Alamos Gold Inc (AGI) 2010 Q2 法說會逐字稿

Good morning. My name is Sara and I will be your conference operator today. At this time, I would like to welcome everyone to the Gammon Gold second quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions). I would now like to turn the call over to Mr. Rene Marion, President and Chief Executive Officer. Please go ahead.

Thank you very much, Sara. Good morning, ladies and gentlemen. Before we begin the presentation, I would like to remind everyone that this presentation contains forward-looking information and I encourage the readers to review the forward-looking information statement. Joining me this morning are from Mexico, Russell Tremayne, our Chief Operating Officer. Scott Perry here in Toronto our Chief Financial Officer and Anne Day our Director of IR. If you're looking at the webcast presentation, please proceed to slide six. In the second quarter, the company reported earnings before other items of $11.4 million or $0.08 a share. The improving operations at Ocampo, however, generated $19.5 million or $0.14 a share in operating cash flow during the second quarter. And as previously reported on August 6, during the quarter, the Company recorded $193.3 million non-cash asset impairment charge related to the Company's El Cubo mine resulting in a remaining carrying value of $61 million for El Cubo long lived assets. Scott will be elaborating on that later on during the conference call. The Company reported it's 11th consecutive quarter of positive operating cash flow. During the second quarter, the Company generated a net $15.7 million in operating cash flow as compared to $13.7 million in the same period in 2009. And as previously disclosed, the Company's consolidated metal production in the quarter was negatively impacted by a continued labor destruction at the El Cubo mine that began on June 2, 2010. And as a result of this disruption, there was negligible production reported from the El Cubo mine in June. Operations at El Cubo have been suspended indefinitely and the mine has been placed on care and maintenance. This decision was the result of what management views as a continued illegal labor disruption by the unionized workforce.

During the second quarter, the Company produced 29,400 ounces of gold and 1.29 million ounces of silver or 52.97 gold equivalent ounces at our long-term gold to silver ratio of 55 to 1. And cash costs during the quarter were $494 per gold equivalent ounce using the Company's long-term gold to silver ratio of 55 to 1. Preceding going over to the next slide regarding Ocampo production and cash cost. The improved operations as I mentioned at Ocampo generated $19.5 million in operating cash flow. For the second quarter, the Ocampo mine reported steadily improving productivity. In the quarter, the Ocampo mine produced close to 25,000 ounces of gold and 1.1 million ounces of silver or 44,360 ounces of gold equivalent production. Total cash cost in the second quarter at Ocampo were $427 an ounce at 55 to 1. Important to note, as previously disclosed, our cash cost reduced from $471 an ounce in April down to $406 an ounce in June and the downward trend continues on into July.

In comparison to the first quarter, the second quarter gold production at Ocampo showed an increase of 14% on gold and 11% on silver. And this trend will continue throughout the remainder of this year. Also the Company mostly completed a number of capital projects during the quarter. In April, we completed a commissioning of the Phase III mill expansion at Ocampo. The mill now is running between 3300 and 3400 tons per day. We also commissioned the seventh thickener which was completed in early July. And the sixth leach tank will be commissioned within the next week. Both are key items that will allow the Ocampo mill redundancy program to take foot and improve future silver recoveries. We also installed the gear box on the overland conveyor with number one going to the Heap Leach pad, and we did that in July as well with an anticipated target rate of 10,000 to 12,000 tons a day going forward, anticipating actually approaching the higher end throughout the third and fourth quarter. Also a of key note is we redeployed 154 contract miners and professionals from El Cubo over to Ocampo, and I'll touch a little bit on that later. But they're advancing the development of the Santa Eduviges, Belen, San Amado, Jesus Maria, Molinas SW, Rosario, and southern extensions of Aventurero. All of these outside our reserves and resources. And also during the quarter we bolstered key mine management positions.

Over to the underground at Ocampo, we made excellent progress during the second quarter. Continuously improving on our tons per day metrics and underground development. Currently we have a drill ready inventory of approximately 210,000 tons, all seven of our long hole drills are in operation with fully trained personnel. We're currently producing from 12 long hole stopes and two cut and fill stopes with an additional two cut and fill stopes being developed currently. The grade continues to increase over time as a proportion of development [muck] going to the mill decreases and stoping production increases. And we are also accessing high grade Belen in Santa Juliana discoveries currently. Again, as I mentioned earlier, outside of reserves. And a key thing to highlight is not only do we have a primary access from surface to Ocampo northeast and Santa Eduviges, but level two which is accessing the ore below the mill and the Belen are being accessed from separate portals from surface. I would like to highlight some of the development improvements. You saw in April, May and June continued increases in development. From as low as just under 1400 meters in April to 1700 meters in June. However, in June the El Cubo contractors were not at site. With July being the first full month of having the contractors from El Cubo, we saw development increase some 37% from June to 2,333 meters, which is approaching 80% over Q1, which is quite significant because what they're doing now is predeveloping stoping areas for the latter part of this year and into next year.

Over at Santa Eduviges, we continue to develop and drill. Thus far we have developed over 900 meters to date. We've completed our first ore horizon and are just accessing our second ore horizon and are on target to be stoping in the fourth quarter. We also have two diamond drills delineating four new veins discovered during the initial drilling phase. To highlight this when we went to the Board of Directors for approval for development of our second underground mine Santa Eduviges, we based it on just one primary vein and immediately brought in two drills. And our goal is to definition these four new veins before the end of the year so we can see how they're interrelated and how they can augment further production in 2011.

On the Ocampo open pits, things continue to progress quite well. The Picacho open pit is currently mining at the confluence at San Ramon, Adularia, Picacho veins. Productivity remain in the 100,000 tons per day plus range. And we're accessing higher grade mill and Heap Leach feed. Also the final Plaza de Gallos lay back is largely completed and Refugio is approaching completion. And this will give us total flexibility going forward with ore access both to the mill and Heap Leach in the coming months, quarters and years. Plaza de Gallos will be connected to Refugio and Picacho and that will allow us to reduce the haulage distances from primary ore to the crusher by later on this quarter into early Q4.

And on the mill side, we have made great progress. Silver recoveries continue to improve and continue into July of this year. Further improvements are anticipated once the sixth leach tank is commissioned within a week. And with that leach tank, the thickener, the mill automation due in Q3, 2010 and the fourth filter commissioning in early Q4, we anticipate not only will the Phase III expansion program but also the redundancy program will be completed this calendar year allowing us to stabilize throughput through the mill. Having said all of that, we did have a two-day shut down in July to tie in some of the equipment. And further major shutdowns are not anticipated. And over to the Heap Leach, we successfully ramped up to 10,500 tons a day in June. And with the access to the three open pits, we continue to envision being able to ramp that up over the coming months. We also managed a rainy season with 30,000 tons stockpiled ahead of the crusher. So if there is any delays due to rains in the open pits, we do have a bit of a cushion here.

And the conversion of the Valley Leach design was completed in April. And, in fact, if you look at the photo on this slide, it shows that largely the pond solution area is being filled in currently. And the important thing to note on that the added benefit to this redesign will join future raining seasons, reduce turbidity experienced during these heavy storm events. I would like to remind all of the listeners that the crushing plant was modified for three stage crushing of 100% of the ore to the Heap Leach pad. Over to resent highlights, on June 30, the Company provided an update on a strategic exploration program. Positive results continue to be reported at both Ocampo and Guadalupe y Calvo. Where numerous high grade intercepts have been identified at new discoveries during the quarter. At Ocampo, multiple veins were discovered in the Molinas south target area that in addition to the excellent potential previously identified to the northeast in Santa Armado district and to the southeast on the Aventurero Rosario parts of the district demonstrate that the underground is open to expansion to the northwest. The first holes from drilling at Guadalupe y Calvo project have discovered bonanza grade mineralization that indicates the potential for underground mining.

At Mesquite in Zacatecas, permits are in hand and a drilling contract is being awarded as we speak. And we hope that we'll be commencing drilling later this month, early into September. On June 1, 2010, the Company acquired five million units of Golden Queen pursuant to a non-broker private placement. On June 18, the Company announced that it had executed a binding letter of intent that will give Gammon the option to acquire 43,000 hector block of mineral concessions called the Los Jarros properties from Valdez Gold. The important aspect on this is that land position not only closes off the gap in land between Ocampo and Venus, but also covers the southeast extension of the Pinos Altos trend and northwest southeast extension of the Frisco mine. And on July 16, the Company acquired 4.7 million units of Corex pursuant to a non-broker private placement.

And on to expiration -- sorry. My apologies. With that, I'll pass it over to Scott Perry, our Chief Financial Officer, and I'll close off with some of the advancements on exploration.

Okay. Just moving on to slide 15 on the El Cubo impairment charge, by way of background the Company indefinitely suspended operations on June 17, of 2010 at the El Cubo mine due to continued labor disruptions by the unionized work force and arising operating cost associated with the failure of the unionized work force to achieve expected productivity levels. From an accounting perspective this was considered a "triggering event" for the purpose of accessing whether the carrying value of El Cubo mine long-lived assets and good will were impaired. As a result, the Company conducted a long-lived asset impairment test where by the carrying value of the El Cubo reporting unit was compared to its fair value. The net estimated cash flows in the El Cubo mine were calculated on an undiscounted basis using management's best estimate of future gold and silver production, long-term gold and silver prices and increased cost estimates based on revised operating levels under the assumption of operations resuming in a future period. The fair value was calculated by discounting the estimated future net cash flows using a 10% discount rate. Which is commensurate with the risk profile. Management's estimate of future cash flows is obviously subject to risks and uncertainties and, therefore, further impairments could occur. Based on the results of the impairment test, the Company recorded a non-cash asset impairment charge of $221.6 million in the second quarter, or $193.3 million net of tax. This impairment charge consisted of a reduction of goodwill of $106.8 million, a reduction in other long-term assets of $4.4 million and a reduction in mining interest, property plant and equipment of $110.4 million. Subsequent to this impairment charge, the remaining carrying value of El Cubo's long lived assets is now $60.9 million. And this will be our depleted base going forward from a future depletion, depreciation and amortization perspective there is possibly $110 million of long-lived asset depletion expense that will no longer be depleted over the remaining life-of-mine should operations recommence at any point in the future Obviously this adjustment is a non-cash adjustment, so there is no impact on cash flow. The Company's cash balances or our proven and probable reserve inventory.

Moving on to the next slide, slide 16, just highlighting consolidated production and cash cost results. Gold equivalent metal production in the quarter increased over the previous quarter by approximately 9%, which is despite a suppressed contribution from the El Cubo mine. During the quarter, the Company realized an average gold and silver price of $1,201 per ounce and $18.47 per ounce respectively which compares to $920 per gold and $13.71 per silver ounce in the prior year corresponding period. So what we have seen is our realized gold price has increased by 31% versus the prior year quarter and silver has realized prices increased by 35% this is the prior year corresponding period. Even in comparison to the most recent quarter the Q1 result our realized gold price is some 8% higher and our realized silver price is some 9% higher. So it really does demonstrate the Company is benefiting from the strong metal price environment and the Company's full unhedge metal position.

In terms of the total cash results, during the quarter our total cash cost result was $494 per gold equivalent ounce which was in line with the previous quarter. El Cubo's result was $823 per ounce, so you can appreciate the inflationary impact that this had on the consolidated result. In addition, 60% of our costs denominated in Mexican peso, and we did see a appreciation in the Mexican peso during the quarter which also had an inflation impact on our cash cost result. If we back out the El Cubo's contribution, Ocampo's result was actual $430 per ounce during the second quarter which was an important data point as it does demonstrate that we're comfortably operating the bottom end of our full year cost guidance for Ocampo. As Rene mentioned, all unit operation cost efficiency rates are on target, and this is particularly so at Ocampo mine ramps up to its targeted levels. Looking at the Company as a true gold producer where by we utilize the silver revenues as a byproduct cost credit, second quarter total cash cost were actual $70 per gold ounce sold. The more notable result is when we back out El Cubo and in utilizing Ocampo's silver revenues of the byproduct cost credits second quarter total cash cost at Ocampo was some negative $33 per gold ounce sold, which really does illustrate that in the current metal price environment Ocampo is actually mining its gold for free.

Moving on to the next slide, on Slide 17, just in terms of the second quarter financial performance, revenue for the second quarter were $57 million, which is a significant improvement over the $43.3 million generated in the prior year corresponding quarter. And even relative to Q1, revenues have increased by $2.4 million or some 4% which, again, represents the stronger realized gold and silver prices. In the Second Quarter of this year, the Company is reporting earnings before other items of $11.4 million or $0.08 per share. And this is inclusive of a $1.6 million or $0.01 per share accrued severance expense charge associated with the El Cubo mine. This compares very favorably to the $3.4 million or $0.03 per share generated in the same period of 2009, which is approximately an $8 million improvement. Relative to the most recent Q1 result, Q2 earnings before other items were in line with the prior quarterly result, and this is despite the negative earnings result of 4.3 million at El Cubo in the most recent quarter.

In terms of net bottom line earnings, obviously we're posting a significant loss this quarter which reflects the non-cash impairment adjustment of $193.3 million that I spoke to previously. If we normalize the bottom line earnings result by adding back this impairment adjustment, notional net earnings were $13.6 million, which, again, illustrates another quarter of strong profitability despite the negative earnings contribution from El Cubo. From a cash flow perspective, the Company is reporting its 11th consecutive quarter of positive operating cash flow. During the second quarter, the Company generated $15.7 million in operating cash flow as compared to $13.7 million in the prior year corresponding period. The improved cash flow contributions are despite the negative operating cash flow result from El Cubo resulting from the labor disruption and eventual suspension of operations. And is best evidenced by the positive $19.5 million operating cash flow result at Ocampo alone. Also I want to point out that this quarter in terms of our G&A expense of $5.6 million, this is consistent with our Q1 result and is in line with our previous guidance that G&A should average between $5.5 million and $6 million per quarter. Obviously that reflects a significant reduction over prior G&A running cost. From balance sheet perspective key highlights, we closed the quarter with a cash balance of $102.7 million. There has been no activity on our credit facility, so we still enjoy undrawn credit facility capacity of approximately $23 million.

Moving on to the next slide on Slide 18, just further on the strong cash flow profile. What we're illustrating on this side is a water flow chart just illustrating the change in cash position quarter over quarter. And you can see moving from left to right, we commenced the quarter with approximately $125 million in cash. If we look at the operating cash flow contribution from the assets there was $19.6 million contributed. In terms of how we applied that cash, $27 million was invested in capital expenditures and exploration. We saw approximately $5.5 million in terms of devoted to our accelerating exploration drilling program in terms of our stripping activity, we incurred costs of approximately $7.4 million, which reflect the fact that we really have accelerated our stripping activity and now are enjoying the benefit of that going into Q3 where by all three pits have access to all. Underground development was approximately $5.5 million and then land acquisitions, open pit and underground mobile equipment acquisitions make up the delta. We closed the other -- the other investment there illustrated is the $7.7 million strategic investment in Golden Queen. The investment in Corex Gold Corporation does not feature in this water flow chart. That was subsequent to the second quarter. And on that point, I think the Company has really demonstrated its willingness to lever its strong financial position by making such strategic investment in Golden Queen and Corex Gold Corporation and these strategic investments are parts of Gammon's growth strategy of identifying and investing in quality companies and assets located throughout North America. Again, from a treasury perspective, we do enjoy cash reserves of approximately $103 million. We do have undrawn credit facility capacity. So all and all, I believe the Company's cash position and improved cash flow to profile is expected to continue to providing the Company with considerable flexibility in advancing the Company's future business development plans.

So with that, I will pass you back to Rene Marion, our President and Chief Financial Officer.

Thank you, Scott. Just briefly over to Slide 20. We have increased our drilling plan to 90,000 meters at Ocampo, 45,000 focusing on Belen, Jesus Maria and Santa Eduviges with the remaining 45,000 on new targets like Santa Librada, Las Molinas, Picacho SE, Picacho deeps, San Amado and Cerro Colorado. To date to the end of June, 55,000 meters over half have already been spent and the underground drilling has been focused on Santa Eduviges, Santa Amado, Aventurero, Rosario and Belen. Along with high grade intersections being discovered at Santa Juliana. Russell's team is currently developing the Santa Eduviges, the Belen, the San Amado, the Jesus Maria , Maria, Molinas SW, Rosario, Aventurero and Santa Juliana discoveries. Again, I would like to stress all of these outside of year end reserves and resources. And Chris Bostwick's team is currently designing the Las Molinas open pit as well as well outside of 2009 year end reserves.

Over to slide 21, we have accelerated our drilling program at Guadalupe in 2010. We have already discovered a new underground target with bonanza grades. This area has got a potential for open pit and underground, and we have awarded the contract for the scoping study or the PEA to Micon International, and we remain on schedule to complete the first draft by October. Four recent bottle roll tests minus a 100 mesh ore simulating milling conditions showed average recoveries of 93% and 69% for gold and silver respectively and further tests are under way. The resource modeling is currently under way with Micon and next month we'll be able to start pit optimizations and underground design.

So in closing, I would like to say that Gammon remains pleased with the progress made in Q2. We continue to see improvements into July and into August on all fronts. And what is pleasing to see is that unitary costs on a per ton basis continue to decrease or hold level, even when one considers a significant increase in Mexico during the past six months in the unit power costs and diesel costs. And it's a real testament to Russell Tremayne and his development team. So with that I would like to turn it over to the operator and open up the call to Q&A, please. Operator.

(Operator Instructions) And we'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of David Haughton from BMO Capital Markets. Your line is open.

Good day, Rene. Scott. Hello. You've got quite an improvement in your cost structure coming out of Ocampo in the second half of this year to meet your full year guidance. Can you just explain how you plan to get there as far as potential grade and cost improvement or unit cost improvement compared to what we've seen in the resent past?

I would say at this point, David, we remain on target after two months into our recaps for the year. That is working quite fine. The underground stoping and with the grades rising, that is obviously a component of increase in grade to the mill. And the increase in tonnages to the mill reduces the tonnage from the open pit, and there by increases the cutoff grade. And then the grades from the pit to the mill improve. We see that not only through April, May and June, but into July as well.

That's all I can say at this point for where we stand here on August 10, we're very comfortable on our guidance for the year. And I would like to highlight despite the rainy season, David, a lot of our mitigating plans are holding quite well. One example being filling in the preg pond at the Heap Leach has significantly reduced any turbidity that was experienced historically during the heavy rains. We're quite comfortable.

The other thing to point out, David, I don't know if you have access to the web cast presentation, but on slide seven we do illustrate Q1 and Q2 cash cost at Ocampo and Q1 came in at $423, Q2 came in at $430. So we are tracking the bottom range of the full year guidance.

Okay. As far as the mill throughput goes, can you see that getting up to the 3300 tons per day consistently for the balance of the year?

Yes. We came awfully close to that in June. We shut down for two days in July. So it will be down down. We anticipate getting there fairly consistently over the coming months. But to allow me to sleep at night, the fourth filter that will be commissioned in October will give me 33.3% redundancy in the mill which will be the caveat to consistency or sustainability in the long-term.

So will that set you up, do you think, Rene, for 3400 tons per day through 2011 and onwards?

Well, I always tell Russell he has 10% more. So my guess is yes.

Okay. And as far as the stacking on the Leach pad is going, it's moving ore in the right direction. I heard the numbers you're getting in July. Can we see it getting up to 11 or possibly 12,000 tons per day into next year?

Yes. We just installed the gear box and commissioning that and what that does is allows us to increase the speed of the overland. And that was the key to get to the upper end of that target. So I'll be able to better answer that in the coming four to six weeks because it's just been commissioned recently. But all I can do is look backwards in time in April, May, June, we're consistently over 10,000 -- well, the last two months, I'm sorry, over 10,000 tons a day. So we have our sites on upper end.

Okay. And as far as recoveries go, last quarter the stack to gold produced ratio looks like it's around the 80% mark which is better than what we saw before for Leach. Do you expect that number to go forward?

Let me go through the Leach curve because it's a fairly complicated curve. We have modeled, high grade, low grade and very low grade that goes to the Leach pad. And they all have different target rates on recoveries. And the weighted average of those recoveries is 83% and 59% for gold and silver. Now, as our model, which goes way back to 2006 moves along, what you see is a divergence during the rainy season and the winter months. We'll call that December, January and part of February. From the theoretical cumulative recoveries. And then you see it during the other parts of the season going back to targeted cumulative levels. So if you said 83% life of mine and 59% life of mine are times a year that were 4 or 5% off and there are other times a year we're banging on our target. So, yes, it's performing quite well going forward.

I would also like to point out as well, we do tertiary crush which speeds up the Leach curve. We are on unclear at this point does it improve overall recovery in the longer term. And the other one is we have yet to see the impact, if any, of stacking height. Now, to counter that one, what Russell has done is increased solution from about 24,000 cubic meters per day to just around 30,000 or so cubic meters a day, which means you've got recirculating load of some 6 to 10,000 cubic meters a day. And what we see is the grade in the pregnant solution is actually consistent if not higher than normal. So we're trying to deal with life that way as we move up the hill.

All right. You've got quite a bit of development going ahead courtesy of the equipment and personnel from El Cubo. You had mentioned before that Santa Eduviges is outside of your reserve and resource base. How should we be thinking about its contribution going forward then?

Well, obviously (Inaudible) reserves and resources but production will start there before we get to that statement. We've given guidance. It will be running hopefully at 250 tons a day by the end of the year. And by 500 tons a day into early next year. I would like to highlight, though, what we're doing right now is we're obviously currently in our budgeting and life-of-mine plan process right now. And the team is working on -- with what we've seen in the first month on productivity and development -- what does the future look like as they're doing all of these things. Because all these development initiatives are outside of reserves. So we'll be providing guidance when we complete it. But, however, keep in mind that our Board doesn't see the budget in life-of-mine plan until the December Board meeting. So we still can't come out publicly with it until the New Year.

Broadly when we're thinking about it, it would be displacing, as you mentioned, low grade material, so mill throughput would remain the same, possibly at that 3400 tons a day kind of mark next year and beyond. But the weighted average grade would be about the mid-two kind of level, I guess.

You'll see the mill grade continue to improve, yes, as the tonnage increases, especially in the latter part of Q1 and Q4 of next year. And we have to make a decision how long we're going to keep the El Cubo people at the site, because that's a key decision as well. And we also have to recognize a lot of these new discoveries are higher than reserve grade as well. So we anticipate seeing further improvements into next year on the mill head grade. Therefore recoveries. Therefore Heap Leach grade. So it's one big circular reference.

I guess with the El Cubo people you have on-site, you have a need for a lot more people once you have the push on development. And once you got the development in place, that need kind of tapers off in time?

Yes, it does. Russell, what percentage of the Ocampo underground work force versus El Cubo work force?

We've increased it by 30%.

So it's quite an influx of people, especially when you consider 100% of them are on development.

I have a question for Scott, and this will be the last one. Just having a look at your production costs as stated within your P&L and also broken out on page eight for more detailed material, when I carry out the cash cost by the ounces on an equivalent bases, I end up with a number well short of the production cost number, particularly at El Cubo. I'm wondering if something else is going in there other than what is stated in the dollar per ounce number?

Yes. Probably the largest item going through there, Dave, is the severance expense associated with El Cubo when you look at P&L statement that is under the production cost line item.

Right. And that's in the order of three mill for the quarter or something?

El Cubo's expense was 1.6 million.

1.6. Okay. I'm still short by more .

Inventory.

The other one it could be in there is well is inventory obsolesce identified at El Cubo. That was $400,000 from memory. If you give me a call after the call, I can sit down and reconcile it out for you.

Okay. Thank you very much.

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

Thank you. One question on El Cubo. Why not write off the whole thing? Why keep $60 million on the books. Are you planning on potential reopening this mine later on giving it a drag on your earnings and your cash flow?

Well, it won't be a drag as much as care and maintenance, excluding legal costs and such. Our caring cost is MXN1.3 million a month. It is an asset. If we believe that we can close the gap between contractor productivity with union productivity we think it is an attractive asset. Currently our contractors who work exactly the same areas as our unionized miners have productivities 32% higher than the unionized guy and their absenteeism is 50% of the unionized personnel. So under the current union regime, no, we're not interested in entertaining their return to work. However, if we can ever position ourselves where they will work as hard as our unionized people -- or our non-unionized people, it's quite a good asset. And we'll work on a plan on El Cubo moving forward. Scott can summarize just briefly on how we ended up at the $61 million carrying cost.

I think just further my remarks made during the call, what is the proven and probable reserve. We modeled that out based on most recent productivity and cost efficiencies. We used our best estimate of long-term gold prices and silver prices and then described a potential undiscounted cash flow profile and we discount rate of 10% and that's how we came up with a value of $61 million.

Okay. So you're still working through the backgrounds with the union given the fact the union is in there right now has known to be hostile, example Cananea. You're still hopeful you can get a new union or you can get the current union members to work as hard as the non-unionized members?

That's well ahead of our self. The next hearing with [La Junta] is on August 13. And within five business days after that hearing, he has to rule on the legality or illegality of the whole strike. In any event, either party will put an --

Injunction

Injunction Thank you very much. I went French. But an Injunction on it and the process will carry forward. All I can say right now is into the second month attendance has decreased considerably at the picket lines. It is the rainy season and we'll see when they're prepared to come back to work under the right conditions.

Okay. Scott, maybe you can answer a question here. Inventories continue to grow quarter over quarter. Can you give us a little bit of color on why that is?

Predominantly the reason inventory is growing is associated with the Heap Leach inventory. You recall that back in mid 2009 we intentionally increased the cutoff grade because we were quite concerned at how quickly we were exhausting the potential capacity so we're potentially any stacking around 5,000 tons of material per day on average.

Okay.

We then modified the design of that leach to evaluate design at certified back in September by independent engineers. That then goes to comfort that we have an additional three years less worth of capacity on that facility. So we immediately increase the stacking rate now targeting -- we've been averaging around 10,000 tons per day plus and they're still looking to ramp that up further to 11,000 to 12,000. Now that the overland conveyor has its gear box installed. And so you can imagine with the increased material you're stacking on the Heap Leach material, you're stacking higher metal content and that attracts more dollars in terms of the cost of mining and placing and treating that material. So inherently, you see the inventory accounting value. As you look at the contained ounces, that's also increasing as well in line of the higher production rate or placement rates.

Do you expect that -- are you expecting to pull those ounces out? You're basically increasing Q1 2009 you were at -- even end of 2008 you were at $49 million inventory. You're now standing at $80 million. So you've increased it $30 million. You've been stacking a lot more on there. When do you expect to draw that down or are you potentially looking at saying down the road we won't be able to get them down, I'll have to write off this inventory?

We're very comfortable you'll see us recover the contained metal as per the estimate as Rene spoke to in gold the way it average target is 83% and silver is approximately 58%. And as Rene mentioned, we do track this since its original inception of the Heap Leach facility and the original inception of the Heap Leach facility and the reconciliations are proving robust. I think going forward we're going through a period where we're going to see a stacking at higher rate but in conjunction of that you'll see more and more metal coming off as well.

Keep in mind on a quarterly basis the auditors do go through the model and check to see considering seasonality how it's performing. The one thing we do have is we don't do inner liners like some other firms do and therefore we're not sterilizing what's below every lift. We're quite pleased with how the Heap Leach is performing, especially since we increased solution pumping rates.

Are you looking at grades on the inner ground and grades form the open pit are you looking at simular run rates as you posted on your monthly June numbers? Would that be a good estimate going forward for the remainder of the year or do you expect to see those increase?

We anticipate we'll pit in the underground to continue to increase and grades to continue to increase as well.

Okay. And just quickly on the underground, Russell, maybe you can comment, how is the dilution running these days?

Around 15 on the stopes share on average.

That's pretty consistent over the last four quarters?

Yes, that's consistent.

Great. Perfect. Thank you.

Sorry, Dan. Dave, you asked a question earlier and for the benefit of the listeners in terms of trying to reconcile the total cash cost rounds back to the production cost line item on the income statement if readers could reference page 23 of the management discussion analysis document there is a full reconciliation there. Back to you, operator.

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

Thanks. Good morning. My question -- most of my questions have been answered but with respect to the head grade at the underground mine Ocampo, the 15,000 ton per day that you're quoting as a throughput -- sorry as a mining rate there that includes low grade material. Does the head grade include the impact of that low grade material that you are quoting 2.2 gram per ton?

Yes, it does.

So, 0.75 is blended into there?

Yes. The important thing is in July, for example, it makes it a lot cleaner. We didn't have any low grade material so it didn't muddy the waters.

Okay. And you said the shutdown on the mill was two days and that was in July and that impact has been worked out at this point?

Yep. That's all completed. That was a tie in the thickener and the preliminary tie in to Leach tank. Russell has a bit of piping left to do and I think he has the shaft. What is the complete status on the Leach tank, Russell?

We're filling it today.

And just with respect to the Leach curve that you were talking about, you said in December, January, February it would be off by 4 or 5%. Was that to the up side or to the down side?

No. Typically what it does if you said your target accumulative life of Heap recovery is X and Y, it's called 100%, typically during the late June, July, August and into early September you'll see it go down to like let's say 95th percentile of your target.

Yes.

And then it comes back up to about even, just shy of even. Then the winter months come in and then it goes back down to 95 and then after the winter months it goes back to 100%.

Okay. So the spring is where you make it up basically?

Yes. And that's how we model the -- in our forecasting. We have the theoretical model that says ignore weather. Ignore rain. Ignore cold . And then we make adjustments on the bottom based on these trend lines.

So April, May, June should be your strong quarters, so Q2 should be the strong quarter in terms of recovery rates?

Yes. And then if I go back and time and take a look at it and it's proof in the putting in the raw numbers, now the confusing thing is you go too far behind you run into the 2007 water issues that we had. And we've become better and better in water management as time goes on. So that is narrowing over time.

Okay.

You have to remember we don't actually lose anything. It just slows down.

Oh, yes. The curve lags.

I mean, that's why we don't do Interliner because you would lose it. We don't sterilize anything. The whole pile remains live .

Okay. And then a last question rainy season, we're coming up on it. How has the rains been so far this year? You sent pretty interesting pictures last year of flooding.

Yes. We haven't had anything like that. No, all the measures we took are working. Obviously after last year's problem with the underground, we considerably altered the royal that goes past the thing. We'll never have that again. This year has been -- yes, we have a few issues with wet over to the mill, but there is not of you can do about that. But the rest of it, fine. There's been some heavy events, but nothing that's caused undo problems.

Thank you very much.

Again, if you would like to ask a question, please press star then the number one on your telephone keypad.

Operator, we'll take one more call and finish the conference call, please.

Your next question comes from the line of [Gary Blanford] from [Sambar] Investing. Your line is open. Speak up.

I wanted to ask you a question there. Rene, on your gold equivalency there, you did in Ocampo 44,000 ounces and of that about 25,000 ounces of pure gold. And if that's the case and silver is a buy product, you're talking about negative $33 an ounce. So in Ocampo alone going forward, you're figuring about 100,000 tons of pure gold at a negative cost. So when I look at your peers, ones closest to you, say they'd be doing 160,000 ounces of gold this year at $380 per ounce. So you're obviously totally under valued. So what are you doing today to help investors know the real value at Ocampo?

Well, basically what we're doing is obviously the communication strategy has been quite transparent showing monthly results going across the board. Yes, it takes over as buy product credit costs are negative and I think what we'll see is with continued performance in the coming months and closing off Q3 and into Q4 people will be seeing the value on the Ocampo asset and hopefully we'll make some progress on El Cubo as well. With that, I would like to turn it over to the operator and close out the meeting.

There are no further questions at this time.

Thank you very much, everyone. And thank you for joining us.

And this concludes today's conference call. You may now disconnect.