystal ball and then let me know, Rene, do you have any ideas how the rainy season will shape up this year?

I always hear that the rain starts on June 23rd because that's a holiday in Mexico. I have no idea. We're well prepared for it. Russell and the team have got all the diversion ditches done and everything like that. We'll probably reduce the solution. Although we've increased the amount of solution on the pad right now, we'll probably go back to our old model of evaporating. I have no idea. The world's pretty strange right now with regards to weather, but we're prepared as we can be.

(multiple speakers) And is that dryer or wetter than a normal spring or anything like that?

One thing I would add, Anita, it's been a pretty normal spring, quite dry. One thing I would add, we're just about to complete by the end of this month, a major diversion in the underground of the [a royal] there to avoid any problems like we had last year. If we do have a bad season, we will not have a mine flooding.

Okay. That rainy season lasts about three months, right? Starts the end of June and generally goes two and a half, three months?

Yes. Generally. Last year it was an exception. It was a very dry rainy season and then we had a 10-year event in November. That was just a pure freak, but last year generally was quite dry.

Okay. All right. Thank you very much.

Your next question comes from the line of Dan Rollins from UBS Securities. Your line is open.

Thank you very much. Quickly just on Santa Eduviges, now that you've gotten Board approval to go ahead, what type of mining rights are you looking for to get into Santa Eduviges once you reach steady state?

Right now, Dan, we're looking at 500 tons a day, getting to that point and that won't happen until the very end of this year or next year. But our current plans for 2011 show it just running flat at 500 tons a day.

Okay. Just back to the underground, based on the block model you've been using right now to mine the underground portions, what type of recovery and dilution factors have you been getting to date? And have you started to see an improvement since the mining methods were transitioned?

Obviously changing over mining methods, it does impact your mining recovery. Our assumptions and reserves are about 95% mining recovery and that's about what we get. We do leave in the long haul sloping at this point in time, a small little skin in between -- a long strike when we -- so we can backfill, minimize the strike plant that we will treat. That skin will be recovered or will be eliminated once we change over to the state backfill. Dilution right now ranges between 13% to 18% actual and we're probably averaging around 15%, 16% which is right on target for reserves.

(inaudible).

I'm sorry?

Your reserve is based on 15% dilution and you're running around 13% to 18%?

That's right.

Okay. Perfect. Just on GUIC scoping study, Q3, is that when it's going to be released? Or are you going to look to get it from the engineering company in Q3 and then maybe released in Q4 or Q1 of 2011?

It will be released in the fourth quarter. That's when we will get it. As you can appreciate, the critical path is these column tests. They are just being -- the samples are there and they are being put together right now. It will be 120 days to finalize that.

Okay. Perfect. Thanks very much.

Okay.

And your final question comes from the line of Wendell Zerb from Canaccord. Your line is open.

Good morning, guys. Just a couple quick questions. First one, anything new on the capital overview pushing into the next quarter?

The biggest outstanding item in capital expenditures in the second quarter, everything is on target. With the higher productivity, Russell has got, we'll have more stripping than initially planned. But I imagine it will be probably in the order of the same as the first quarter on that stripping side. The capital associated with redundancy is going to be pretty well on target and that's going to be spread out equally throughout the full year. Can you think of anything else special coming in, Scott or Russell?

Nothing from my perspective, Rene. I would have spoken about stripping and you already addressed that.

All right. With that, we're still looking at somewhere in the range of $22 million?

That's correct. Our budget for the year is around $84 million, $85 million, of which about $45 million will be spent in the first half of the year. It's pretty equally distributed, depending on productivity in the pit and stripping and development.

Right. Any planned shut downs and maintenance shut downs that come into the next quarter?

No, not really. Just the normal half day on a monthly basis, but nothing special. We've got a small maybe gear box -- we've got a replacement gear box to go in the main mill, but that's a pretty quick job. That won't last more than a day.

Okay. Then Rene, you were talking about El Cubo and targeting 1850 tons per day and it was a little confusing. Is that actually at the beginning of H2? Is that at the end of the year? Just maybe just fill me in a bit on that.

Yes. The target is to get there on a standalone basis by the end of the year and that's the way our budget is planned out. As I mentioned, in April we're about 1700 tons a day and it is just slowly ramping that up throughout the end of the year.

And no change in grade guidance?

The strategy is to get the 1850 and then start eliminating the [Ressagas]. By the end of the year, trying to get to 1850, but of in situ ore, which will improve our grade profile, but we've not assumed that in our guidance. It's a matter of, let's get to 1850 tons a day and then let's deal with elimination of Ressagas after that.

Does that mean development activity is increasing at El Cubo in order to increase to that throughput?

Russell, do you want to comment on development?

No. Other than what we budgeted, obviously the Delores Capulin will be extra, but not significantly over what we budgeted. No.

Okay. You feel satisfied that there's enough development in place, enough stopes available that you'll be able to cover that throughput?

Yes. But you know me, Wendell, I'd always like a bit more.

Of course, everybody would. And maybe just the last question, on Santa Eduviges, talking about 250 tons per day initially expanding to 500. Grade guidelines on that, in line with the rest of the underground?

A little bit lower, going from memory, equivalence it is about 3.5 diluted.

Okay.

But what you've got to remember there is that the logistics, it's right next door to the crusher and it's a wider ore body.

Okay. Now you're talking 3.5 grams per ton gold, right?

No, equivalent. Sorry, equivalent. It's a wider ore body, very close to the main crusher, close to surface. It's got advantages. And the other thing is that production does not impinge on the other mine. It's entirely separate access and logistics.

Right. There is no bottlenecking in other words.

Exactly. Exactly that.

Okay. That's great. Thanks guys.

Thank you. This concludes today's conference call. You may now disconnect.