Alamos Gold Inc (AGI) 2012 Q2 法說會逐字稿

Good morning. My name is Adam, and I will be your conference operator today. At this time, I would like to welcome everyone to the AuRico Gold Inc. 2012 second-quarter results conference call. (Operator Instructions). After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

Rene Marion, President and CEO, you may begin your conference.

Well, thank you, operator, and good morning, ladies and gentlemen. Welcome to AuRico's 2012 second-quarter financial results conference call and webcast. Before we start the call, I'd like to refer our listeners to AuRico's forward-looking statements disclosure.

Joining me today are Scott Perry, Chief Financial Officer and incoming President and CEO; Peter MacPhail, COO, Canadian operations; Russell Tremayne, COO, Mexican operations; and Anne Day, Vice President of IR. This morning I'll present a brief update on our 2012 second-quarter results, and then Scott will present an overview of our second-quarter financial results. I'll then further update the listeners on our operations. And as the operator said, following the presentation, we'll open up the lines for a Q&A session. Please note, though, that the presentation that we're using is available on our website.

Onto slide 4. We've made great strides during the quarter at Young-Davidson, and I'll highlight later in the presentation many of these, but I do want to point out just a few items. The mill continues to perform better than planned. We have 1.2 million tonnes ahead of the mill, including approximately 150,000 tonnes of high-grade open pit ore, which we'll commence processing in early September.

And the long hole drilling contractor has mobilized on site to commence underground production drilling in September on schedule. We remain on target to declare commercial production by the end of this month.

At Ocampo, our recruitment campaign is at the 90th percentile position. Order development in July improved, and drill-ready ore increased by 10%. The first contractor is currently mobilizing and is anticipated to start breaking rock by the end of the month. And finally, grades on the heap leach are increasing to those similar to the beginning of this year. And as you know, we concluded the sale of non-core assets during the past three months.

On slide 5, the key highlights at our North American operations on this slide include Ocampo, production of 37,579 gold equivalent ounces at a cash cost of $515 an ounce, including a non-cash NRV adjustment that Scott will elaborate on. Total cost came in at $774 an ounce.

Chanate performed well at just under 18,000 ounces at a cash cost of $433 an ounce. Now that same six heap leach pad has been commissioned, we are seeing an increase in production, as we have a good mix on variable lifts now being leached. With the completion of the 16-inch water line later this year, we fully anticipate continuing improvements up until the line is fully commissioned and we get over 80% of the pads under leach.

And Young-Davidson produced almost 12,000 ounces during the quarter, with over 7000 ounces in June. And as I mentioned earlier, we anticipate declaring commercial production by the end of the month.

So with that, I'll pass it over to Scott Perry, our Chief Financial Officer.

Thank you, Rene. Good morning, ladies and gentlemen. I guess just to start my review on slide number 7, in terms of the second-quarter operational performance overview, firstly, the operational results illustrated herein include the results of both continuing and discontinued operations. As Rene mentioned, we have successfully divested to what we deem to be our non-core assets with the Australian asset disposition closing on May 4 of this year, and the El Cubo and Guadalupe y Calvo disposition closing on July 13 of this year.

Given the change in ownership closing dates, the applicable assets do contribute to AuRico Gold's second quarterly results, in which they have been presented as discontinued operations. Accordingly, with regards to this slide, it is important to note that the operational results illustrated herein do include the results of both our continuing and discontinued operations.

So moving through the metrics. Gold and crude in production was slightly higher than the prior-year corresponding period, reflecting new production contributions from the Australian operations acquired through the Northgate acquisition; the resumption of operations at El Cubo, which together, offset the lower production contribution from Ocampo.

The total cash costs per gold equivalent ounce was $698 per ounce, which was considerably higher than the prior-year corresponding quarter and reflects higher cost balances from those non-core Australian mine sites as well as the El Cubo operation, all of which has since been divested. If we do back out the contribution of these non-core assets, the total cash cost per ounce was $488 per ounce prior to a net realized ore value adjustment on the Ocampo ore in process heap leach inventory.

Referencing this inventory valuation adjustment, and by way of background and additional color, at Ocampo, pre-stripping activities are predominantly completed at the Picacho open pit, and mining activities have now been accessing the lower-grade halo of the ore body, with the grade expected to slowly increase over the next four quarters as mining activities move closer to the higher-grade core of the pit.

The cost of the mining activities charged to the Ocampo low-grade ores that are added to the leach pad, such costs being open pit mining, processing costs including applicant applicable overhead, depreciation, and amortization -- these costs, combined with the 16% decrease in spot silver prices, are not expected to be fully recoverable at the end of the second quarter.

This resulted in a non-cash flow inventory valuation adjustment of $14.4 million to revalue this inventory at an estimated minute realizable value. In terms of further breakdown, this adjustment of $14.4 million increase production costs by $8.7 million and amortization and depletion expense by $5.6 million.

We should note that should metal prices appreciate in the immediate future, a portion of this adjustment could then be reversed under IFRS accounting standards. Conversely, should metal prices decline further into the future, or should there be a delay in accessing higher-grade ores in the open pit, there is potential for further net realizable value adjustments.

As it was, the net realizable value adjustment increased the Company-wide cost of goods sold by the $8.7 million I mentioned earlier, which results in a Company-wide total cash cost per ounce of $822, as illustrated on this slide. Again, this result does reflect higher cost balances from the divested non-core assets, so if we do back out the non-core assets, the Company-wide cash cost per ounce inclusive of the NRV adjustment was $661 per ounce.

In terms of the realized metal prices, we realized a 7% increase in gold prices; however, our realized silver price was 24% lower than the prior-year corresponding period, which together with the decrease in physical metal sales at Ocampo is resulting in the lower Company-wide reportable revenues.

Just transitioning on to slide 8, in terms of second-quarter financial performance, again, please note this slide does include the results of both continuing and discontinued operations. The first metric, earnings from operations, decreased versus the prior-year result, which is attributable to the decrease in revenues just mentioned as well as the $14.4 million net realizable value adjustment recorded on the Ocampo in process heap leach inventory.

Net earnings decreased slightly, which is due to the lower earnings from operations result and the reasons just discussed, the effects of which were partially offset by a $9.6 million unrealized gain on the fair value of the option component on the convertible senior notes. Similar to the lower earnings from operations result, our adjusted net earnings was lower than the prior-year result, and my next slide will illustrate a further breakdown on this result.

Lastly, in terms of cash flow from operations, the operating cash flow was $14.2 million, which was lower than the prior-year corresponding result, and this is due to the decline in production at Ocampo; the lower realized silver prices; an unfavorable increase in non-cash operating working capital, the effects of which were partially offset by the higher production contributions from El Chanate.

Moving onto slide 9, just in terms of the Company's adjusted net earnings result, you can see here on this slide -- we've broken it down into adjusted net earnings from continuing operations, and then further down, adjusted net earnings from discontinued operations, the aggregation of which derives the Company-wide adjusted net earnings result of $21.5 million, or $0.08 per share.

Just to focus on the second-quarter result, which is the first column from the left, the actual reported net earnings result from continuing operations was $14.9 million, with the key adjusting items being as follows. The adjusted result adds back unrealized foreign exchange gains recognized in the second quarter of $6.5 million.

These gains were due to the weakening of the Mexican peso during the second quarter. These gains and losses typically arise primarily as a result of the translation of the Company's peso-denominated deferred tax liabilities. The adjusted result adds back the NRV adjustment of $14.4 million at Ocampo in determining the adjusted earnings result, advocating that this is not entirely indicative of Company-wide profitability performance on a go-forward basis.

The adjusted result adds back the unrealized gain of $9.6 million on the option component of the convertible senior notes. Further, the adjusted result adds back the unrealized loss on investment of $2.6 million, which arose primarily from the decline in the share price of Crocodile Gold from May 4 to June 30.

We have also added back the gain on to relative liabilities whereby the Company realized an unrealized gain on outstanding warrants during the quarter of some $0.9 million, which again was primarily due to reductions in the Company's share price. Our adjusted result is also adding back the loss on an extinguishment of debt.

The Company during the quarter renegotiated its credit facility, and it was considered a substantial modification for accounting purposes due to the significant increase in borrowing capacity. In this instance, the Company was required to de-recognize its existing debt liability, along with all past related transaction costs that had been netted off against it, and to recognize a new debt liability. The loss of $2.4 million arising from fees that had been previously netted off against the old liability, as well as other fees paid to modify the facility, et cetera, were written off.

The last item adjusted is the impairment charge, which relates to the Company's ceasing explorations at its La Bandera property during the quarter, and therefore $1.5 million of costs that had previously been capitalized were written off. The notional tax effect on all of these adjustments is a $5 million recovery, which results in a final adjusted net earnings from continuing operations of $13.8 million or $0.05 per share.

And down at the bottom, in the second half of this slide, is the net earnings from discontinued operations. The key adjustments here -- on May 4, the Company completed the sale of the Fosterville and Stawell mines. The consideration received was lower than book value by approximately $1.7 million, which resulted in a small loss on disposal, and this adjusted result backs out this loss on disposal. The adjusted result also adds back unrealized foreign exchange gains of some $0.9 million, which were recognized during the quarter for the same reasons discussed previously under continuing operations.

The notional tax effect on these items is a $0.3 million recovery, which results in a final adjusted net earnings from discontinued operations of some $7.7 million or $0.03 per share. Aggregating the contribution from continuing and discontinued operations, the bottom-line adjusted net earnings result for the quarter was $21.5 million or some $0.08 per share.

Just moving on to the next slide, slide number 10, slide 10 illustrates the operating cash flow result for the quarter. Again, please note that this slide includes the results of both continuing and discontinued operations.

The bottom-line cash flow from operations was $14.2 million, which was lower than the prior-year quarter due to the decline in production at Ocampo; lower realized silver prices; the unfavorable increase in non-cash operating working capital, partially offset by higher production at our El Chanate operation. The increase in non-cash working capital is largely due to delayed Mexican commodity tax refunds and an increase in our inventory balances. Given the non-cash nature to this working capital item, we have presented an adjusted cash flow from operations result by adding back the non-cash working capital impact, which results in an adjusted cash flow from operations of $29.8 million, or some $0.11 per share.

Moving on to my final slide, slide number 11, slide 11 illustrates the key North American operation and is representative of the streamlined portfolio following the divestment of the Australian operation and the divestment of the El Cubo operation. Noting, of course, that it will be exciting to shortly be including Young-Davidson in the schedule, given the imminent declaration of commercial production, which will result in a profile that will then be truly reflective of the portfolio's strong asset base moving forward.

In terms of quarterly performance, the core operations were profitable and contributing positively to operating cash flow, and both assets collectively were operating under $500 per ounce during the quarter, prior to the net realizable value adjustment recorded on the Ocampo in-process heap leach inventory.

We finished the quarter with some $56 million in cash, which is understated in light of the El Cubo divestment that closed on July 13, in which we received cash proceeds of some $100 million as well as $100 million of equivalents in the acquirers' shares. Further bolstering the Company's liquidity during the quarter, we successfully increased the size of our revolving line of credit facility to $250 million, which is commensurate with AuRico's significantly improved credit profile. This competitively-trace facility has no operational performance covenants; it is a four-year facility; and it was syndicated with seven high-caliber banks, which I would advocate is a testament to AuRico's strong credit profile and business strategy going forward.

With that, that really concludes the financial overview section of this presentation. I will now pass proceedings back to Rene Marion, our President and CEO, for Rene's concluding remarks.

Thank you, Scott. Over two slide 14.

We've made really good strides, and I'd like to highlight some of those during the quarter. In June we averaged 32,000 tonnes a day in the open pit, and therefore have met the criteria for commercial production from the pit standpoint.

The mill averaged just under 6200 tonnes a day during June, with a remarkable 95% of availability and 88% metallurgical recovery without the gravity or floatation surface running. We now sit with 1.2 million tonnes of stockpile ahead of the mill, and we'll commence processing the higher grade component of the stockpile plus direct mine feed in the month of September.

With production from underground coming online in the fourth quarter, we anticipate head grades to the mill to continuously increase to the end of the year, and therefore anticipate increased production month over month, starting in September. The flotation circuit is fully operational as we speak, and recoveries are starting to improve as the operating team gets used to this new circuit.

As witnessed at our grand opening last Saturday, minimal cleanup construction remains, and only a skeleton crew completing those outstanding items are on site.

Underground development to the Northgate shaft, mid-shaft loading pocket has advanced enough to commence the next 450-meter leg of that shaft. Still, development in the upper boundary zone has advanced such that a long-hole drilling contract has been awarded, and the contractor is currently mobilizing. And once again, we remain on target to declare commercial production by the end of this month.

Moving over to Ocampo, ore development has historically typically run at over 550 meters a day, but it did fall by some 55% in the quarter due to the jackleg miner turnover. But by the end of Q2, drill-ready inventory that -- is starting to increase as we build out the jackleg crews. Ore development is now increasing, and we're starting to see that impact on the drill-ready inventory, where in the month of July we increased it by 10%. We anticipate the impact on production rates by September/October, while returning to Q1 2012 levels in the first half of next year.

Drill-ready inventory is increasing, and the first of the two development contractors are mobilizing on site as we speak. We are adding $10 million for this initiative with the contractors, of which $7 million will be allocated to ore development, and $3 million towards capitalized infrastructure development. Both of these have been included in the guidance provided in the month of July.

Our recruitment program is progressing well, and we should be rolling out our retention program shortly. But I want to be clear here. This program is only anticipated to cost $2 to $3 an ounce moving forward, and again, has been included in our guidance. This program incorporates an escalating deferred payment schedule that encourages retention.

The final layback pre-stripping at Picacho is now completed, and we're now mining fringe material, and the -- movement towards a higher core in the coming quarters. Grades to the heap leach are already increasing this month.

With the completion of the pre-stripping, we have now idled six open pit machines -- four 100-tonne trucks, one drill, one 992 loader, and some ancillary equipment. And the mill is performing well, with both gold and silver recoveries increasing into the 90s, with gold at 97% recovery and silver at 93%.

Now to slide 16, El Chanate, my last slide. The open pit mining rates have reached our targeted rate of over 95,000 tonnes that day during the quarter. The crushing plant was over 20,000 tonnes a day, with an additional 11,697 tonnes a day of run-of-mine material plays, thereby averaging over 31,000 -- almost 32,000 tonnes per day placed on the heap.

The 16-inch water line is approximately 50% completed. It is tied in, and we're seeing larger volumes as we speak. With the completion of this line later this year, we anticipate increasing the area under irrigation by year end over 80%, and thereby improving the operation and production even further.

And with that, I'd like to turn it over to the operator to open up the line for Q&A.

(Operator Instructions). Rahul Paul, Canaccord Genuity.

A question on Young-Davidson, fairly good progress there. You indicated that you have 178,000 tonne high-grade stockpile, creating around 1.5 tonnes. Does that include development also on the underground?

No, it does not. Underground is stockpiled separately. The only ore that has come from underground is, as you pointed out, developments. So it's not that substantial.

Oh, it's not that substantial in terms of tonnage?

No, it's not. Because the first two stopes that we're bringing online are 50,000 tonnes a piece. But because of the width, so it's not much ore development.

Okay, fair enough. And then just moving on to Ocampo, just a question on the cash cost adjustment. Just wondering if you could give me an idea as to how many recoverable ounces would drive that valuation adjustment, especially -- can you just -- trying to get a sense of, does that apply only to a small portion of your ore in process inventory at Ocampo, or does it apply to a much larger portion?

It's Scott here. So if I'm understanding your question, in terms of the current heap leach inventory, we have approximately 39,000 gold equivalent ounces that are recoverable sitting in the inventory.

And I guess the second part of your question, when you look at our inventory accounting, it's based on a weighted-average approach. So I guess in terms of that convention, really that adjustment is being applied to every single ounce that comprises that inventory. But if you looked at what was the catalyst for the adjustment, it was more related to the actual performance during the quarter. But in terms of accounting and how you book the adjustment, it gets cascaded down to every single ounce within that inventory.

I'd just like to add to that, though, following the leech curve, so that the maximum -- the inventory is based on the gold ounces placed on an increasing manner over the next last 12 months and silver over the last 24.

Okay, that's good information. Thanks. And just one last question. On Ocampo underground, you mentioned that more than 90% of open positions have been filled. Just wondering if you could comment on the skill level of the new hires?

It's Russell. We're building up the skill levels. Obviously, the highly skilled, practiced ones, a lot of them left. So we've been doing a big training program, and the skill levels are increasing.

Our development, overall, has gone up a bit -- 20% on what it was. And then we've added contractors coming in, and we have one that should start this week. He's mobilizing equipment on site. And the other one, we hope, by the end of the month. I see us -- we're addressing the problem there.

Okay, that's it for me. Thanks, everyone.

Trevor Turnbull, ScotiaBank.

Rene, you mentioned that you've got -- the jackleg miners are picking up the pace again, but your underground contractors, they're just getting mobilized here this month. But have the guys that you've already hired -- they've already started to -- you've already seen a pretty good bump in the development just from them alone?

Yes. Just our own crews -- typically we would average about 75 meters a day on overall development. Where we're sitting here, in the first 11 days of August, we're averaging 93 meters a day. And that's just our crews. The contractor will start breaking rock at the end of the month.

And so the contractors, what kind of footage you think you're going to -- are you expecting to get out of them on top of your own guys?

Well, I'll pass that to Russell.

Yes, I would look -- when they are fully settled in, around about 500 meters a month.

Okay. So yes, it's going to be fairly significant.

Yes, coming close to 3500 meters a month.

Okay. And you made mention that the bonus retention program -- you said that adds $2 to $3 an ounce, was that right, Rene?

Yes, and that's included in our recaps that we provided last month.

Right. Although -- but that doesn't include the $10 million you've dedicated on the capital side?

Yes. The operating costs are broken -- the $10 million are broken out -- $7 million is operating and $3 million is capitalized development. That $7 million is included in the guidance for the guidance for the second half -- for the rest of the year. That's why our costs in the second half of 2012 are higher than in the first half.

Right, okay. but the $7 million isn't part of that $2 to $3 an ounce.

No, not in the overall number.

Okay. And then just with respect to the inventory changes on the leach pad at Ocampo, does that mean -- are you looking at changing any of the cutoffs or the operating cutoffs that you use in the pit and what you're directing to the heap leach today, given silver prices have come off?

Why don't we -- you have to remember that the current silver prices and gold prices are still lower than in the backwards-looking trends. When you optimize an open pit using ore, okay, the way it optimizes is essentially, the ounces are carried by the -- or the waste stripping is carried by the high-grade ore material.

And therefore, as the optimization goes down, the low-grade actually through a whittle optimization actually doesn't carry any costs. So when you're coming in on these fringes, right, you optimized it by running the entire life of mine design on it. That material actually got a free ride.

Now, from an accounting standpoint, it doesn't get that free ride. It actually has to strip. And so it's a moving -- it's really shifting costs that were being absorbed by high-grade and placing them on low-grade. So operationally, no -- those ounces make money.

Because you have to move those tonnes anyway, you may as well extract what you can out of them on the marginal cost.

Yes, think of it this way. Whittle would assume its waste at the high-grade. But from a net free cash flow basis, that material makes money.

And I know you've gone through this, but just to be clear, are you mostly through the halo now that you're into Q3, or that's not quite yet?

It will be over the next several quarters. But to give you an idea as -- we're already seeing grades approaching 0.2 gold to 0.26 gold and 7.0, 7.5 grams silver. So we're starting to see the improvements as we're moving into the higher-grade core.

So it will take a few quarters to bring it up. When we've looked at the recapsing to the end of the year, we're well positioned by the end of the year, early next year.

Okay. And maybe just one last quick one for Scott. With respect to the sale of El Cubo, which will close I guess in Q3, do expect to have to have any adjustments between carrying value and the final compensation that you're picking up for El Cubo?

No adjustments in terms of impact on carrying value, Trevor. But if anything, we are likely to book a gain on sale there.

Yes, it looked as if the value you've got on the books relative to what you're receiving did look like you were going to have a gain. So is that the right way to think about it?

Yes, that's the right way to think about it. And then unfortunately, in the third quarter we will still be talking about continuing and discontinued operations. I think we're all looking forward to the fourth quarter, when we'll have a nice clean slate in terms of just reporting on the three core assets.

Okay. Thank you very much, guys.

Steven Green, TD Securities.

A quick question -- I'm just following up on that inventory issue. Most of what I had has been answered now, but just wanted to confirm something. So the inventory actually went up in this quarter to $160 million on ore in process. That includes the $14 million write down, is that right?

You're saying the inventory value went up, Steven?

Yes. It looks like, just looking at the notes in the statements, the ore in process inventory at the end of March was $158 million, and now it is $160 million.

Yes. I think that might be a consolidated number that we're looking at there, so that consolidates inventory from all the operations.

I see.

But the heap leach inventory at Ocampo in terms of quantum from a dollar of perspective, so in terms of carrying value, it went down during the quarter.

Okay. And that's why I'm -- so it is Chanate as well. Why don't you just report production as actual gold produced rather than making assumptions on the leach pad?

And you're saying, do away with our convention of reporting gold equivalent production?

No, just rather than reporting a production number, which is an assumption you're making based on ore heaped on the pad, why -- wouldn't it be easier from an accounting perspective and from a reporting perspective to just report what is actually produced out of the solution and into dore?

That is exactly what we do do, Steve. We don't make any assumptions. It is actually what comes out in solution from what we ultimately pour.

Okay, so I guess I'm confused, then. Why is it then that sales have been significantly below production for several quarters in a row?

And we're just saying that inventory is getting tied up in the in-process in the mill circuit at Ocampo.

Okay, so that inventory is in the mill and in solution, and in dore, and not necessarily on the pad?

That is correct. It's not related to the heap leach.

Okay, thanks. And next question, just on Young-Davidson, can you guide us to what you think CapEx will be for the rest of this year? It looks like you're now slightly above where you said you'd be for the year, so can I assume that most of the CapEx is now finished? Development CapEx?

Well, the CapEx that will be continuing on in the second half, Steve, will be obviously, the Northgate shaft, the head frame for the Northgate shaft; a little bit of cleanup stuff around the site. We still have some 50 construction guys just tidying up. Underground development in the mid-shaft -- the reaming of the shaft, then, ongoing capital development. So it does go down significantly.

Excluding the interest and spillover from last year, we've already provided guidance for the full year, which is about $40 million higher on the EPCM than previous guidance.

Okay, so how much, then, in the second half of the year are you approximately expecting?

Excluding interest and the spillover from last year, you're looking in the order of $225 million, $227 million, if I'm going off the top of my head, total for the year. So just take your year to date and subtract that. But making sure you don't double account for both the interest, the $10 million spillover, and the exploration of $6 million.

Okay, great. Thanks.

And just lastly, on Orion, we haven't heard a lot about that lately. Can you just give us a quick update on where you are on that and how that fits into your plans?

Yes, Chris Rockingham's team are now just blowing the dust off it to take a look at what we want to do. We will be doing a bit of drilling in the second half of this year. He hasn't -- doesn't have a budget yet, but it's just a matter of reallocating some of the exploration dollars that we were going to spend on La Bandera and elsewhere.

But you're not looking at a hugely significant -- the last number I saw was around a 10,000 meter drill program. What we want to do is test his new hypothesis on our thoughts at the -- the drilling in the area and on variable structures wasn't deep enough. So we're picking a different horizon. We're just getting quotes from drilling firms as we speak.

Okay, great. So still advancing that one, then.

Yes.

Great. That's all I had. Thanks.

Thank you, Steve.

Brian Christie, Desjardins.

You gave us a pretty good summary of what happened up until June at Y-D; just wondering, Rene, if you can give us a little more color on what happened in July?

Good question. I don't have it up here right now. But largely, the pit remained around the same. The mill during July tonnage per day was slightly lower, as we commissioned the floatation circuit. It's kind of like a brand-new circuit, and everybody is having fun with stowages and that.

We're starting to see it come back up. Metallurgical recoveries for the last seven days or so have been in the 90%s, so that has been good. Still have a few learning issues as we commission this month, but overall, nothing too -- nothing that the guys aren't handling. Tonnage is coming up, but it's still hanging around -- just under 6000 tonnes a day as they get their feet wet on the floatation circuit.

Okay, thanks.

David Haughton, BMO Capital Markets.

Thank you for the update. With the employment of the new underground labor force and their subsequent training, what does that mean for the timing of getting the third underground access underway?

Third underground access? I presume you mean the shaft.

No. You were looking at a third excess point for underground mining. You've got northwest, you got southeast, you got level one?

Sorry, Dave. We've already started that. It's done on the -- so close to the land. We've portaled away prior to the contractor arriving. And basically, if you take any pawlish from the land now has about a five kilometer round trip. This will take it back to about 500 meters.

We envisage putting the contractor in there on multi-shift blasting, because he's on his own and without restrictions. And we see that as a great benefit in that whole area. And once we are in, we shall connect with the Juliana, Mastuerzo, and other areas here -- Cabrero. So it opens that part of the mine, including the areas below Picacho and Altagracia. So that portal will be very advantageous. We see that being effective by the beginning of the fourth quarter.

Okay. And does that mean that you've got additional underground miners that you need to bring into place to -- once that's in development?

No, we're using the contractors for that. We're getting two contractors, one for the northwest and the other for the southern part. And initially they'll concentrate on the land in the portal, and then the connection to Juliana, and then we'll be running with both that. Our own labor will move off up into the Northeast and develop the Cabrero. This sort of parallel structures to Santa Marta, which was our best producing area.

So the combination of those additional faces together with the shaft being brought back into commission, or being commissioned, will help you get the 4000 tonnes a day feed to the mill?

Yes, I mean, the shaft will be basically economics. It will be much cheaper using the shaft and then cutting out the hole up the narrow road there. So that will be economics. And decongesting the main ramp. And in the access through the Belen portal will also decongest the ramp as far as waste is concerned.

What sort of timing do you think you would have to be able to feed the mill to 4000 tonnes a day?

Yes, 2014.

And do you have a sense as to what additional CapEx might be required, as far as the conversion of the rod mill to a ball mill and all the other ancillary things?

No; we're still working on that and looking at the best way to do that, because that's obviously not strategic at the moment. The strategic one at the moment is the shaft, and that really depends on the electrics. We've got all the rest worked out, but we're looking at the best way to do it electrically.

David, in our three-year guidance we've allocated $6 million for the mill to be expanded to 4000 tonnes the day. That includes a new additional thickener, leaching capacity conversion of the ball mill, and the filter, which is the filter is a big chunk of it. The shaft conveyor drift and conveyor weigh is about $9 million.

Okay. Having a look at the heap leach here, you're running over the 10,000 tonnes a day kind of level, albeit at lower grade than perhaps what we'd like to see in the longer run. Can you maintain that kind of stacking rate, or is there scope for it to increase to offset the lower grade being presented at the moment?

No, we can maintain that stacking rate. We've already started the next expansion phase of the heap leach, and that's just to give us ample time so we don't get caught.

And that's the additional pad space?

Yes. The present design will give us 18 million tonnes. And that's looking -- cost-wise, it's looking a lot less than the original, when you compare it to cost per tonne stacked.

Okay, switching now to Y-D, underground ore development underway there. Would you expect to get underground ore delivered to the mill by mid-next year, or do you have some other timing in mind?

Yes, it is Peter MacPhail. We have underground ore schedules in our mine planned for the fourth quarter of this year. We've got 90,000 tonnes coming in in that quarter. So we're ramping up. That is 1000 tonnes a day starting in October. And plan 1500 tonnes a day average for next year, ramping up to 2000 by the end of the year.

Excellent. Good. Thank you very much.

Anita Soni, Credit Suisse.

My first question is with regards to the open pit at Ocampo. You've got six trucks now idle as a result of no longer pre-stripping there. Why not use those to accelerate the ore -- mining of the ore and supplement the mill with some good grades from the open pit? Or is that just not available right now?

That is more of a sequencing issue, Anita. At this point in time, the trucks weren't required, because we've got a full bench now, a full layback bench in ore. And now it's just a matter of sequencing.

When -- we'll start revisiting life of mine plans and strategies in September to October, and we'll be looking at different ways of deploying that equipment. But right now, A has to come before B for us, and we have to look at the alternatives of being able to change that sequencing.

Could you not use those six trucks two accelerate that layback there?

The layback for which pit? Because I couldn't hear you.

For Picacho, I assume. The Picasso pit.

Oh, Picacho is done. So now it's just a matter of sequencing on those benches to get it to the higher-grade core. If the trucks aren't needed, you're limited on floor space, right?

But we will be looking over time to see if we can use them for the Belen/San Jose pit to accelerate that. Altagracia is downdip of the Picacho, so it has to come after Picacho.

Then my next question is with regards to the ramp up at Young-Davidson. So when we were on the tour end of June, or June 19, you guys were guiding for the gravity in the -- or you guys were indicating that the gravity and the flotation circuit would be completed by the end of June, then you would be 30 days through July and you would be commissioned in August. I'm just trying to figure out what the flotation in gravity -- what exactly is causing that circuit now to have taken eight weeks almost to commission instead of the projected two?

Anita, it is Peter. We finished the construction of the flotation and gravity circuits in -- by the beginning of July or thereabouts; they took a bit longer. It always takes longer than you expect. We got it done.

And then through the month of July, we been in process commissioning. So you don't -- also (inaudible) is overflowing and dealing with that, and speaking of pumps, and just getting the process commissioning right, as well, takes longer than we thought. So that by the end of July, early August, we're now starting to process commissions and starting the clock.

That's where we got to. And I should add, the gravity circuit, while we've commissioned it, we probably won't necessarily run it with a pit where it's not necessarily providing much benefit on underground ore.

Commercial production is also forward-looking. So the way this month is progressing, it's looking great. And that starts the 30-day clock, right? So I think it might not have been communicated that way. So once we do that 30 days, okay, then we're in commercial production, and that's going forward -- it doesn't look at the previous 30 days to include that as commercial production.

Okay, sorry. Could you just repeat that, that last part about forward looking?

Yes. The declaration on commercial production is forward-looking. So once we finished the 30 days of running the mill with the floatation circuit, which is the way we think of it as -- call that August 1, so that by the end of August, we will declare it commercial production. And that means that starts what you call commercial production. It doesn't stay -- you don't look at the month of August except for the test.

Oh, no; I understand that. I was just trying to back it up from when we were on the tour, and you guys had said that it was undergoing commissioning currently. So just trying to see why the disconnect in terms of the timing there. Okay, I think that's it for my questions.

Mike Parkin, Bank of America Merrill Lynch.

You gave some good guidance on where your grades are in the open pit at Ocampo now. Where are you targeting those to be by, say, the fourth quarter on average?

I don't have that in front of me, but you should be looking at trying to get back to the 0.3 to 0.5 gram gold and the 20 to 25 gram silver within the next four quarters.

Okay, thanks, guys.

Barry Cooper, CIBC.

Clearly, what happens at Ocampo now seems to be very much in the hands of the contractors there. Just wondering, what are they doing? Or are they facing some of the same issues of turnover stuff that you did? And if not, why not?

I wouldn't say that it's all in the hands of the contractors. We've got our own workforce building up and getting more experience, so we have that. I think the contractors are a slightly different beast. Certainly they don't have the same problems as we do. They tend to move around, and they tend to, shall we say, have their own crews from their own areas. They are very localized from where they come from.

So normally in past experience, I haven't noticed that with them -- they haven't had that sort of problem.

And their experience level, where would you put it relative to the guys that you lost and the guys that you're getting to replace the ones that you lost?

Yes, quite a few of the contractors I've used have had fairly long-term people there who just like to move around. These guys have come off other sites from important, influential companies in Mexico. And they've built up very good references and very good experience. I think they're pretty good. We have a minimum performance per and per machine, so we have that control.

Right. And then on Young-Davidson, what is the capital expenditures for the last six months of the year that you had planned there, in terms of dollars and what it's -- I assume most of it is going to the underground?

Barry, it is Scott here. If you look at our full-year guidance for Young-Davidson, our original guidance was up to $190 million. I think some four weeks ago we revised that guidance due to the fact that in terms of the EPCM work, we're expecting a $40 million increase there. And once you factor that in, essentially what we are saying is full-year guidance is now recalibrated at $220 million. So then if you look at our financial statements the first half of this year, you may note that on a cash flow basis, we have invested year to date $200 million at Young-Davidson.

Yes, and hence the reason for the question, because it doesn't sound like you got enough for the rest of the year.

Yes, that's a valid question, but the key thing to note, in that $200 million that have been invested year to date, the big ticket item there is we've paid down $80 million, so $80 million on accounts payable accrued liabilities that we were caring into this year at the end of December of last year.

So what I'm advocating is add back the accounts payable, which relates to work carried out last year. The first half of this year, we've really incurred $120 million. With that I would advocate that the guidance is in good check, that we'll be spending up to $220 million this year of new capital being incurred.

So then, although I don't think we have a budget for next year, the CapEx -- we should assume that there's the potential for carryover of 2012 costs into 2013?

From a cash flow perspective, yes.

Yes. Okay, good enough. That's all my questions. Thanks.

Spencer Lehman, Financial West.

Back to the balance sheet, on your long-term debt as of the March quarter, I think it was about $250 million. What was that long-term debt as of June, before the July sales?

Long-term debt at the end of the second quarter was approximately $290 million on a gross basis.

So it went up by $40 million?

Approximately, yes.

Okay. And then after the July sales, what do you -- will that $100 million and whatever -- is that going to go directly to long-term debt? What do you envision is approximately what your long-term debt will be at the end of the September quarter?

We're still evaluating what we're going to be doing with that cash. Presently we have in excess of $100 million in cash just sitting on the balance sheet. We also have in excess of $100 million worth of equity shares in different public companies. I think we're very -- in terms of the financial foundation, we're on good footing in that regard.

In terms of paying down the debt balance as we move forward, I think the key thing we're really focusing on is just the declaration of commercial production at Young-Davidson. That is largely imminent. That will be forthcoming before the end of this month.

And thereafter we should be in a space were we're starting to generate more positive cash flow. And so it really becomes a question of do we want to use that cash flow to more aggressively pay down the revolving line of credit, or do we just want to take a chunk of our existing cash balance and pay down the long-term debt? So, to answer your question, it's still under evaluation.

I'd like to remind you, though, that $167 million of that debt doesn't mature until 2016.

Okay. And then just a quick snapshot of the Company. After the dust settles with all the sales and what's going on, what approximately is your percentage in gold, your revenue of silver, and then copper and the other base metals? Just a ballpark.

In terms of the various metals that we produce, it is only gold and silver. There's no copper, and there's no other byproducts, be it base metals, et cetera. It's just gold and silver. And shooting off the cuff, when you look at the portfolio moving forward, I think silver is going to represent between 25% and 30% of total revenues.

Okay. I thought you had some copper from the Northgate acquisition.

There is a development project called Kemess, which is located in British Columbia. It's really just an advanced exploration project. And if you were to look at that advanced exploration project, it does have a copper inventory.

Okay.

On an operation.

All right. So you're about 75%/25% gold/silver.

Yes.

Okay, thank you.

There are no further questions at this time. I would like to turn the call back over to Rene Marion.

Well, thank you, everybody, for calling in and joining us for the second-quarter conference call. And we'll speak to you again later.

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