Alamos Gold Inc (AGI) 2015 Q4 法說會逐字稿

Good afternoon. I would now like to turn the meeting over to Mr. Jamie Porter, Chief Financial Officer. Please go ahead, Mr. Porter.

Thank you, Operator, and thanks to everyone for attending Alamos's fourth-quarter 2015 conference call. In addition to myself, we have on the line today John McCluskey, President and Chief Executive Officer; Peter MacPhail, Vice President and Chief Operating Officer. To address any questions with respect our reserve and resource update and our exploration programs, we also have on the line today Chris Bostwick, Vice President, Technical Services, and Aoife McGrath, Vice President of Exploration.

I would like to remind everyone that our presentation will be followed by a Q&A session. On this call, we will be making forward-looking statements. Please refer to the disclaimer on forward-looking statements in our news release and MD&A, as well as the risk factors set out in our annual information form. All forward-looking statements on this call are qualified by these cautionary statements. There can be no assurance that our forward-looking statements, even though considered reasonable by management and based on information on hand, will prove to be accurate. Future results and events could differ materially.

Technical information in this presentation has been reviewed and approved by Chris Bostwick, our VP, Technical Services, and a qualified person. Also, please bear in mind that all of the dollar amounts mentioned in this conference call are in US dollars, unless otherwise noted. Now John will provide you with an overview.

Thank you, Jamie, and good afternoon, everyone.

The fourth quarter capped off what was a transformational year for Alamos. We built a much bigger and stronger company through our merger with AuRico and we strengthened our development pipeline through our acquisition of Carlisle Goldfields. We are also adding value through exploration with a highly successful first-phase drill program at Cerro Pelon and La Yaqui.

Operationally, we had a strong quarter with costs down substantially from the third quarter and productions increasing to a record 104,700 ounces of gold. For the full year, we produced 380,000 ounces at all-in sustaining costs of $1,091 per ounce, both meeting 2015 guidance.

As we look to build off this momentum in 2016, our core focus remains our continuing the ramp-up of underground mining at Young-Davidson and developing the Cerro Pelon and La Yaqui deposits at Mulatos. We expect to produce in the range of 370,000 to 400,000 ounces, with stronger production in the second half of 2016 reflecting the ongoing ramp-up at Young-Davidson and higher grades stacks at Mulatos. All-in sustaining costs are expected to decrease to $975 per ounce, down 11% or more than $100 per ounce, driven by improvements at both Young-Davidson and Mulatos, a trend we expect to continue as we execute on the respective expansions.

Capital spending is expected to decrease by more than 20% across the board in 2016 as we narrow our near-term focus on growing low-cost production from our core operations. As we execute on these expansions and generate more free cash flow, we will look to deploy this back into our development pipeline with a focus on our highest return projects first.

This includes the Lynn Lake project in Manitoba, which we consolidated ownership of earlier this year. Lynn Lake has quickly become one of our most attractive projects, given its many positive attributes, including its strong economics, favorable location, and Canadian dollar exposure.

We continue to push ahead with the permitting process in Turkey. However, consistent with our near-term strategy, we don't expect to spend any major capital on these projects until the expansions at Young-Davidson and Mulatos are complete.

We had a good year on the exploration front in 2015 with reserves replaced at Young-Davidson for the fifth consecutive year and total reserves and resources at Cerro Pelon and La Yaqui more than doubling from a highly successful initial exploration program. Total reserves and resources at Cerro Pelon and La Yaqui increased by 145% or 321,000 ounces to now total 542,000 ounces. This included a 17% increase in total reserves to 260,000 ounces and a 230,000-ounce initial inferred resource at La Yaqui. These increases came from a short first-phase exploration program which has surpassed our initial expectations.

With a large zone of alteration at La Yaqui and several more exploration programs to come, we are encouraged by the potential to add to this resource base, which will be the driver of our first future reserve growth. This is higher-grade, open pittable, heap-leach ore that will provide substantial lower-cost production at Mulatos, so I cannot stress enough the positive impact these deposits will have on overall operations.

At Young-Davidson, we more than replaced depletion with an increase in underground reserves, maintaining its 15-year reserve life. This reserve replacement was accomplished through infill and stope definition drilling and virtually no exploration drilling. Exploration drilling has not been a focus in the near term, with a large long-life reserve already in place.

That said, the mine retains excellent exploration potential with the deposit open primarily at depth. This will once again be a focus as the lower mine is developed. With a strong record of resource conversion and significant exploration potential, we expect this mine will be producing gold well beyond 20 years from now.

With growing North American production and declining costs, one of the best portfolios of gold projects, and a strong balance sheet to support this growth, Alamos remains among the best-positioned companies to deliver long-term sustainable shareholder value.

With that, I will ask our CFO, Jamie Porter, to comment on our fourth-quarter 2015 financial performance. Jamie?

Thank you, John. As I mentioned in our third-quarter conference call, our financial statements for 2015 reflect a number of complex accounting issues, impairment charges, and other non-cash adjustments that we do not expect to recur going forward.

You will recall that as a result of the merger we inherited AuRico's financial statements and have made a number of adjustments, including material impairment charges that made up the majority of our loss for the year. We look forward to reporting more meaningful financial results starting with the first quarter of 2016.

Focusing on our financial performance in the fourth quarter, we reported revenues of $116 million, based on the sale of 104,400 ounces of gold at a realized price of $1,109 per ounce, beating the average London PM Fix price by $3 for the quarter.

Higher gold production and sales helped drive costs lower in the fourth quarter, with total cash costs of $780 per ounce and all-in sustaining costs of $1,073 per ounce. For the full year, total cash costs of $766 per ounce and all-in sustaining costs of $1,091 per ounce were in line with guidance. We expect substantial cost improvement in 2016, with all-in sustaining costs decreasing by more than $100 to $975 per ounce.

We reported a loss of $60.5 million in the fourth quarter, or $0.24 per share, with the majority of this loss related to non-cash adjustments.

At El Chanate, we had a third-party leach pad specialist review our pad inventory in the fourth quarter. The result of this review was a reduction in the estimated number of recoverable ounces in leach pad inventory at El Chanate to 100,000 ounces and a corresponding write-off of $25.4 million, or $17.8 million after tax. In addition, we wrote off a historical carrying value associated with an exploration joint venture in Mexico of $17.6 million, incurred foreign exchange losses of $5.1 million, and other non-cash losses of $5 million. These adjustments totaled $0.18 per share.

Operating cash flow before change to the non-cash working capital was $17 million or $0.07 per share in the fourth quarter. We expect increased operating cash flow and positive free cash flow from each of our mines in 2016 at current gold prices.

Capital spending in the fourth quarter totaled $41 million and $190 million for the full year. We expect a 20% reduction in the rate of capital spending in 2016 across all operations to between $138 million and $158 million.

Amortization expense was $37.5 million in the fourth quarter, or $299 per ounce. This decrease on a per-ounce basis relative to prior periods reflecting the impairment charges taken at both Young-Davidson and El Chanate in 2015.

Our corporate G&A expense in the fourth quarter totaled $6 million. Prior to the merger, the combined 2015 Alamos AuRico corporate G&A budget was $25 million. We have $16 million budgeted for corporate G&A in 2016, reflecting $9 million in annual corporate synergies that we have realized from the merger. We've also realized tax and operational synergies of $11 million, bringing the total annual savings to $20 million, double what we anticipated when we announced the merger.

Given El Chanate's higher cost structure, we took advantage of the increase in gold prices to lock in gold price and to help ensure the operation generates positive free cash flow in 2016. As of March 22, the Company has sold 17,000 ounces, with a further 51,000 ounces of Chanate's 2016 production hedged through collars, which will settle throughout the remainder of 2016. The collars ensure a minimum realized gold price of $1,140 per ounce and a maximum goal price of $1,274 per ounce.

We continue to possess one of the strongest balance sheets of our peer group, with $290 million of cash and available-for-sale securities at the end of December. We designed our 2016 budget so that each of our operations was free cash flow neutral at an $1,100 gold price, while we are expecting our debt service, exploration, and corporate G&A costs to be financed from our balance sheet.

With the increase in gold prices to above $1,200 per ounce, we now expect to generate meaningful free cash flow from each of our operations and forecast ending 2016 with a similar cash balance to what we have currently. We expect further strong free cash flow growth over the next two years, driven by the ongoing ramp-up at Young-Davidson and new production from our higher-grade Cerro Pelon in La Yaqui deposits.

At this point, I would like to turn the call over to Alamos's COO, Peter MacPhail, to provide an overview of operations.

Thank you, Jamie, and good afternoon, everyone.

Young-Davidson continues to hit new milestones, with underground mining rates increasing to an average -- a new record of 5,900 tons per day in the fourth quarter and over 6,000 tons per day in December, beating the year-end target. The operation also achieved a new low in terms of unit mining costs of $27 per ton, reflecting ongoing productivity improvements, the weaker Canadian dollar, and the benefit of a nine-month hydro rebate of $2 per ton in the quarter.

We also met our budgeted meters for underground development and remain on track as we transition to 100% owner development by the end of the second quarter. We expect this to drive significant savings over the next several years.

Mill throughput averaged 7,630 tons per day in the fourth quarter at an average process grade of 2.17 grams per ton. Throughput was slightly lower than the comparable period in 2014, due to scheduled maintenance in the mill in October. Process grades were 10% higher as underground ore supplied a higher portion of mill feed. Underground grades mined were 2.58 grams per ton in the quarter and 2.67 grams per ton for the full year, consistent with the mine plan and reserve grade, with a slight positive reconciliation to the block model.

Young-Davidson produced a record 44,700 ounces in the fourth quarter and 160,400 ounces for the full year, in line with guidance. All-in sustaining costs of $980 per ounce in the quarter and $986 per ounce for the full year were both below the midpoint of guidance, as productivity improvements and the weakening Canadian dollar continued to positively impact the operation.

Both total cash costs and all-in sustaining costs are expected to continue to decrease as underground mining rates increase. We remain on track to achieve the underground mining rates of 7,000 tons per day by the end of 2016. We expect this to drive production higher, to a range of 170,000 to 180,000 ounces, with all-in sustaining costs decreasing more than $160 per ounce to $825 per ounce. We expect further improvements in costs as we ramp up underground mining rates to 8,000 tons per day by mid-2017.

Growing production, declining costs, and a declining rate of capital spending will translate to significant free cash flow generation in the years ahead.

Mulatos produced 41,830 ounces for the quarter, a 52% improvement over the previous quarter, reflecting higher tons and grades stacked, the recovery of deferred ounces from the seasonally weak third quarter, and improved mill production. The leach pad continues to perform very well, with the operation continuing to experience positive grade reconciliation from the Mulatos pit. Grades stacked of 0.94 grams per ton in the fourth quarter and 0.87 grams per ton for the full year were above the budget of 0.8 grams per ton.

Mill throughput improved in the fourth quarter, reflecting higher grades processed of 19.4 grams per ton and higher throughput of 450 tons per day.

To date, we have realized positive grade and negative tonnage announced reconciliations at St. Carlos. The block model and mine plan have been updated to reflect this in the 2015 reserve, resulting in a decrease in tons at St. Carlos, partially offset by a 75% increase in the reserve grade to 11.7 grams per ton. This is expected to result in higher grades processed to the mill over shorter remaining underground mine life of approximately one year, based on current reserves. We are continuing to evaluate the potential for conversion of existing resources to extend the mine life.

For the quarter, all-in sustaining costs at Mulatos were $958 per ounce, down $252 per ounce from $1,210 in the previous quarter. On a year-to-date basis, all-in sustaining costs were $1,047 per ounce.

Mulatos is expected to have a stronger year in 2016, with production increasing to a range of 140,000 ounces to 150,000 ounces and all-in sustaining costs decreasing more than $100 per ounce to $925 per ounce. We expect this trend to continue as the higher-grade and lower-cost Cerro Pelon and La Yaqui deposits come online.

The [MEA] submission for La Yaqui remains on track for the end of March, with initial production expected in mid-2017.

El Chanate had another strong quarter with production of 18,210 ounces, bringing the 2015 year-to-date production to a record 79,312 ounces, beating guidance. The operation continued to benefit from higher grade stacked in previous quarters and improved recoveries from the leach pad, partially offset by lower mining rates.

El Chanate is a higher-cost operation, but extremely efficiently run, as demonstrated by its ability to generate positive free cash flow in 2015 despite the weaker gold price. As Jamie mentioned, with the hedges in place for 2016, we look forward to another year of positive free cash flow from the operation.

With that, I will turn the call back to John.

Thank you, Peter, and that concludes our formal presentation. I will now turn the call back to Donna, our operator, who will open the call for your questions.

(Operator Instructions). Cosmos Chiu, CIBC.

Thank you, John, Jamie, Peter, and team. Congrats on a very successful 2015. Maybe first off, a question on Young-Davidson here. You mentioned free cash flow earlier in the presentation. How I look at free cash flow is I take operating cash flow, subtract out CapEx for sustaining CapEx with development, and if I do that for Young-Davidson in Q4, I get negative $6 million in free cash flow.

I guess my question is two parts, maybe for Jamie. Is this how you look at free cash flow? And certainly, we are going to see Young-Davidson, as you mentioned, all-in sustaining costs come down in 2016. When would you expect at the asset level for Young-Davidson to be free cash flow positive? Is it going to be in 2016 or is it going to be closer to 2017?

Cosmos, it's Jamie here. It will be in 2016. In fact, it will be next quarter.

As I mentioned, we designed our budgets at $1,100 gold such that YD would break even by the end of the year, so we were free cash flow negative for the first half, but we are recouping that in the second half. Now at $1,220 gold, we will be free cash flow positive in the second quarter.

That would be great.

And the way we look at it is exactly as you suggest. It's the proceeds from the gold that we sell from Young-Davidson, offset by every dollar that we spend there, so that obviously would include their operating costs and their sustaining and their growth capital. It's an all-in number.

Great. Maybe another question for Jamie. We've talked about the write-off of the ounces on the leach pad. I can't seem to find it on the net or on the income statement. Is it part of the NRV adjustment? And if that's the case, is it embedded in the operating cost, then, in Q4? Is that how we should look at it?

Yes, so it's actually -- it's split between mining and processing costs and depreciation. So it was a $25 million write-down. $20 million of that flows through mining and processing costs and then the other $5 million through amortization expense.

Okay. And then maybe on El Chanate as well, certainly you're not spending too, too much -- too much money in terms of CapEx at El Chanate in 2016. It's been profitable in terms of free cash flow, but how should we look at the mine life here at El Chanate? Should we pretty much take the 100,000 ounces on the leach pad, plus recoverable reserves that you've stated? I'm just wondering if there's any kind of upside behind that.

At a $1,250 gold price, Chanate continues mining for about three years, after which we start residual leaching the pads and then would recover the remaining 100,000 ounces.

Yes, over the course of another up to three years.

Okay. And then maybe one last question from me here, switching gears to Mulatos. It's great that -- it's good to see that you've added quite a number of ounces in terms of inferred ounces at La Yaqui. Could you remind us again in terms of, historically speaking, the conversion rate from inferred into M&I and ultimately into reserves at Mulatos, or more specifically at La Yaqui and some of the satellite deposits?

I will probably address that one the best. Going back to the early days of Mulatos, it was drilled off by Placer Dome, and by 43-101 definitions, it was probably half a measured and indicated resource and the other half was an inferred resource.

As time went on, within the immediate area of the Mulatos pit, we had -- we converted everything that was stated as measurement -- pardon me, as inferred resource and more. So we -- from an open pit basis, we've had very, very good success in the area of the Mulatos pit.

This is, at La Yaqui, a new exploration discovery. And by the time we cut off the drilling data to calculate this year's reserves and resources, we were only able to incorporate a very limited number of [dro] holes from that first exploration program.

We were quite surprised that with that limited amount of drilling, we were able to pull in as many resources as we did in any category. It's our expectation with the type of mineralization that we see there that we are going to have a fairly high conversion rate.

Okay. Great, that's all I have. Thank you.

Anita Soni, Credit Suisse.

My first question is just regards to Young-Davidson and the stockpile level. So I'm just trying to reconcile what was mined and what was milled. Could you -- and it seems like the stockpile level went down to a greater degree than I would have anticipated, given what you had mined from the underground mine. Could you just talk about that?

I think we still have -- it's Peter here. We still have over 1.5 million tons -- around 1.4 million tons at 0.8-ish grams per ton in that stockpile. Comparing to prior year, it should be just the simple math of how many tons we milled minus how many tons came from the underground. I don't have that -- those numbers detailed right in front of me. Chris, do you have those numbers?

Yes. So our depletion last year from the stockpile was about 900,000 tons at 0.7, and from the underground, it was 1.8 million tons at 2.66 grams per ton. So that adds up to the mill tons throughput.

I would add there just for color that there's more than enough material in the surface stockpile to probably outlast the current underground reserves. So once the underground mine gets to 8,000 tons a day, we won't be taking anymore from that surface stockpile. And it will be there for -- to fill in if we have either dips in production or ability to produce more. It's there as an insurance for us into the end of the mine life.

Don MacLean, Paradigm Capital.

We're looking forward to 2016, too. Just on the Mulatos, I guess, Peter, there is going to be a bit of a balancing going on here between the end of San Carlos and the startup of La Yaqui. Any sense of how much time goes between the two of the -- the end of one and the start of the other next year?

It will depend on our ability to convert some resources into the central zone at San Carlos. We are in there now. We are mining in there now, so our ability to find work will be dependent on our drifting through it.

We expect production from La Yaqui by early in the seventh half -- second half of 2017, so is there a quarter or so that we dip and then come back up? That's quite possible, but in the grand scheme of things, looking at La Yaqui and Cerro Pelon and the way they are developing, this is not a big issue.

Yes, yes, for sure. Okay, well, then, maybe just touching on that, the number of holes -- John, you'd mentioned that you were surprised at how many ounces came in with the limited amount of drilling. Could you give us a sense of how many holes were actually in that resource calculation and how many holes have been drilled to this point now since the resource was calculated?

We've got our VP of Exploration, Aoife McGrath, here. She's the lady who oversaw the program and was responsible for those drill holes, so I will let her take the questions.

Hi, Don. Up until the end of last year, there were about 60 exploration holes drilled on La Yaqui. There was a number of -- there's about 5,000 or 6,000 meters in addition to that, which were infill and metallurgical and geotech and condemnations. But those 60 holes were all the way along the kilometer-long ridge in a zone about 300 meters wide. So they are pretty widely spaced, still.

There is more -- there were more holes drilled on the southeast portion of that ridge, where -- when [maturity] came into reserves. I'm not -- that's where we are building now is to -- we are drilling around that and showing that we fully understand the controls and mineralization there so that we can infill that fairly quickly this year.

Okay, so I guess two things. One is, how many holes have you been able to put in since the resource was calculated? Have you been able to put in quite a bit? And I guess ultimately what I'm trying to get a sense of is how long will it be before you have a sense of basically your third dimension down the hill?

We are currently drilling up there now again. We've got four rigs drilling at the moment. So we are going fairly steady on that. It's a very large zone. All of La Yaqui is a large zone, so we are going to take it very systematically. We continue exploring the rest of the ridge, so we launch [also] run programs concurrent with that to infill the zones to the southeast.

In terms of timing, I think it'll be a steady program throughout the year.

Okay, so we'd like -- would we maybe be able to get an exploration update midyear or third quarter?

Don, it's Jamie here. No, I think it will be results dependent. We will evaluate it as we go, based on the results of the infill drilling.

Okay, fair enough, then. And then just lastly on the Mulatos itself, the heap leach, the resource -- the reserve came down, but it wasn't a focus. Can we maybe get some color as to whether or not it will be easy to replace depletions going forward if it does become a focus again at the Mulatos heap leach area? Or is it really the future of the project is going to be very driven by the new satellite zones that are being found?

Yes, Aoife has budgets for drilling around Mulatos this year, so we will do some more of that, and we would expect some conversion, but the focus really is on Yaqui and Pelon at this point.

Yes, understandable with the economics. Okay, thanks, guys.

Phil Russo, Raymond James.

Peter, just on San Carlos here, can you maybe just expand about what happened here in this negative tonnage and the ounce reconciliation you saw that saw the reduction in expectations?

Hi, Phil, it's a high grade and really dependent on how you mine it. So we were able to mine it quite a bit more selectively than initially anticipated in the early days of setting the reserve before we got underground.

So we are mining it more selectively at a higher grade. We are getting spectacular grades, but less tons, and that's just the way it's turned out. It's about a -- just over a 40,000-ounce reduction in ounces. So it's not that significant, particularly with what we're finding elsewhere on the property.

Okay, and then at La Yaqui, with the good result there, is there a chance that La Yaqui could be beginning to contribute to the year in ounces or as you look at La Yaqui evolving here, is it more about just adding to its loss? Can it be a bigger contributor? And I guess where I'm going with that is, does Mulatos, can it still get over 200,000 ounces collectively through all these different sources? Or was San Carlos lowering here? Does the mine struggle to get over 200,000 ounces in the next couple of years or can it do it with what you have, irrespective of what happens at San Carlos?

Hi, Phil, it's John McCluskey here. Right now, both La Yaqui and Cerro Pelon are at a relatively early stage in terms of their evolution.

Indications are they're going to get bigger and we could see that the middle of last year. The results came in far beyond our expectations, and right now we're feeling very enthusiastic about what we are seeing there. The area of alteration associated with both of those zones is quite substantial. We used an analogy with La India, the Agnico Eagle property, and in terms of the style of mineralization and so forth, they are very much in the same family. The area of alteration, though, associated with La Yaqui is quite a bit bigger. From that perspective, we just look on -- in terms of scale, we know La India is around 800,000 ounces or so. And so, we see that type of potential at this point at La Yaqui.

So given that we are starting it off small with what we are permitting and what we've designed up until now, initially the impact is going to be smaller. Between La Yaqui and Pelon, for example, we envisioned about 50,000 ounces of production when they were both going at full tilt. That will evolve as those ore bodies grow, and we have already been able to give a very good indication based on very preliminary results from 2015 that these ore bodies are growing. And I think commensurate with that, our expectations is that production profile is also going to grow.

So this 50,000-ounce a year number could easily change to 100,000 ounces a year, between those deposits, and possibly beyond that. So given that it's early days, I don't want to get too far out in front of the story, but we have pretty high expectations for it. The grades are excellent. The network shows that recoveries are excellent; mining costs we expect are going to be very, very low.

From this point of view, we see La Yaqui and Pelon as the future of Mulatos. We've still got a long way to go in the Mulatos pit and there's still lots of potential around there, but in terms of where we see the biggest upside in terms of grade, the overall economics, and so forth, the area of the alteration, the fact that it's so underexplored, it really is pointing to Pelon and Yaqui now. So from that point of view, do I believe we have the potential to get the project back up to that 200,000-ounce a year range? I absolutely do.

Great. Thanks a lot, John, Peter.

Anita Soni, Credit Suisse.

I apologize. The operator dropped me, so I did not hear the response to the question on stockpile, and I also have one more follow-up with regards to -- it was with regards to Mulatos. So I'll let you just -- if you want to torture everyone again, just give me your (multiple speakers) on the stockpile.

I did the calculation, your year-end level was 1.74, and then you basically -- the variance would be about 160,000 that you would have put to the mills, based on what you've mined, and that would get you to about 1.6 in the stockpile level and you posted about 1.4.

Yes, so Anita, it's Chris Bostwick. The actual depletion from the stockpile or production from the stockpile last year was 900,000 tons at 0.7 grams per ton, and from the underground, we produced 1.85 million tons at 2.66.

And then just on Mulatos, if I look at the 3 million tons of conversion that you had that lowered the strip ratio there, and congratulations on that, I'm just wondering what was the genesis of that. Was it lower costs, I'm assuming?

Yes, it's Chris again. Yes, it was lower cost, principally lower milling and admin costs that enabled us to essentially lower our [cutoff rate].

Process (multiple speakers) approach costs.

Yes, (inaudible) costs driven by essentially lower cyanide costs.

Right. Would that material have a lower associated recovery rate or would it be the same?

Generally, it will have the same average recovery.

And then, one last question with regards to San Carlos. The mill that you guys have there, would it be possible to use it as -- or crushing facility. Would it be possible to use that at La Yaqui or Cerro Pelon?

Hi, Anita, it's Peter here. Yes, the mill and the associated crushing facility with that mill is very small, 500 tons per day capacity to crush very fine. So, no, we wouldn't be -- probably wouldn't be able to use any of that at Pelon or Yaqui.

All right, thank you very much.

Michael Gray, Macquarie.

Back to La Yaqui, just a few questions. First is, drill hole about a kilometer north of the current reserve. The whole 68, is that included in the inferred resources?

The whole 58? It's Aoife here.

Yes, 68.

She's pulling up her computer, Michael.

Okay, well, while that's being pulled up, maybe also interested in what is the spacing for the inferred criteria for hole spacing?

The criteria for inferred is less than 76 meters.

Okay. And everything was pit constrained? Nothing considered underground?

No.

It's all pit constrained.

Okay. And then, when you go about with the $5 million exploration programs systematically, is that a grid pattern more or less or is that really subject to controls on mineralization, and what would the spacing be if it is systematic?

To get us down into measures -- or indicated is less than 36 meters, so we are aiming for somewhere between 25 meters and 30 meters.

It's not as easy to bill on a [greater third]. It probably isn't very simple, but what we would do is we would put fences mounted on portable rigs (inaudible) and drill from that. So if there's -- there aren't locations at the top where we have current infrastructure, we can put diamond rigs in our C rigs, and as we move down the hill and while we are getting infrastructure in place, we will be using nonportables.

Okay, understood.

She's still looking up 68 for you, Michael.

Okay.

We can always take that off-line, Michael, and get back to you later this afternoon.

Sure, yes. No, let's call it there. Thanks very much, guys.

Mark Mihaljevic, RBC Capital Markets.

Actually, most of my questions have already been answered, but a couple quick ones for you. So first off, can you just update us on the permitting at La Yaqui? So I guess you are submitting everything very shortly, you said, in the Q1, and then you are expecting about a six-month permitting timeline and then about a couple quarters of development. Is that correct?

Yes, you are exactly right, Mark. That's the timeline that we are working to.

And does that -- can you just give us a sense of how the ongoing evolution of the exploration there impacts that?

Yes, we -- what we are permitting is the initial reserves pit that's been kind of on the books for a while, and so that's what this MEA is about. Once you have a permit in place, it's easier to work from an existing permit and make modifications than to do it the other way around. And we can wait another year for Aoife to figure out what we've got there and start all over, but this is the more prudent -- the faster approach.

Okay, that makes sense. And can you just give us any update on Esperanza, when you guys are doing there? How's the progress with the updated EIA going?

We actually -- so at Esperanza, we've slowed down the process of pushing that forward. It's kind of gone down the rank in terms of priority. We are continuing to poke away at it, but it's not imminent what -- you are familiar with the current governor that's in place there. We pretty much have to wait for another term, I think.

Okay. And just one more cleanup for me, how is the MCM shaft? I believe you guys were saying that should be basically commissioned, give or take, right now? How is that going and have you started to see any of the benefits you discussed on the site visit 12 months ago?

Yes, so it happened last week -- we are now (inaudible). We are now able to send people up and down the MCM shaft in a cage, so that's kind of a bit of a game changer for us, so that's occurred.

We can now skip from getting ready to skip in the bottom of the MCM shaft, at least locally produced waste as we develop out from the bottom. We still have the -- the waste has to develop from that part of that shaft up into the upper workings and that will take over the course of the next year or so. That's kind of what gives us the ability to get to 8,000 tons per day in 2017.

Okay, perfect. Thanks, guys, and have a great, long weekend.

(Operator Instructions). [David Medlik], Macquarie.

I have a question for Peter. On Young-Davidson, could I get a bit more color on the underground development savings? And also, what percentage of the crew has transitioned to owner operated?

Yes, sure, David. So we save around CAD2,000 per meter between our owner crews and contractor crews, so that's the number to use. And in terms of -- I'm sorry, the second question was how much are we currently doing? Was that your question?

(multiple speakers). No, the second question was what percentage of the crew has already transitioned over to owner operated?

Right. So we have just about everybody we need in place to take it on ourselves, and not everybody was transitioned over. We picked some people and not others, and some others want to go on and mine somewhere else. But the labor pool at the [crypting length] campus is good and we have no challenges getting people to work for us.

So in terms of the CAD2,000 per meter savings, are you finding sort of the development rates are better than when you are with contractor? What are the main facets of why you are getting such a good improvement?

No, the development rates are similar. There is a significant profit margin associated with the development contractors, and the other thing is you got double the overhead and supervision requirement. I guess the other point to make, that CAD2,000 I quoted was in Canadian dollars, so just keep that in mind. We think at Young-Davidson in terms of Canadian dollars, mostly.

Great, thanks, guys. Have a nice long weekend.

Don MacLean, Paradigm Capital.

John, I was reading how you weighed your words on Turkey versus Lynn Lake, but maybe we could just ask you a bit more color on what you think about the -- what's happening with the two projects because that is probably the most common question I ever get as an analyst from investors on what the Company is doing in Turkey. And then maybe, Jamie, you could throw in a bit of color because actions often speak louder than words, about the relative budgets of how much you are spending in Turkey versus how much you are spending in Lynn Lake this year.

Yes, Don. In terms of the work going on in Turkey, it's really focused now towards securing the outstanding permits that we have for our -- the first of the projects we want to bring into production at [crossley]. There is interesting developments going on in the big postelection they had -- the big federal election last fall in this region of the country, which has in the past been heavily weighted towards the opposition.

At this point, the province at Chanate is evenly split between two MPs belonging to the opposition party and two MPs from the [Auk] party. The governor, of course, is an appointed official. He was appointed by the Auk party government. And so from that perspective -- from a political point of view, I don't think there's ever been a better moment, let's say, for something like a gold project to get permitted in this region.

And with that, a Turkish company that has been working in this district along with us and others for the last few years, they recently did receive their forestry and GSM permits and they will be able to move forward with construction of their project.

That's the first gold mining project to be fully permitted in the Biga, and many of you will remember there were certain voices out there, very loud and influential voices, saying that no projects would ever get permitted in the Biga. Well, that was clearly wrong. And the first of these is now underway and we anticipate that this year we will also get our permits with respect to forestry and construction. We fully expect that's going to happen and we are undertaking that work now.

Don, it's Jamie. Just in terms of our respective budgets, we tried to lay it out in our guidance release in early January that the focus for the next 12 months is really on the ramp-up of Y-D and development of Cerro Pelon and La Yaqui, so we have cut back on our spending and our development pipeline. We are budgeted to spend about $4 million in Turkey this year through the permitting process and about $8 million at Lynn Lake advancing towards the feasibility study.

Okay. And in terms of -- they are less priority, clearly, both Lynn Lake and Turkey. Is there -- is one more top of the pile than the other at this point?

They both have very strong IRRs, Don. They're almost equivalent. They are in the range of about 30% or so. And so from that point of view, they are extremely attractive projects.

Capital costs on the Turkish project is somewhat lower than Lynn Lake, and -- in fact, we intend to undertake work there this year. It's just that the initial work that we do is relatively low cost. We can remove quite a number of the critical path items even this year, assuming we get the permits in the next six months or so. There's still scope to undertake certain work with respect to roads and reservoir construction and so on that are rather important pieces of the puzzle in terms of getting the project into production.

But they just don't require a big capital spend. We don't envision any really significant capital spending in Turkey until probably the latter part of 2017, by which point both Mulatos and Young-Davidson will be generating quite substantial amounts of free cash flow, and that's always been conceptually the way we envision it since the merger. We've been thinking in terms of developing what we have, that's already permanent, that's already in production. Get our production up and our costs down, and with the free cash flow generation, focus that on growing the pipeline.

I was just over in Europe and I think they are -- and in North America there is a growing concern about the stability of Turkey, John, so I guess that's -- late 2017 is far enough away you will have a better sense of how things are unfolding in that part of the world.

That's true, and I would also say here that I don't have any concerns about the stability of Turkey. That's a very, very stable company. I visited it 25 times in the last five years and I've spent quite a substantial amount of time there. And I've had an opportunity to talk to politicians of every political stripe, from the local communities right up to cabinet ministers in the federal government.

I have a very good perspective, I would say, on what's going on in that country and frankly, when you get down to it and you start sourcing information that is coming from experts on the region, they will tell you that the issue isn't so much economic stability, political stability, and anything else; it's more to do with civil rights. And I had some concerns along those lines, but from the time I've arrived in Turkey, I could see from -- the civil rights that Turkish people enjoy aren't quite as liberal as the ones that I've enjoyed as a Canadian. And, frankly, what I think we have as Canadians is a rare thing throughout the world.

But I would say that I wouldn't have any hesitation about making an investment to Turkey. I think our -- they do have the rule of law there. Our investment would be well respected and our ability -- we've looked in some depth at our ability to repatriate earnings and so forth, and we are quite confident that that is -- that that's all for real. That has not changed.

But having said that, you are quite right. We are not planning on any significant spending in Turkey until the latter part of 2017. And the world could be a completely different place as far as that region is concerned by that time.

Okay, thank you, John.

Thank you. This will conclude the question-and-answer session. If you have any further questions that have not been answered, please feel free to contact Mr. Scott Parsons.

Ladies and gentlemen, this will conclude today's conference call. Please disconnect your lines at this time and thank you for your participation.