Alamos Gold Inc (AGI) 2011 Q4 法說會逐字稿

Well, welcome, everybody. Good morning, ladies and gentlemen, here in St. Andrews, but also people that are listening in on the webcast. We're going to go through first thing this morning AuRico's 2011 fourth quarter and year-end financial results conference call and webcast. I'm Rene Marion, Chief Executive Officer. I would appreciate it if everybody could turn off their phones and Blackberries so we don't have any disruption of our audience that are on the webcast.

And before we start, I would like to refer everybody to AuRico's forward-looking statement disclosure. Joining me today are Scott Perry, our Chief Financial Officer; and Russell Tremayne, our Chief Operating Officer for Mexico. Unfortunately, Peter MacPhail cannot join us, he's our Chief Operating Officer for Australia and Canada, as he is en route to Australia to meet up with the Crocodile Gold personnel. So in his place we have Luke Guimond, General Manager for Young Davidson; and we've got Andrew Cormier, our construction manager for Young Davidson. And also we have Ann Day, our Director of Investor Relations. For the analyst day presentation that will follow at 11.00 a.m., we'll also be joined by Chris Bostwick, our Senior Vice President of technical services; and Chris Rockingham, our Vice President of exploration and business development.

This morning, I'll start off with presenting a brief update of 2011 and then pass it over to Scott, where he can review the fourth quarter and year-end financials. Then I'll, at a high level, provide the three year guidance for the Company that we released this morning. It's a really exciting growth profile, and I hope we'll be able to share quite a bit of detail in the subsequent analyst call starting at 11.00 a.m. Following the presentation, we'll open up to the floor initially for a Q&A period, and then we'll go to the webcast to see if there's any questions from there. We would like to remain on time and finish no later than 10.50 a.m. That will allow us 10 minutes to get set up for the analyst day call and allow everybody in this room to grab a quick lunch. And please note that the presentation is available on the website and via the webcast.

Well, I'll start off with last night's announcement with our Australian assets. As you saw in our financial statements last night, we have put the Australian assets as discontinued operations. That's an IFRS definition, and it's because from the onset in November, we said we would divest. Well, last night, we announced the transaction with Crocodile; $70 million in cash payable upon closing, 20 million shares or $10 million in script, and $25 million in deferred payments for a total of $105 million; but in addition to that, the way I look at it is we were allowed a $12.5 million cash fleet from the balance sheet, so the entire amount is $117.5 million.

There is no condition of financing for closing, and we anticipate closing the transaction by the beginning of May. This allows us to focus on our North American assets. We've always said in our vision, we want to be a North American centric company. And as of last night, we are. And now, we can focus on our exceptional unprecedented growth profile.

I would like to comment on a few things here. 2011 was truly a transformational year for AuRico. We started the year with one operational mine. We ended the year with five. And as of last week, Young Davidson is processing ore, so now we have six; and we divested of the two Australian assets. I'll provide more detail on how we're doing a little later in this presentation, but I would like to talk about 2011, where we grew production in North America by 35% to 264,000 gold equivalent ounces, and we kept cash costs in tow at $461 an ounce. We grew our margins by a whopping 51%. In other words, $1,138 an ounce or 71% a spot. We grew our revenues to a record $402 million. We grew our operating cash flow to $160 million or up 63%.

Our net earnings went up 191%, and we added 1 million ounces to Young Davidson in proving probable reserves and we discovered 456,000 ounces at Ocampo. We grew our shares -- or our reserves per 1,000 shares by 56%. We went from 19.6 ounces per 1,000 shares to 30.6. And we've also bolstered our management team. With the transaction with Northgate, we now have a strengthened operating team, but also a very strong development team and exploration team. In 2011, we also completed the harmonization and integration of four companies AuRico, Capital Gold, [Nioreed], and of course, Northgate. And all at the same time, we ramped up Chanate by 50%, and we embarked upon reengineering studies at Young Davidson. So you must agree that 2001(sic) was quite a fast-paced year.

So quickly, I'll look at our operations. Year over year, reserves grew by 5.9 million ounces or 217% to 8.6 million ounces. Our measured and indicated resources grew by 5.4 million ounces or up 758%. At Young Davidson, we started mining in the open pit in November last year. Just in the past two weeks, we started wet commissioning, crushing ore, and now as of the 22nd, processing ore. We also have 575,000 tons ahead of the crusher. That's over three months of production.

We grew our reserves by 1 million ounces, 36%. But what's more important is we grew our reserves measured and indicated and inferred resources by some 53%, from 4.1 million ounces to 6.2 million ounces. This places Young Davidson as one of the largest mines in the Timmins Kirkland Lake camp ever. And it shows the acquisition in Northgate of just over $1 billion was indeed a cheap acquisition. At Ocampo, I mentioned we discovered 456,000 gold equivalent ounces. The vast majority of those ounces are high margin mill feed ounces. This quarter, we're averaging over 2,200 tons a day in the underground operations. That's important because historically, underground contributes 75% of the operating cash flow.

We also finished all the engineering studies on level 2, our third underground mine that will be in production by early 2014. We'll also increase our underground mining rate from where we are today, 2,200 tons a day to 3,000 tons a day. We completed our engineering studies in the expansion of the mill, from 3,200 tons a day to 4,000 tons a day, and we'll embark on a construction program in the latter part of this year so we can commission by early 2014. And we finished the engineering studies in the northeast underground mine for commissioning the shaft in underground ore handling systems. And that will be commissioned by 2014.

At Chanate, we finished the Phase II expansion ahead of schedule. Just in the last 10 months, we have increased the mining rate by almost 80% in the pits and 44,000 tons a day to where we are this quarter to date at 78,000 tons a day. We increased the crushing and stacking by 50%, from 14,000 tons a day to 21,000 tons a day. We increased the area under leach in the pads by 67%. Every single ton placed on those pads are now going under leach. And we increased the capacity of our processing facility, the ADR plant by 66% with 5 tons. And again, I got to stress, we did all of that without changing any personnel and only in a 10-month period.

And at Cubo, we've got three long hole drills going. The crews are being trained. The crews on remote mucking are being trained. We're at 1,200 tons a day right now, 20% of our production is long hole, and we're on target for ramping up the contribution of long hole to over 90% by the end of the year and increasing our tonnage from 1,200 to 1,800 tons a day. And of course, we'll naturally see costs go down hand in hand.

And what's really exciting at El Cubo is Dolores Capulin Discovery. This is a blind deposit that does not carry up to surface, yet we were able to add to reserves and significantly to resources, both open pit and underground targets. We commenced development towards Dolores Capulin in September last year. Well, we're in ore now. We're doing the foot wall development and ore development as we speak, and remain on target to put Dolores Capulin into production in the third quarter.

Before I hand it over to Scott Perry to discuss the financials, I do want to circle back and talk about Ocampo. As you're aware, in the fourth quarter we ran into some sequencing issues underground. We typically run up to 27 stopes at any one time at Ocampo, and we do that so that we can mix our ores and maintain a 4.5 gram to 5 gram -- or 4.5 gram to 6 gram, I'm sorry, head grade going to the mill. And we do that because we get optimal metallurgical recoveries, and it straddles the reserve grade. During the fourth quarter, we had new mining areas that we had to table bolt, and so we replaced a significant tonnage that was planned that was going to be 5.3 gram to 9.6 gram a ton, deferred that and replaced it with 1.7 gram to 4 gram a ton.

And you can see in November, our grades from the underground operations dropped to just above 3 gram a ton. What you can also see on the chart is we're now back on track. In March, we're running at over 5.5 gram a ton. This resequencing has been completed. So with that, I'll now pass it over to Scott Perry, our Chief Financial Officer, to discuss the Q4 and year-end financials. Thank you.

Good morning. Okay. Thanks, Rene, and good morning, everyone. It's a real pleasure to be here today reporting a set of financial results for a year that truly did knock on the most transformational years in AuRico Gold's history. In the back of 2011 and I guess implicit in today's three year guidance, this Company has never been better positioned for growth, for participation in today's record metal price environment, and strongly positions the portfolio going forward in terms of growing profitability, operating cash flow generation; and therein, compelling valuation upside.

Today, I'm going to walk you through the key financial performance highlights and try and break down some of the moving parts as being a transformational year with some specific accounting items that I do want to give you an overview on. So 2011 represented first time adoption of International Financial Reporting Standards. I would generally put forward that relative to the previous regime being Canadian GAAP, there wasn't any significant impact on our financial results. But you will note there's a lot more disclosure in terms of our financial statements.

Most importantly, 2011, we embarked and closed two key strategic acquisitions. The first one being Capital Gold, which we closed in early April of 2011. That delivered the El Chanate operation into our portfolio. Second acquisition that we closed at the end of October was the Northgate acquisition, and that delivered the prior Young Davidson asset. As part of these acquisitions, we had to embark on purchase price accounting evaluations. And you'll see a lot of disclosure in our financial statements on that in our business combination section. But also, in terms of assessing and evaluating our Company's results and what's indicative of going forward, bear in mind that El Chanate, we've equity accounted for nine months worth of production and contributions in El Chanate. Likewise in terms of Northgate, in terms of closing that transaction at the end of October, we're effectively equity accounting for approximately two months worth of contributions.

Now, with closing the Northgate transaction, that delivered essentially 100% ownership into operations in Australia being the Fosterville operation and the Stawell operation. At the very outset of these transactions, we always deem these assets to be non-core. That didn't fit with our portfolio of low cost, high growth North American domicile assets, so as always being our key objective as divesting these assets and we saw that we've been successful in that regard as per yesterday's announcement. But from an accounting perspective under International Financial Reporting Standards, we have to account for these assets as discontinued operations. And the specific classification there, so when you review our income statement or our cash flow statement, you'll see in terms of the contribution that these assets we're making to the Company's results, they're categorized as a separate line item down at the very bottom of the income statement and down at the very bottom of the cash flow statement.

And from the perspective of the analyst community, when evaluating our Company-wide results, I would definitely advocate you need to include these standalone line items when evaluating our Company-wide's results versus what may be your estimate or consensus estimates. The fourth item there, just on Canadian tax loss pools. Prior to the Northgate transaction, AuRico Gold has always had quite a sizable pull of carry-forward tax loss pools that we've never previously recognized on our balance sheet, and our inability to do so was due to the fact that we never had Canadian domiciled income. But we've closed on the Northgate transaction, and that's bringing the Young Davidson asset into our portfolio, which will be going into operations very shortly, we now have a source of Canadian income and it's now highly likely that we'll be able to utilize these carry-forward tax losses to offset that Canadian-based income going forward. So again, from an accounting perspective, we're now recognizing these losses as a deferred tax asset on the balance sheet and likewise in terms of the income statement, you'll see a deferred tax recovery flowing through.

In terms of the balance sheet, we're revising the carrying value of two of our Mexican assets. Namely, the El Cubo gold mining operation, as well as the Guadalupe y Calvo development project. At El Cubo, we had previously booked a pretax $223 million impairment adjustment at this asset when we suspended operations back in June of 2010. In the fourth quarter of this year, we determined that a lot of the factors that drove that impairment adjustment had now been resolved and, again, under International Financial Reporting Standards, we were required to evaluate whether or not that impairment should be reversed. The operation is back online. Operational performance has definitely improved. We're getting good productivity, improved cost efficiencies, and we're in a much higher gold and silver price environment.

So when we looked at what is the new value of El Cubo as per our assessment, this is the balance sheet carrying value, what was required was an upwards revision to El Cubo's carrying value of some $109 million; and on an after-tax basis, in terms of the positive impact you'll see flowing through our income statement, it's approximately a favorable $84.2 million impairment reversal adjustment. Secondly, at Guadalupe y Calvo, for the majority of 2011, we have been working on a preliminary economic assessment at this project, the results of which were finalized and reported through to the market in February. When we look at the fair value that was ascribed to Guadalupe y Calvo, the balance -- the carrying value on our balance sheet needed to be revised downwards to be consistent with the value derived from the preliminary economic assessment. So again, what you'll see on our balance sheet is we're revising downward the value of Guadalupe by some $57.8 million; and then likewise in terms of the impact on our income statement, you'll see an after-tax adjustment there of some $41.3 million. So in total, from an accounting perspective in terms of income statement, you're going to see a favorable after-tax $43 million impairment reversal adjustment; and likewise in terms of our balance sheet, you're going to see our net assets growing by a corresponding amount.

Okay. So accounting aside, diving into operational performance, focusing first on the key quarterly results; as you can see here, our gold equivalent production for Q4 was some 75% higher than the prior year corresponding quarter. This reflects new production from El Chanate coming into the fold following the Capital Gold acquisition. It reflects new production from El Cubo following the -- following the resolution of the labor disruption there. And it also reflects two months of production from Northgate's Australian operations being equity accounted for. And so when you come down to the next metric being total cash cost per ounce, you can see that our cash cost per ounce was higher than the prior year corresponding quarter. But the context here is we have two months of those higher cost ounces in the Northgate Australian operations, as well as higher cost balances from El Cubo. El Cubo is ramping up to full production capacity, so whilst we're going through that ramp-up, the cost efficiency is there and not at their optimal targeted rate.

In terms of the realized metal prices as essentially records. That's obviously concurrent to the strong metal price environment, but also reflects our fully unhedged status or profile in terms of all of our gold revenues and our silver revenues. Down the bottom half, looking at the full year calendar results, in terms of the gold equivalent production profile, it was 50% higher than the prior year period. That's really reflective of the two strategic acquisitions that we closed last year. It really has transformed this Company's annualized production rate and bodes very well for what you can expect moving forward into 2012 when very shortly we'll see Young Davidson coming into operation; and again, consulting our guidance and looking at our North American portfolio, this is a number that's going to be very quickly growing to some 400,000 ounces of annualized production.

In terms of the total cash cost per ounce, one of the key niches that we've always enjoyed, if you look at our portfolio-wide cash cost per ounce, we're definitely in the lower cost quartile versus industry average. And you can see that being demonstrated here where for the full year, our result came in at $501 per ounce. Again, that does reflect two months of equity accounting for those higher cost Australian operations. We're now divested of those assets and we're entirely focused on our North American domiciled portfolio. In terms of this $501 cash cost announced result, that's 6% higher than the prior-year period. But if you back out the Australian operations, the result for the Mexican operations was $461. So we actually outperformed last year's costs per ounce.

And again, in terms of our realized metal prices, and I guess referencing the chart in the bottom right-hand corner, again, because of our unhedged profile, we continue to realize very strong margins. Year over year, we've been growing those margins. That is obviously concurrent to the rising metal price environment. But also, we've been very good at containing costs. If you look across our operations, our operators have done very good in terms of fiscal cost management, and we haven't seen a lot of the inflationary pressures resonating in our cost structure that we may have seen in our comparative peer group.

In terms of the financial performance, again, just referencing the quarterly highlights, in terms of the bottom line net earnings number, net earnings was significant -- it was 166% higher than prior year corresponding quarter. What's that attributable to? We've got an expanded portfolio of production, you've got the higher realized metal prices. There's also the reversal of that net impairment adjustment in El Cubo. So that's what's driving those very strong earnings. Likewise, in terms of cash flow from operations, stronger metal prices, higher level in production.

Looking at the full year calendar results and the key highlights there, if you look at bottom line net earnings, $177 million, significantly larger than the prior year period. Again, this reflects the expanded portfolio of operations. It reflects nine months, with El Chanate being consolidated in our results. But again, also favorably benefiting from that net impairment reversal at El Cubo. In terms of cash flow from operations, this is really the key metric on what we gauge the business by. Operating cash flow was approximately 86% higher than the prior year period. So obviously, we're -- again, reflects the expanded portfolio production, it reflects the higher metal prices, but it also reflects very good cost performance at our operations.

And that's really illustrated in the chart there in the bottom right-hand corner, and it's quite an exciting trend, something we're proud of. You can see year over year, we've been really driving trending higher on that operating cash flow per share metric. Again, I look favorably forward to 2012 and beyond, when you'll be having 12 months worth of El Chanate in this metric, and you'll have Young Davidson coming into operations. And Young Davidson will be ramping up year over year. And just one balance sheet highlight, treasury perspective, we finished the year with $180 million in cash reserves, and we look at our cash balance in light of the Australian divestment and the pending cash injection from that transaction, and we look at the available liquidity on our credit facility profile, as well as our operating cash flow streams within our existing portfolio, we've got good financial liquidity and we're more than adequately financed moving forward.

This slide is just a water fall chart, just breaking down our fourth quarter earnings result, just trying to demonstrate where a lot of the profitability is coming from. We're just moving from left to right. You'll see the North American operations had very robust performance during the quarter and generated approximately $50 million of earnings. That was favorably complemented by positive earnings from the Australian operations. The Australian operations during the fourth quarter, they generated $15.5 million. Again, when you're consulting our income statement, you'll see that as a separate line item down the bottom. Likewise, in terms of cash flow, the Australian operations were positive $2.3 million, and that's down the very bottom of our cash flow statement.

Other items of note, in terms of the convertible bond that is outstanding, that's obviously recognized as a liability on our balance sheet. There is an option component implicit in that convertible bond. On a quarterly basis, we do have to revalue that option component. That component was revalued downwards as a liability, so that was a favorable adjustment in terms of its impact on earnings. G&A expense was approximately $8.7 million. You can see tax expense there.

And then a couple of the decrements on the right, we had -- we revalued our Mesquite exploration property following the discontinuation of our exploration program there. Share-based compensation expense of $2.7 million and transaction related costs associated with the Northgate acquisition of $7.7 million. So that then leaves you with a subtotal of $35.1 million; and then to the right of that, you can see the impact of the net impairment reversal at the El Cubo operation. When you aggregate that, that's what leaves you with the fourth quarter result of $78 million. In terms of the transaction-related costs and the revaluation of the Mesquite property, that may be of interest for the analyst community. I would advocate that those items are one-off, not indicative of future operations moving forward.

Final slide here is just a breakdown of the portfolio in terms of the core assets. Now, all of these assets are really our Mexican-based assets. But obviously very shortly, we're going to be including Young Davidson within this schedule as well, with Young Davidson coming into operations and obviously being a core asset. But I guess referencing the top section of this chart, you can see key take-aways, all of the Mexican assets contributed favorably to our after-tax earnings, they contributed favorably in terms of operating cash flow performance within the quarter.

One item that probably stands out is El Cubo's cash cost per ounce during the quarter. Cash costs were around $1,096 per ounce. But again, the important context there is El Cubo is ramping up to full capacity. El Cubo will be at full capacity in the second half of this year, and our guidance for El Cubo this year is around $750, so that's what you can sort of be expecting as we move forward. In terms of the 12-month result, looking at the individual contributions in the assets, obviously Ocampo and El Chanate are key assets, Ocampo generated earnings of $158 million and generated operating cash flow of $175 million. Ocampo alone represented just under $1 per share of operating cash flow.

Again, El Chanate very strong contribution to the portfolio. Bear in mind that El Chanate result is only nine months worth of equity accounting. So bodes well as we move forward, when we think about El Chanate being in the fold for a full 12 months. And again, El Cubo operating on its way ramping up to full capacity in the second half of this year. And again, you can see the cash costs per ounce there for that portfolio, $461 per ounce. And again, a lot of costs -- lower cost quartile in terms of the portfolio.

So I guess in wrapping up, I said it at the beginning and I guess I'll use it to wrap up now. With Young Davidson coming into operations, this Company has never really been in a better position when it comes to growing profitability, growing operating cash flow generation across the group and what that means in terms of the inherent valuation of the Company. With that, I'll pass proceedings back to Rene Marion, our President and CEO.

Thank you, Scott. On this section of the presentation, I'm hoping to leave you with four take-aways. I'll list the take-aways and see if we can wrap up with the take-aways. AuRico has an unparalleled growth profile in the intermediate gold space. We have four key assets located in North America, geopolitically sound. We have low cost operations. Three of our four assets being close to the $500 an ounce range, but well below industry average forecast for this year, which is $670 an ounce. And finally, we successfully and accretively shown that we can grow our reserve base at a cost that is much less than the industry average of $80 an ounce. So as I move forward throughout this presentation, we'll only be talking about North America through the eminent sale of Australia.

We'll start off with the reserves. If you look in the top two charts, we're looking at North America tripling our reserve base through from end of year 2010. In fact, if you take a look at the snapshot in the top left-hand chart, we have even broken out 2011 into three stages. In 13 months, we've increased our reserves per 1,000 shares by 51%. The reserves are in North America. If you look on the bottom left-hand chart where we've increased that 51% per thousand shares, our assets are in North America. They are not in geopolitically unstable countries. Our reserves and resources have also gone up 9% on a per thousand share basis.

Here I'm going to break out this year's forecasted production of 370,000 to 420,000 ounces by quarter. At Ocampo, the first quarter will be between 36,000 to 38,000 gold equivalent ounces, as we ramp back up the underground to our target of 4.5 gram to 6 gram a ton. And then for the remainder of the year, it will be fairly consistent, between 45,000 to 55,000 ounces a quarter, reaching our guidance of 180,000 to 200,000 gold equivalent ounces. And at El Chanate, while we said if you're operating at 14,000 tons a day stocking, we'll do 14,000 ounces a quarter. We saw in the fourth quarter when we did 18,000 ounces -- tons per day, we did 18,000 ounces.

In the first quarter, we'll do 18,000 to 20,000 ounces, as in March, we commissioned our 21,000 ton a day expansion. And then for the remainder of the year, we'll be running at 21,000 tons a day and we'll be balancing between 20,000 to 23,000 ounces a quarter. At El Cubo, we'll continuously ramp up production throughout the year, reaching our guidance of 47,000 to 57,000 gold equivalent ounces, as long haul production increases. And then at Young Davidson, we'll produce 15,000 to 17,000 ounces in the second quarter. We won't be in commercial production then. We're assuming commercial production by Q3, but you'll see quarter-over-quarter this year increases in production and that continues on for many years to come.

So you're looking at going from Q1 to Q4, an increase of 71% to 83% in production. And on the cash cost side, Ocampo will be in the low $500 an ounce in the first quarter and then reducing as we get back to where we historically have been. Chanate, first quarter's looking like fairly good cost, between $410 and $440 an ounce. And then we're suggesting in the mid to $400 to $500 range for the remainder of the year. In El Cubo, we'll start the year off at $1,000 an ounce. But then return by the end of the year to more of our historical cost structure. And at Young Davidson, we're anticipating $450 to $550 cash costs, with the contribution from underground mining commencing in the fourth quarter. So our year guidance is $500 to $525 cash costs, well below the $670 an ounce cash cost the industry is experiencing right now. When we roll that into our three-year guidance, we're looking at a 32% compounded annual growth rate. We're tripling our production profile from 2010.

Ocampo will be steady for 2012 and 2013, and come 2014 with mill expansion, the underground level 2, our third underground mine running, we anticipate going to 210,000 to 245,000 ounces perhaps upwards of 20% higher production. Chanate will average between 75,000 to 85,000 ounces depending on grades, but with the possibility of getting to 95,000 ounces in 2014 without any further expansions. El Cubo will hang around that 50,000 to 70,000 ounces. And the reason we believe we can do that is we're experiencing a lot less dilution with long haul. We're already seeing in the first quarter, our grades coming up. And Young Davidson reaching 135,000 to 155,000 ounces next year, 165,000 to 190,000 ounces.

Next year, we anticipate averaging about 1,500 tons a day from the underground mine; and in 2013, approximately 4,000 tons a day from the underground mine. It will take till 2016 to ramp up to 8,000 tons a day. We'll also outline the cash cost structures. Ocampo hanging around the little higher cost in 2013 due to stripping and not being at the higher tonnage rate yet. Going back down to the low $500s in 2014, predominantly because of the mill expansion, and really spreading out our fixed costs over larger denominator of ounces. Chanate will remain in the mid $400 range to $500.

El Cubo should stick around its historical costs, and in Young Davidson costs will reduce come 2014 because of the significant increase in underground operations. In fact, 50% of the mill feed will be from underground. CapEx, we're giving guidance already of $271 million to $307 million this year. It is a heavy year. A lot of that has to do with the accelerated capital cost structure for ramping up the underground much sooner than originally planned in the feasibility; and so for example, the Northgate head frame is being constructed. The underground development was being expanded, additional underground equipment was being brought on and the shots are being sunk.

What happens next year? We're looking at reducing Ocampo costs. We do have to finish the CapEx on the expansion of the heat lease, that's why our CapEx goes up to $60 million, but then it reduces in 2014. We do have capital strips on these new pits that we have discovered. At Chanate, we have to finish next year, the stripping on the east lay back. At Cubo, we really anticipate status quo, sustaining CapEx in 2013 and 2014, along with capital development. And Young Davidson, you'll see in 2013, we're working on the shafts, we're working on accelerated development, and we'll have heavy development up until when we reached steady state in 2016. What you'll see in 2014, capital costs reduce down to about $50 million. So overall, our CapEx requirements reduced by 32%.

Now, I don't want to take too much thunder from Luke and Andrew, but I will talk briefly on Young Davidson. What we've accomplished in the last 4.5 months, already spoke about increasing the reserves to 3.8 million ounces. We have reengineered the underground mine. We've gone from four mining methods, really to one, to long haul. We've color coated this long section. The red is transfers long haul and the magenta is longitudinal long haul, and it's just based on widths of the ore body.

By the introduction of a pace backfill plant, we now can increase mining recovery from approximately 70% to 92%, and that added over 600,000 ounces to our reserves. And pace fill allows us to reduce dilution to 10%. The underground development is being accelerated as we speak with production from the upper boundary zone, which is our best drilled area and our highest grade area commencing in the fourth quarter. Our mill capacity optimization studies show that for very little money, we can increase the capacity of the mill to 8,000 tons a day, so our strategy at this point in time for now is to go to 8,000 tons a day. And Chris Rockingham will point out why he's so bullish on this deposit being open at depth and on strike.

If we take a look at the camp, virtually all the historical mining was the top 2 kilometers or 2,000 meters, and we're only down to 1,400 meters right now. This shows our growth profile. North America over the next three years, 200% growth. I'll go back to my four take-aways. AuRico has an unparalleled growth profile in the intermediate gold space. Well, we've got a 32% CAGR to 2014. We have four core assets located in North America and offer low geopolitical risk.

Young Davidson is the sixth largest mine in Timmins Kirkland lake camp ever. It is a Company maker. Ocampo will be ramping up to perhaps up to 245,000 ounces a year by 2014. It's another Company maker. Chanate should be able to get it to over 90,000 ounces in 2014.

We have a low cost structure. As you saw, between $500 to $550 long-term. That's well below the $670 that the industry is experiencing right now. And finally, successfully and accretively growing our reserves. While we increased our reserves by 51% per 1,000 shares, discovery costs is well less than 50% of the industry. So with that, I would like to open it up to Q&A. We do have a microphone here. We'll go to the floor here in Toronto first and then we'll take a few questions from the phone line. Thank you.

Nothing? Okay. Well, with that, I would like to take a 15 minute break. We'll start at 11.00 with the analyst day. We do have lunch out -- no? Okay. Next break. Okay. We will have lunch in a break.

The way we'll structure the analyst call at 11.00 is we'll start off with Chris Bostwick. He'll speak about the reserves. Then we'll have Luke and Andrew update everybody on Young Davidson. Then we'll have a short break to collect lunch. Then we'll hand it over to Russell Tremayne for the Mexican operations and then Chris Rockingham. Thank you very much.