Alamos Gold Inc (AGI) 2011 Q2 法說會逐字稿

Good morning. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the AuRico Gold Inc second 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.

Thank you, Mr. Rene Marion, President and Chief Executive Officer, you may begin your conference.

Well thank you, operator, and good morning, ladies and gentlemen and welcome to our Q2 conference call and webcast. It's our first as AuRico Gold. Before we start the call, though, I'd like to refer our listeners to the forward-looking statements on slide 2. Over to slide 3; joining me today will be Scott Perry, our Chief Financial Officer; Russell Tremayne, our Chief Operating Officer; and Ann Day, our Director of Investor Relations. I would also like to note that this presentation will be available on our website and via the webcast. And, following the presentation, I will turn over the call to the operator for a question-and-answer period.

So, I'd like to start with slide 4 and look at our Q2 consolidated highlights. We have grown realized production of 75,000 gold equivalent ounces, which is 53% over 2010. Strong, realized cash cost performance of $384 an ounce, totally underpin with Ocampo at a record of $340 per gold equivalent ounces. And we had record margins of $1,125, or 75% per gold equivalent ounce. At Ocampo, the margins there were nearing $1,200 an ounce or 75% of our margin. Our 2 mines, that we're operating during the quarter, generated almost $70 million in operating cash flow. We had record revenues of $113 million, that's up 98% over 2010. Record operating cash was at $54 million, or up 247% 2010. Record net free cash flow of $21 million, or up 261% over 2010. And we increased our quarter end cash balance by 54% to $102 million following the acquisition of Capital Goal.

Our earnings before other items of $44 million or $0.26 a share, is 86% higher than Q1. Our operations generated earnings of $56 million or $0.33 a share, which is 372% higher than the same quarter in 2010. And we have a significant expanding production profile, obviously, with Chanate coming in, in Q2, but El Cubo in Q3. And this will continue well into next year, with the -- especially with the announced expansions at El Chanate.

Turning over to slide 5. We did provide recently positive revision to our 2011 operational outlook, where we've increased production and decreased the cash cost estimates. We have continued strong performance from Ocampo, and we recently forecasted the cash cost to reduced for the remainder of 2011. And how many companies in this environment are very re-forecasting cost downward? At El Chanate we did receive a significant boost in production in the second quarter, but productivities are increasing, as we speak. And we've R&D approved the first 2 phases of a potential 5 phase expansion program that we announced just recently. El Cubo resumed commercial production on July 11. The underground production is ramping up, and we're processing near design levels.

Our exploration programs of is one of the largest in Mexico. Ocampo has already reported numerous high-grade intercepts and new discoveries. El Chanate has reported grades significantly higher than reserve grades. We continue to have positive results from Venus and Los Jarros, already in announcing the discovery of Balleza and Santa Nino up in Venus and the Gaby project down in Los Jarros. The Ocampo district, itself, is a very exciting epithermal deposit and properties in Mexico.

Over to slide 6, as I mentioned earlier, we provided revised guidance upwards on production and downward on cash cost. It's quite contrary to the current industry environment where cash costs in the industry in 2010, according to GFMS, increased17%. This is all underpinned by the robust performance of Ocampo. The expansion program at El Chanate will not only increase production, but we'll start seeing reduction in cash cost late this year -- early into next year. And, of course, El Cubo comes online on the third quarter. So, as I mentioned over, not only are we going to see quarter-over-quarter growth in production this year, but that carries on well into 2012.

Before I pass it off to Scott, on slide 7 I'd like to talk a little bit about the cash cost performance at Ocampo, specifically. I commented that industry cash cost alone last year went up 17%, and they appear to be increasing even further this year. But last year, 2010, the global average cash cost was $557 per ounce. While Ocampo's cash costs at 55 to 1 have largely stayed flat since the second quarter 2009, and, realized -- they have that actually reduced by 21%. So, industry average cash costs are 64% higher than Ocampo's current cash cost, or, in other words, we're $217 per gold equivalent ounce lower than last year's industry average. And you can see in the bottom chart, that's what's giving us a 77% margin at Ocampo.

So, before going into the operations themselves, I'd like to pass it off to Scott Perry, our Chief Financial Officer, to discuss the financial results during the second quarter.

Okay -- thank you, Rene, and good morning, ladies and gentlemen. Very pleased to be reporting our second quarter results. This most recent set of quarterly results really does mark a consecutive track record in terms of improving production and operating margins, and also in terms of bottom line cash flow and profitability within the business. Just starting on slide 9, -- just walking through some of the key operational highlights. Gold equivalent production, during the quarter, was just above 75,000 gold equivalent ounces on a realized basis. That's a 53% improvement over the prior year corresponding period. Included in this result, is, obviously, 11 weeks worth of having El Chanate within our portfolio, since we closed the Capital Gold transaction on April 8. So, that really has augmented our quarterly gold equivalent production profile.

As Rene mentioned, cash costs continue to decline, and cash cost result, during in the quarter, came in at $384 per ounce on a realized basis, and that's our consolidated cash cost per ounce number. And that really is contrary to a you're seeing in the industry. When you're looking at most recent peer group quarterly results, we're definitely seeing a lot of cost inflationary pressures creeping into the cash cost per ounce structure. But, in terms of our various expansion initiatives -- our cost initiatives -- we really are having a lot of success in terms of driving down our cost structure and maintaining our margins.

That really does lead us into the next point here -- in terms of our realized gold prices and silver prices, they were again record this quarter. Obviously, consistent with what we're seeing in the metal price environment -- AuRico Gold fully unhedged on both its gold and silver. So we've realized a gold price of $1509 and a silver price of approximately $38. That, obviously, bodes very well, when you consider moving into Q3 when we are in a current gold price environment of some $1750 per ounce.

Moving on to the next slide. On slide 10, just to focus on some of the key financial metrics. Again, during the quarter, we posted record revenues of $113 million, which is more than 100% increase over the prior year period. Revenue result, in terms of earnings from operations, we came in at $56.1 million, and, in terms of adjusted earnings, we came in at $35.8 million. Which is -- both metrics had significant improvements over the prior year corresponding period. In terms of the key cash flow metrics, it was a record operating cash flow result of the company. We came in at $54.4 million, which is almost a four-fold increase over the positive operating cash flow in the prior year corresponding period. In terms of net free cash flow, we generated $20.7 million during the quarter.

In terms of the balance sheet, we finished at $102 million in cash on hand. And, just to put that into perspective, when we closed the Capital Gold transaction on April 8, you may recall there was a cash component in that transaction. After we closed a transaction and funded that cash component, we had company-wide cash reserves of approximately $66 million. And so from April 8, we were able to build our cash reserves to a consolidated $102 million. So I think that really does speak very well in terms of the underlying financial performance of the consolidated business.

Just referencing the chart in the bottom left-hand quarter -- just illustrating our quarterly earnings per share -- in terms of the bottom line net earnings result, we came in at $0.15 per share. You can see as we're illustrating here -- we're just adding back 2 items not really indicative of quarter-over-quarter performance. Obviously, we had the Capital Goal acquisition related costs. If you had these back, this is approximately $0.05 per share. And, also, there we have the El Cubo standby costs which just represents the costs in terms of maintaining El Cubo when it was on its current maintenance status. So, adding back those two not typical items, where we come into our adjusted earnings per share result of $0.21 per share, or alternatively, $35.8 million.

Also, I'd like to note -- since we closed the Capital Gold transaction, we had to go through a purchase price allocation exercise, which is essentially where we revalue all the assets that we acquired to their fair market value. This includes inventory that was on hand at the El Chanate operation. If you look at our earnings results in terms of some of those revaluations, we are, in the quarter -- there is an expense within our production cost line item of approximately $4.3 million, which is associated with that inventory fair value adjustment. That really is an accounting revaluation adjustment and is a totally -- a non-cash item, but definitely something worth noting when considering the earnings results.

Looking at the charts on the right hand side of the slide, you can see, in terms of operating cash flow, we really continue to go from strength to strength quarter-over-quarter. Obviously, this is concurrent to these -- to the record metal price environment that we're seeing. Obviously, it does reflect our fully unhedged status on both gold and silver. But most recently in Q2, coming in at $54.4 million. That's obviously a record result, and I think that really does bode well when you look forward to Q3, Q4. Obviously, in Q3, we'll have an entire full quarter of El Chanate, and, as Rene mentioned, we'll have El Cubo coming online and starting to contribute to bottom line earnings and cash flow. And, obviously, Ocampo continues to post strength and performance.

The bottom right-hand corner there -- just a chart on the margins -- I've largely reiterated this, but you can see our margins are growing quarter-over-quarter, which is twofold. It's, obviously, due to the rising -- particularly the rising gold price, but also rising silver prices. In the bottom segment of those columns, in blue, is our cash cost per ounce. And you really can see that there's a very positive trend there, in terms of our cost structure. Almost every quarter we've been posting reduced operating costs per ounce. This is on a gold equivalent basis, utilizing the gold equivalency ratio of 55 to 1. But it really is improved productivity and, particularly, the improved cost structure that led to us favorably revising both our production guidance and our cash cost guidance.

Moving to slide 11 -- just have two sides to sort of highlight the key operating aspects. On slide 11-- just focusing on Ocampo and the quarterly highlights -- it was the fifth consecutive quarter of strong production and favorable cash costs. In fact, it was a record quarter in terms of our realized cash cost per ounce result. Ocampo produced its gold equivalent output at $340 per ounce during the quarter. That really is embedding Ocampo firmly in the lowest quarter in terms of gold mining operations, and that's what really lead to us favorably decreasing our cash cost guidance for the full year. In terms of margin, we realized a record margin during the quarter of $1171 per ounce, and that's, obviously what's driving the strong cash flow and the strong earnings company-wide.

Then the fourth bullet point there -- just something I wanted to touch on is -- what we've illustrated here, and we've illustrated it in the chart in the bottom right-hand corner is just where the operating cash flow is actually coming from when you look at Ocampo on a unit operations by unit operation basis. So, really in terms of where we process our production or where we produce metal from -- the higher grades are typically treated for the mill processing facility, and the lower grade is treated for the heat leach facility. And what's really the key take-away here is, in terms of the mill facility, 82% of the site's operating cash flow is being generated from our mill processing facility. And, if you look at the split of that 82%, 60% is actually coming from the underground.

As you can see with this chart, looking at it period-over-period, you can see the increased contributions that the underground is making in terms of bottom line operating cash flow and, correspondingly, in terms of earnings. And that's really what is allowing us to obviously, continue to augment our production profile. But, I think, more importantly, that is what's really driving the reduced cost structure and the improved earnings in cash flow in the current metal price environment. And that's, obviously something, that, as we move forward, you'll continue to see an increased presence of underground feed as we continue to optimize the North-East underground as well as expanding production at Santa Eduviges.

And that really is a key focus as well in terms of our exploration program. If you look at the exploration program and the extensive newsletter that we have been releasing this year, and two thirds of our exploration efforts are actually focused on the underground. Obviously, a key objective there being to continue to delineate additional resource and reserve expansions.

Moving on to the next slide on slide 12 -- just to cover up on El Chanate. This is, obviously, the latest asset that comes into our portfolio following the consummation of the Capital Gold transaction that we've been reporting production earnings and cash flow contribution here since April 8. That was the day that we closed a transaction. We fully completed the integration here, both operationally, and also from an administrative perspective, and this is a great asset fully autonomous, and it's really performing well. I think that's been demonstrated in terms of the Q2 results.

Production during the quarter was 15,500 ounces. Cash costs came in at $486 per ounce, which is in line with the guidance that we had previously released. El Chanate, as well, is a fully unhedged asset -- so fully participating in today's gold price environment. And if you look at the margins during the quarter, we realized a margin of $1023 per ounce. So, that allowed El Chanate to contribute during the quarter $14.3 million of positive operating cash flow. In terms of earnings before other items, El Chanate contributed $9.2 million. As Rene mentioned, we most recently released our program here in terms of optimizing El Chanate. It involves a five phase expansion program, and we've already embarked on phase 1 and phase 2.

The really key objective here is we obviously see a lot of potential in terms of expanding El Chanate's production profile. But equally so in terms of its reserve and resource based. We've been releasing quite expensive news flow in terms of the drilling program this year. And the board has approved a 20,000 meter program for the second half of this year. In terms of the grades that we're seeing at El Chanate, you're getting very good grades relative to the current reserve grade and also some very good intervals -- very good width in terms of those draw results. So that's what's really underpinning that expanded budget in the second half of this year.

So with that, I will now pass the pass the proceedings back to Rene Marion, our President and CEO.

Thank you, Scott. I'd like to go to slide 14 and perhaps elaborate a little bit more on Scott's comments on the previous slide 11. Russell Tremayne and his operating team have done an excellent job on improving productivities, but it's also not just productivities.

On the productivity front, depending on the open pit mill or heap -- or underground, we've seen tonnes per man shift; true productivity increases of 17% to upwards of 80% in those unit operations. And, therefore, a lot of the cost pressures that we have, which are very similar to all companies -- we've been able to counter that. On a liters per tonne of diesel fuel, that's down some 34%, and that's been done through better designs of roads and material management. And we've centralized procurement for the 3 operating mines, which reduces cost significantly. Most recently we saw cost for cement, example at Chanate, go from $180 per tonne downwards to below $150 a tonne through centralized negotiations. But, specifically at Ocampo, we had strong underground productivities of 1900 tonnes per day.

Development remains at 2500 meters per month. That's without the Cubo personnel and without the Cubo equipment. And keep in mind, that this material from underground represents 60% of our operating cash flow margins at Ocampo. The open pit continues to perform well at 110,000 tonnes a day. The pushback at Picacho is virtually completed, and, as Chanate did not need or require any further equipment from Ocampo, we decided now to move the pit gear towards the Conico North and South and Refugio South -- those final laybacks. But keep in mind, as well, the open pit productivity -- 20% of the operating cash flow margins are generated by the mill material coming from the open pit.

Mill productivities remain robust at 3200 tonnes a day with stabilizing mill feed grades and optimizing grind. Russell's team has been able to increase gold recovery from 94%, just over a year ago, to 97%, and silver, more predominantly, from 76% to 88%. And to reinforce Scott's earlier comment, the mill represent 82% now of our operating cash flow margins. The heat bleach continues to ramp up. In June we averaged 7,073 tonnes per day, and, in July, 8,952 tonnes a day. So we are ramping up faster than planned, predominantly because the access now of the Picacho ore. And this will continue to increase to target levels of 10,000 to 12,000 tonnes a day by the end of the year.

Switching over to the Chanate expansion. We immediately mobilized 12 new pieces of equipment into the pit and are currently mining at a rate that's 79% over the 2010 average. This did not cost us one cent -- not even mobilization costs for such equipment. The team at Chanate are stacking run of line material onto the heat leach pad, and, with the additional access to water, we've been able to put a lot of the older leach pads back under leach. They've been sitting idle for quite some time. We recently announced the potential 5 phase expansion program that may eventually ramp Chanate from 14,000 tonnes a day to 26,000 tonnes a day, or up 85%. The Board of Directors have already approved phase 1 and 2, which will bring the throughput rate for crushing and stacking from 14,000 to 21,000 tonnes a day for a capital cost of only $4 million or a rate of return of 1300%.

The engineering team, headed by Chris Bostwick, are busy incorporating the new drill data. They'll be updating the reserves for Chanate early in the first quarter and will be making a final decision on what expansion we'll eventually go. And we'll bring that to the market at the end of the first quarter. The exploration program, referred to by Scott, has been launched. There was one RC drill on-site. We've got a diamond drill now, because we believe the structure interpretation may be different at Chanate than by the previous owners. And that core drilling will allow us to test that structural interpretation. But already, following our model, our targeted drilling has seen upwards to double the grade and reserves grade. So, we just approved a second half exploration program. Of 20,000 meters.

Going over to slide 16 for a further update on El Cubo. Stoping tonnes have increased to 25,000 tonnes in the month of July. We have a new management team, and a new collective agreement, and development activities commenced in May 1. We already started developing immediately, to the new discovery of the Dolores Capulin, where we'll be drilling there shortly. In June, we averaged above 1000 tonnes a day, and in this month to date, in August, we're looking at 1,150 tonnes per day mined. So the productivity continues to improve.

We started long-hole mining for the first time in the history of El Cubo. On the lower right-hand side of slide 16, you can see our first stope. We had very strong hangwall footwall contacts, minimal dilution -- ground conditions are quite favorable, in fact, much better than even at Ocampo. And several of these stopes have significant widths that are much wider than Ocampo. We see that upwards of 40% plus of our production will eventually be from long-hole mining. We have remote control scoops now on site. The first new long-hole drill is on-site. The second one will be arriving shortly. Further to that, we're targeting 1,800 tonnes a day by the second quarter of 2012. And that's with in-situ mining. I would say that we are ahead of schedule on reaching that, but remain cautious and still suggest to anticipate 1,800 tonnes a day by the second quarter.

The mill re-commenced on July 11, and we immediately started processing the Los Chorros custom milling material, so that our operators could get back into the cycle of operating the mill. When we started the mill, we had 75,000 tonnes of ore stockpiled ahead of it. We currently have 57,000 ahead of it as of a few days ago. In July month-to-date, were operating at 1,740 tonnes a day, closely approaching our 1800 target. Recoveries continue to improve, as we work through some of the surface oxidized material that came from the underground mining because the mine sat idle for a year. But, already, were in the 80%'s plus metallurgical recoveries, and we anticipate approaching our historical 88%, 89%'s within the next month or two.

Exploration drilling is commenced, and we have our first priority is on Doloros Capulin, where we made a significant discovery last year. I believe there's 12 additional holes to be able to convert the measured and indicated resource there, to proven and probable by the end of the year. And we fully hope to be in their stoping no later than the second quarter of next year.

Moving over to slide 17, I'd like to take an overview at Ocampo, if I may. On the middle right-hand side the magenta colors, the North-East underground just a few years ago, where we had 6 veins and were operating at 400 tonnes a day. The turquoise is where it stands as of the end of last year with 27 veins and the footprint that's 4 times larger. We're currently running at approximately 1,700 tonnes per day. And really the major but bottleneck is ventilation and the fact that all the ore and waste has to be trucked to surface through the portal. The ore, then, has to be re-handled and brought back all the way up past the mill to the crusher and back to the mill. This year's exploration program in the North-East underground will hopefully allow us to make a decision by Q1 to go ahead and commission the shaft that has sat idle for the last 4 years, and perhaps give us an opportunity, by the end of 2012, to start increasing throughput some 10% to 15% more in the latter years.

Working our way to the south, through the turquoise, you see the dog tail headed towards the big red circle on the lower right-hand side. That's the Belen area that we're quickly developing and was announced as a new discovery last year. That's followed by a gold dotted line into the gold large -- I guess you'd call it a blob. What we're finding here is Belen actually goes into a new discovery called Altagracia. Altagracia is 3 parallel structures that have a strike length of upwards to 800 meters. So we've been focusing on developing underground towards it also drilling it from surface to a measure indicated drill pattern. And what were finding is that indeed Belen upper and Altagracia in the upper 200 m is headed all the way around to the northwest towards Picacho, and you can see in the bottom left-hand side some of the intercepts significant widths at grades almost order magnitudes higher than our reserve grade for the open pits.

That led us to take a look at some blank areas in Picacho, and we recently announced a new holes the lie outside of reserves but even outside of the pit shape and that Picacho drilling results came up with 26 meters of 12 gram, including 13.7 meters of 22 gram, 8 meters of 26 grams and 10 meters of 3.3 grams. So are pretty excited. We've got quite a few surface rigs on this to make sure that this not only gets to measured and indicated by the end of the year, but hopefully we can then design the pit extensions in the first quarter and try to get this into reserve. Moving over to Santa Eduviges -- that continues to perform well -- slightly better than expectations only on widths but on grades. And we remain on track to meet our targeted mining rates, by the end of the summer -- early September.

Moving up to the north, where we've circled in red level 2. The operating team are a kilometer into the hillside looking at drilling and developing 4 new discoveries made there. We're working on drilling that to indicated and to be able to make a production decision by early next year. And the reason this is all important, is if potentially we can get beyond 1700 tonnes a day in the North-East underground, hopefully, towards 2000, and if Santa Eduviges can operate at 500 tonnes a day and perhaps level 2 at a similar level. That would essentially fill the mill. And so early next year we will have to be revisiting the mill capacity and, perhaps, investigate whether a fourth expansion is required. And that's all underpinned, because the open pits continuously deliver 1000 to 1300 tonnes a day to the mill. So, were quite focused on our drilling program at Ocampo. It's going quite well. In fact, will be reaching 10 diamond drills underground by October.

Moving over slide 18, which is really a step out in the same district in the Ocampo Caldera. When we take a look at this region, it's an epithermal deposits very similar to Picacho, Guanajuato and Tayoltita, where, historically, they have minds or have remaining in reserves some 24 million to 30 million gold equivalent ounces. And, as I mentioned, this is very similar here at Ocampo. This camp currently has 13 million gold equivalent ounces in all categories including inferred. But the remaining region remains largely unexplored.

We now have 8% of the land position in this district. We now have the northwest southeast extension of Pinos Altos. We now have the northwest extension of [Kecheno]. We've already announced three new discoveries up at Venus -- La Balleza, where we have extremely high-grade underground targets, which is proving to be quite prolific. Santa Nino -- we've commenced drilling, and that represents an open pit target and both of these lie only a few kilometers to the Ocampo property boundary. And down at Gaby, we've drilled 5 holes. We're mapping down there and are hopefully resuming drilling before the end of the year. So we're really excited about the Ocampo belt moving forward, and we'll be busy for many years to come.

Switching over to slide 19 with El Chanate, exploration program, as you know, was launched in the second quarter. We have 1 RC drill and 1 diamond drill on-site. Our objectives this year are in converting inferred resources to measured and indicated, including the 213 holes in the new Reserve Resource update at the end of the year, extending the deposit at depth to the south and southeast, and using what we learn in-pit to identify new targets ex-pit for follow-up. We've already drilled to the end of the quarter 5000 meters and, as I mentioned, adding another 20,000 for the remainder of the year. We have one of the largest exploration programs in Mexico. And by October, it will be supported by 14 drills throughout the organization.

So, in closing, I'd like to highlight the following. AuRico is demonstrating quarter-over-quarter record results, including operating cash flow, net free cash flow, margins and cost. We believe that we're one of the leaders in reducing cash costs to the lowest quartile amongst our peers. Our Q2 results have supported our updated guidance that demonstrates stronger production at reduce costs. And we will see continued quarter-over-quarter production growth well into 2012. So, in closing, I would like to stress that we begin the second half of 2011 well-positioned for accelerated growth in an unprecedented metal price environment. And with no major capital costs projects ahead of us, were not exposed to the capital cost pressures that are prevalent throughout the industry right now. We are built, and we continue to grow.

So with that, I would like to pass it back to the operator to open up the lines for a question-and-answer period.

(Operator Instructions) We will pause for just a moment to compile the Q&A roster. David Haughton, BMO Capital Markets.

Just having a look at the throughput you've got from the underground. You've got targets pretty much in place from your discussion to lift the throughput to more than 2000 tonnes a day -- 2500 tonnes a day as a possibility. What should we be looking at for the timing for the startup of level II and what could it contribute?

Well I will take that David. This is Rene. First of all, in level II, we need to finish this year's drilling program and do the engineering in the first quarter of next years so that, not only can we get into reserves, but we can pick an optimal mining rate. So, at this point in time, we don't know where it would fall. There are 4 distinct strong structures with good grade. It carries great from about just under 2000 meter ASL straight down about 1500 meter ASL so there's a good 500 vertical meters there. It will take time to develop. I could imagine start seeing in second quarter next year some production from the area but really ramping up throughout the year. So it's a little -- still early to tell. With regards to the North-East underground, it would probably take us -- we are just putting the plans together right now, but I would say in the order of about 3 quarters to get the underground conveyor a way in and everything up and commissioned. So we could potentially be seeing some increased production from the North-East underground by probably Q4 next year.

And for access to level II are you looking at a portal from the belly forth like you've got for North-East, or is there some other access that you think you've got?

No, it has a different access. It's about halfway elevation wise from the North-East portal to the mill. It's just down from the hotels off the main road going up the hill.

Okay. So that makes it relatively easy then to haul material up to the mill?

Yes, and it was -- the access was driven over size to allow trucks.

And for the mill throughput during the quarter, you're at about 3,200 tonnes per day lifting to maybe 3,200 tonnes a day through next year. How far can you push what you've got at the moment.

Well, we are currently investigating, the main primary crushing system at the mill itself, can do over 4,000 tonnes a day. We are investigating whether or not we can convert the rod mill to a ball mill and, under such a scenario, we believe we can get in excess of 4,200, 4,300 tonnes a days through the grinding circuit. Obviously, we have excess capacity on the filtering circuit. We probably would add a fifth filter. The main area for construction would be additional thickeners, leach tanks and, obviously, expansions in the [maril cove] and gold room, so not significant capital requirement.

And that would all be contingent on that additional underground high-grade feed?

That's right we would not expand the mill, unless we believe at the end of the first quarter that it's reasonable to assume we can expand underground.

All right, for the heat leach in the quarter were looking around about the 5,000 tonnes a day, we've got plans to just about double that is you're exiting 2012. If the underground comes through do you really need to have that kind of stacking? Could you just focus more on the higher grade material and less on the -- lower grade open pit?

We'll be putting always the best grade onto the heat leach pad, but it runs totally separate -- from a cost structure standpoint, it's likely in the $750 an ounce range, so the underground is really the cost driver here. But sill on the order of $800, $900 margins off the heat leach pad. As I mentioned earlier in July, we did 8,900 tonnes a day and we anticipate that continuing to increase his quarter. So, still free money. It's not the driver though for our operating cash flow margins.

Right -- although it contributes at 25,000, 30,000, 35,000 ounces sort of thing.

Yes.

Having a look at El Chanate. I know you have got your five step plan there you had previously discussed, only about a month ago. Now you have Phase I and II pretty much under way. What do you need to commit to the balance of that expansion?

It's all a matter of to be able to do a proper NAV curve at different throughput rates, we needed to update the reserves, rerun the pit shells and phasing, for all different scenarios from 21,000 to 23,000 to 26,000 tonnes a day. And that way were going to have --be picking the optimal the NAV impact, which we believe lies between that 21,000 to 26,000 range. So for that, get all the drill holes into the database, get this 20,000 meters in, which is predominantly in pit or just barely ex-pit asked re-optimize the pit that metal prices. So that's why we're saying Q1, and we'll probably saw off data by early to mid-December. We won't be able to make any significant changes to interpretation or geological structural interpretation for reserves, because over 90% of the historical drilling was RC. We believe that, in a different structural model, but we only have one diamond drill there testing that. So we'll be using next year to reinterpret the deposit. So Chris Bostworth and his team are busy updating the old resource model that's [cragged], using that along with our interpretation right now to drive the 20,000 meters of drilling then add that into it and update the plan in Q1.

All right. Thank you.

(Operator Instructions. There are no further questions at this time. I turn the call back over for any closing remarks.

Okay, thank you, operator. And thank you listeners for joining us for our inaugural AuRico Gold Q2 conference call. And if there's any further questions, feel free to contact Ann Day, and we'll get back to you as soon as possible. Thank you very much.

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