Centerra Gold Inc (CGAU) 2005 Q1 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the Centerra Gold first quarter results conference call. During the presentation all participants will be in a listen only mode. Afterwards we will conduct a question-and-answer session. At that time if you have a question please press the one followed by the four on your telephone. As a reminder this conference is being recorded, today Friday April 29th 2005.

I would now like to turn the conference over to Sharon Luong, Director of Investor Relations, with Centerra Gold. Please go ahead.

Thank you Dave. Good afternoon everyone and welcome to Centerra Gold's first quarter 2005 conference call. My name is Sharon Luong and I'm the Director of Investor Relations for Centerra Gold. Present with me today are Len Homeniuk, President and CEO, David Petroff, Executive Vice President and CFO, George Burns, Vice President and Chief Operating Officer, Rob Chapman, Vice President Exploration and Marina Stephens, International Legal Counsel.

On the call today, Len will start with a review of the quarter, and an update of our exploration programs. George will then proceed to operations and given outlook for the second quarter and the year, and David will follow with a review of the financial results. We will then open the phone to questions.

Today's conference call is open to all members of the investment community and media in listen only mode. There is a slide presentation that's part of the review today, and it is available on our web site at www.Centerragold.com under the Investor section. Please note that all figures are in U.S. dollars, unless noted otherwise.

Before we begin, I would like to caution you that certain statements made on this call may be forward-looking statements and as such are subject to known and unknown risks and uncertainties which may cause actual results to differ materially from those express or implied. For a more detailed discussion of the important risk factors associated with Centerra's business and industry, please refer to our securities filing and see our web site, and more specifically, to annual information form dated March 15th 2005.

And now I'll turn the call over to Len.

Thanks Sharon. Good afternoon everyone. Our results for the first quarter built on the momentum established in 2004. Both Kumtor and Boroo had strong better-than-expected operations. Total gold production of almost 214,000 ounces exceeded our forecast by 10 percent. Our production costs remained amongst the lowest in the industry, at $211 per ounce versus our own forecast of 235, and the expansion of the Gatsuurt deposit moved us further along in our reserve addition goals. We have now outlined a resource of about 1.3 million ounces at 3.5 grams per ton.

As our first quarter release of earlier today noted, net earnings were $0.17 per share or $12 million. Cash generated by the operations amounted to 37 million, and Centerra ended the quarter with $185 million of cash on hand.

On the growth side of the company, the resources that the Kyrgyz Deposit was significantly expanded with the addition of another 52 drill holes to the database. The resource estimate as it now stands right now is, as I mentioned, 1.3 million ounces in the indicated category and an additional 210,000 ounces in inferred.

Needless to say, we are very encouraged by this latest edition as we get ready to initiate the feasibility study on the development of this deposit.

Elsewhere in our exploration program, extensive drilling continues at all sites. At Kumtor, there are nine drills in operation, with most of the activity focused in the northern part of the pit. At the Southwest zone, there are an additional two drills testing for the northern strike extension to the deposit.

At the Boroo mine site there were two drills working, and they completed 55 exploration holes, mostly in the vicinity of pit No. 6. And that the REN property in Nevada, the 3.5 million phase one drilling program was started in February and is currently ongoing. A follow-up phase two program is contingent on the results of this program, which are expected by the end of the second quarter.

Now I would like to take a few minutes and address the political situation in the Kyrgyz Republic. 2005 was expected to be a politically active year for the country, with parliamentary elections scheduled for February and presidential elections for October. However, the follow-up from the parliamentary elections in February precipitated a number of the events including the resignation of President Akayev and the formation of an interim government and the rescheduling of the presidential elections to July 10th. During this whole period of events, the Kumtor mine kept operating.

Recently, some negative comments in the media have come to our attention regarding the Kumtor restructuring agreement. In this regard, I would like to mention a few key points. First, the Kumtor restructuring agreement was reviewed by various international organizations, including the European Bank for Reconstruction and Development and the International Finance Corporation.

Second, a legal opinion of the Minister of Justice of the Kyrgyz Republic has always been that the government had the legal right and the capacity to complete the restructuring.

Finally, I would like to add here that in a meeting last week that I had personally with the interim President, he assured me that the current government will honor the agreements with foreign investors entered into by the previous government, including ours. Since my meeting with the President there has been public confirmation of his statement. It is our observation that the negative comments about the agreements always seem to be made to make the news when some individuals feel the need to try to gain some political mileage in advance of the presidential election, but I can assure you of one thing.

The Kumtor restructuring agreement was created in the same open, transparent, and fair manner that Centerra conducts all of its business. We are confident that the upcoming presidential election in the Kyrgyz Republic will result in the stabilization of the country, and its leadership, and ultimately improve the investment climate. Kumtor is a meaningful contributor to the economy of the country, and a responsible corporate citizen. We will continue to work with the elected leadership and continue this partnership.

I will now turn the call over to George for a review of the operations.

Thanks Len. The Kumtor mine had another strong operating quarter. Production of almost 142,000 ounces was eight percent over our forecast at the beginning of the year on account of higher throughput, ore grade and low recovery. Subsequently, the cash cost of production at $235 per ounce was lower than forecast. As expected, the average mill head grades of 3.7 grams per ton were lower than those of the first quarter and average of 2004.

Our major profitability improvement projects are all on track. The ultrafine grinding mill, which is expected to improve gold recoveries, is due to be online by the end of the year. The expansion to the mine fleet for the development of the Southwest pit and the main Kumtor pit is also progressing as planned.

Our outlook calls for production of 135,000 ounces at a caps operating cost of $252 per ounce for the second quarter, and a total of 520,000 ounces at a cash cost of $258 per ounce for the year.

The Boroo mine, which recently celebrated its first year of commercial operations also recorded another good operating quarter. Gold production of almost 72,000 ounces was approximately 15 percent above forecast due to higher than anticipated ore grade and recovery. Mill head grade averaged 5 grams per ton for the three months compared to 4.6 assumed in our forecast. Although we mine 50,000 tons of fresh ore during the quarter, we did not see the drop in gold recovery as expected. Although this is clearly good news, we have not yet adjusted our forecast recovery assumptions.

The site mill grades were replaced with a smaller opening size to improve grinding. This resulted in a higher throughput rate late in the quarter, which is continuing to date.

The first quarter mining rate of 19,000 bank cubic meters per day was 24 percent above forecast, resulting from productivity improvements.

The higher mining rate will enable adequate stripping for the higher anticipated ore deliveries to the mill.

Those cash cost of operations remained amongst the lowest in the industry, at $165 per ounce. The outlook for the second quarter calls for gold production of 74,000 ounces at a cash cost of $173 per ounce. Factoring in the recently improved throughput rate at the mill, we've increased the forecast for the year to 270,000 ounces, with an average cash cost of $174 per ounce.

Overall, Centerra's cash cost of production was 211 per ounce in the first quarter, and is forecast to averaged $229 per ounce for the year. The total production forecast is for 209,000 ounces of gold for the second quarter, and 790,000 ounces for the full year.

The impact of globally higher costs for diesel, steel, and reagents, plus costs for Sarbanes Oxley implementation is being somewhat offset at Centerra by continuous improvement projects aimed at reducing costs and improving productivities. Examples of some of these projects include improve mine productivity, and increased mill throughput at Boroo and an in-house mining fleet rebuild program at Kumtor. All of these projects have had an impact to the bottom line in the first quarter.

Now I'd like to turn the call over to David to review the financial results.

Thanks George, and since we're comparing the quarter for 2005 to 2004, I thought I'd start by reviewing the relative ownership interest in the two properties, operating properties that we have. Last year we had a one-third interest in Kumtor. This year its 100 percent. And Boroo last year was 53 percent and this year is 95 percent. So these have impacted our income statement.

Now, furthermore, you'll remember that Boroo static commercial production March 1 of last year, so that the results of operation for 2004 have one month of commercial production at Boroo. This year we have the full three months. So now on to the income statement.

Revenue for the first quarter of 2005 was $92 million, which is significantly higher than the first quarter of last year. Now, we've already talked about the two reasons -- two of the reasons for it. One was the higher interest in Kumtor, 100 percent versus a third last year, and the second reason, a full quarter of production at Boroo compared to just one month last year. And so together, we have 220,000 ounces of gold that we have being sold in the first quarter of 2005, which was significantly higher than last year.

The third reason why our revenue is up is because we have higher realized gold prices due to both the higher spot price and the fact that we are unhedged.

So for the first quarter of 2005 the market price -- the average spot market price was $427 per ounce, of which we realized $417 per ounce. So there was a $10 hedge impact from the closing of the program last year and the carryover into this year on the income statement. There was a non-cash impact.

Now that compares favorably to the first quarter of last year, where the market price was $408 per ounce and we realized less than 90 percent of that level, a significantly higher amount of hedge related reduction in realized price.

The cost of production in the first quarter on a cash basis was $52 million and the non-cash part for depreciation depletion and amortization was $17 million. So a total of $68 million cash and non-cash costs of production.

You've heard the per unit rates; $211 cash cost per ounce, $78 non-cash per ounce for a total cost of $289 per ounce as measured by the Gold Institute standard.

The reason for the increasing costs were the same as related to the revenue; the increased ownership of Kumtor, the startup of commercial production at Boroo, and also some higher costs for consumable items.

Year-to-date exploration was $5.2 million. The year over year higher exploration expense reflects the more extensive program which we implemented in the second half of 2004 to build the Company's reserves.

And we keep repeating it, so I'll say it again; the Company has no debt. And therefore we have no interest expense. What we did have however in the quarter was a $475,000 foreign exchange lost on our Canadian cash balances, when the Canadian dollar weakened relative to the U.S. dollar during the course of the quarter. And also included in our interest and other line is almost $1 million from interest earned on our surplus cash balances.

Administrative costs for the quarter were $3.7 million, up considerably on a year over year basis, but this is simply reflecting Centerra's status as a standalone Company. And what we forecast for the year is $16 million approximately in administrative costs.

We did provide $2 million of taxes in the quarter. 300,000 of that were cash taxes. The balance was added to future income taxes on the balance sheet. Now, we'd like to point out here that at the Kumtor Goldmine even though we have -- still have losses to be carried forward, which will shelter us from cash taxes for approximately three years in total. We still do provide on the income statement taxes at a rate of 20 percent.

So the bottom-line net earnings were $12 million, an increase of 4 million over the amount reported a year ago.

I'd like to address the balance sheet for a few minutes. You'll see on the balance sheet, if you're following along in the slides or looking at the results, the press release, that at the end of the quarter hour cash balance stood at $185 million, up $32 million from the year-end and that all came from the cash generated from operations.

We have 256 million of property plant and equipment on the balance sheet. 155 million of that is allocated to Kumtor, and 99 million of that is allocated to the Boroo project.

We also have $155 million of goodwill on the balance sheet from our purchase of the assets in the second quarter of last year. Of that 155 million, 130 is allocated to the Kyrgyz Republic and 26 million is allocated to Mongolia.

On the statement of cash flow, as Len mentioned, cash generated by our operations totaled $37 million. That's $0.51 per share for the quarter. It was also augmented by a working capital decreased of about $4 million, and that was on account of the reduction in the finished gold inventory, which we built up at the end of the year 2004.

Capital expenditures for the quarter were $5 million, of which 3 million was spent in sustaining capital. And for the total year our new forecast is for $35 million of capital expenditures. This is an increase from what we reported in the fourth quarter of 04, because we have identified additional productivity improvement projects. And the major items however, remain, as George pointed out, the ultrafine grinding mill that's budgeted at 8 million, the development of the Southwest pit, $4 million forecast, and mobile equipment at Kumtor to facilitate the pit expansion. That's $8 million forecast for that.

And so enclosing I've just like to address Centerra sensitivity to gold prices. We plan on selling approximately 600,000 ounces of gold in quarters two, three, and four, in aggregate this year. So for a $10 change in the price of gold, our revenues would be impacted by $6 million. Our cash flow would be impacted by approximately $5.5 million because we do have some revenue and production related taxes and royalties, and our net earnings would be impacted by $4.8 million reflecting of course both the minority interest at Boroo and the provision for future taxes at Kumtor.

So with that, I'd like to hand the call back to Len.

Thank you David. I'd like to make a few closing comments before we open the lines for questions. Centerra remains very strong financially with steady operations from both its mines. This has positioned the Company very well to continue to pursue growth organically, and on the acquisition and joint venture front.

Now operator, could you please give the polling instructions as we would like to start the question period.

Thank you. Ladies and gentlemen, if you would like to register for a question, please press the one followed by the four on your telephone. You will hear a three tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. If you are using a speakerphone, please lift your handset before entering your request. Once again, to register for a question, please press one four.

Once again ladies and gentlemen, as a reminder, to register for a question, please press one four. Please stand by for the first question. Ladies and gentlemen, once again as a reminder, to register for a question, please press one four.

And the first question will come from the line of Mike Durose of Scotia Capital.

Yes, and good afternoon everyone and congratulations on another strong operating and financial quarter. Just a couple of questions, the first one on Gatsuurt. I was wondering if you could just remind us as to the infrastructure and how much you think or feel you could benefit from, you know, existing operations at Boroo in terms of you know developing the project and operating the project. And also, if you can just give us a quick breakdown on the oxide resources versus the sulfites based on the latest resorts update.

Thanks.

Thanks, Mike, for the congratulations. We too are very pleased with the quarter. With regard to two questions I'll take the first one. First of all the infrastructure at Gatsuurt is very good; it's right near a major highway and railway line. With regard to the synergy we will have between Gatsuurt and Boroo, it is quite significant. Of course, we won't need two offices, we won't need two accounting departments and all of that sort of thing. So we do expect that we will benefit greatly from the fact that we do have Boroo already in operation. And with regard to your second part, with the oxide and the sulfites or, the ratios George or Rob, either one of you have any comment?

(inaudible) but if my memory serves me correctly, the oxide was about 100,000 ounces, but I'll get back to you on that one, Mike.

OK. Second question, maybe for David or Len, just you know your free cash flow generation is pretty significant. You know, something like -- your run rate is over $100 million this year alone. I last few this before and I'll ask you again, I mean what about a dividend policy for shareholders? Even if you were to give like a one percent yield, which is not huge, but it's something back for shareholders, that's only about 11 million bucks out of your cash flow. I mean is that something you'll contemplate?

Mike, certainly you know, a dividend is a Board decision, and that will be reviewed from time to time. But our current policy is not to pay dividends, just getting out of the gate from the IPO and intent on growing. We have to you know tackle a few growth opportunities first, see how that works through our cash flow, our capital structure and the like, and then I'm sure we'll revisit the dividend, and see what comes out of that.

Thank you.

Your next question will come from the line of Geoff Stanley, with BMO Nesbitt Burns. Please proceed.

Thank you, and also my congratulations. Great quarter. A couple of questions. Firstly, perhaps to Greg on the grade. Obviously, you know, a lot of the strong results was driven by positive grade reconciliation. Can you give us a sense of the extent to which that -- you know, way that occurred to the extent to which it was perhaps managed at all, if you had the opportunity to mine higher grade material than you had originally planned or whether it was just simply a positive reconciliation with respect to your reserve calculations.

Thanks for the comment, Geoff, on the quarter, and we do appreciate that. And I'll turn it over to George for a comment on the grade reconciliation. I assume you want it for each of the two sites, yes?

Correct, yes.

In the case of Kumtor, the ore grade was just one percent above what we had forecast, so nothing significant there. Boroo the ore grade was more significantly higher, and we're seeing ore grade gains in both high-grade areas of pit two and pit five, where the mining operations are conducted or have been conducted to date. In terms of our forecasting going forward, we have not adjusted the forecasted ore grades at Boroo, with the exception of this month of April.

We did have in pit blasted inventory, so we used the blast old data for the month of April, and that higher grade we're seeing in that month is in the annual forecast, but the on that we stuck with our resource model estimates and you know to date it's been conservative. We're seeing the higher grade coming out of the higher grade zones within the deposit, and you know we've been evaluating the cutting limits that we put on those high-grade intercepts. I'd also comment today at this year we've seen tonnage ore gains and reconciliation of Boroo, which are also going to help us. But again, based on one quarter we haven't done and the forward-looking increases in our forecast with the exception of grade in the month of April.

OK, well thanks George. Perhaps a question for Len, with respect to investment. I mean David indicated, and I think the market as a whole has been expecting to my you know, some level of corporate activity you know emphasizing centralizing expertise and the like. How do you see the investment climate in that part of the world? Are there opportunities walking through your door? You know, obviously you can't speak and specifics, but if you could just give us a flavor of you know what the investment climate is like there at the moment and what kind of opportunities are presenting themselves.

Certainly Geoff. I'll comment on that. First of all, we are focusing on Central Asia, Russia, and other parts of the former Union, as well as other imaging markets as we have articulated in the past. We do see that there are still good opportunities there for what we feel our projects within our niche, and that is something within the range of one to three million ounces that we can develop at 100 to 300,000 ounces annual production, and we have initiated discussion with several governments and parties looking at these and we are moving along; we're not standing still, but at the moment we have really nothing more to comment on other than that, and the fact that we are -- we remain very active in that part of the world looking at opportunities.

And do you get a sense that there are situations that you could bring to your table within the next to say six to 12 months?

I'm hopeful that we would be able to do that in that timeframe, yes.

All right, great. Thank you very much.

Your next question will come from the line of Terence Ortslan, with TSO & Associates. Please proceed.

Thanks. Just want to echo the good results again. David, your cap ex number includes, I guess, all of the refined grinding mill expenditures for this year?

That's correct.

And how much is that again, off the $35 million?

Of the $35 million of which 26 million would be at Kumtor. The ultrafine grind is eight. Southwest development is four, and the mobile equipment is eight.

Got you. And just remind me again how much of the recoveries will be improved buy with the ultrafine grinding.

Up to two percent.

OK, and could we go, Len, maybe -- or George, with respect to the exploration programs you have in each of them, with respect to what's your targets are really what you're trying to achieve by year-end.

OK Terry, that's a tough question, so we're going to turn it over to Rob to handle.

(inaudible) sorry about that.

Not a problem. At Kumtor, we're focusing part of our exploration program around the pit. We see good targets to the north of the pit and to the southern part of the pit. So they are our priority targets and certainly at Kumtor we're also testing of the satellite areas in the long strike (ph) of the Southwest zone.

So that's how program in a nutshell at Kumtor. For Boroo we're drilling around the periphery of the pits, trying to extend them and going along strike as well. REN, we've got a good targets at the 69 zone that we're following up at this time, and we've also got some other geological geophysical targets around there.

So the phase one is the 69 zone or is it more to it than that for REN on phase one?

We'll test the 69 zone and also some other geological targets.

OK. Thanks for that. Just coming back to the estimates for the year, obviously with the first quarter costs being so attractive and you know, fairly prolific, are you expecting -- unless you're going to change or numbers, credit, dramatic change in the cost levels in the second half or the fourth quarter to accommodate the annual numbers. Is that the understanding, if it's for budget you want to maintain at the moment in time or you're being a bit somewhat pessimistic?

Well, we always -- Terry, we always tend to the on the conservative side for sure, but we are forecasting lower production from Kumtor in the forthcoming quarters, and Boroo I think, as George described, because it's a new operation we still are really trying to tune up the resource model. George, is there anything you want to add to that?

I would add also, and Boroo we've got an operation that's done well in the first year and we're seeing some improvements in productivity and anticipate we'll keep pushing forward on those. I think if you look back at the prospectus at Kumtor we made significant improvements in the first four or five years of that operation and we expect to continue to improve Boroo's results in a similar fashion.

OK. Mike asked the question about dividends, but let me ask the question another way. If you were to do -- pursue the projects all the deal flow coming through the front door, I don't know if David or Len you want to talk about this, but do you have a billing power and arrangements right now to the bank, something less than -- with conference (ph) going to ask this question and you said you know you're in discussion, negotiating, with the financial institutions to see what the capacity is. Have you done and the sort of work (ph) on this?

Thanks.

Are you talking about our (inaudible) terry?

Correct David, thanks.

Yes. Well, you know, I've been in discussions with prospective lenders. We have no facility in place today, but through the discussions they're right up to speed on what we're doing and what our potential is, and the more appropriate time, in my opinion, to settle something with them is when we have a deal that we're about to consummate and we've got a capital structure planned and we actually need the financing, but since we are not yet at the point of pulling the trigger today on any growth transactions, they're progressing along, but we're not ready yet to pull the trigger, and it's a little early to raise the financing.

OK. Thanks guys, thanks again.

Thanks Terry.

The next question comes from the line of Barry Cooper, with CIBC World Markets. Please proceed.

Yes hey, nice to see yourselves differentiating from the rest of the pack there with that quarter. George, I was just wondering if you could elaborate a bit on the metallurgical breakthroughs, and I'm not sure whether they're breakthroughs or not, but the changes that you're saying at Gatsuurt.

At Gatsuurt there's really not any metallurgical change. We're continuing with the same strategy, that's it'll be a similar operation to Boroo, with the exception of bio oxidation process. The test work we've done to date is bench scale test work, and we're now proceeding with more detailed grinding test data that will supplement the feasibility study, and we also planned to do a pilot test on the bio oxidation process this year that'll help us finalize the engineering assumptions on that part of the plant. So things are continuing as we had discussed at the end of the year, and we're optimistic that will have good things to talk about at year-end.

Right, I guess I was referring to the line in this morning's press release, where you talk about the reverse additions, that there was encouraging metallurgical test work there. So was there anything further to elaborate on that? Or is it just a work in progress that seems to be going in the right direction?

It's just a work in progress. We continue to take additional samples from the deposit, and the results that we're getting are duplicating prior work, and right now we're in the process of a drilling program that will be pulling together the samples we need to do the pilot tests by year-end.

OK, so if we were to look at where the recoveries sort of are seeking, keeping in mind that it is a work in progress, I think as I recall the original recoveries sort of were on the sulfite component were down in the sub 40 percent level. Where are we sitting right now?

Barry, on that one, what's the coverage (ph) we're talking about (ph) are basically flotation. The (inaudible) vision is floating a con (ph) and taking the con to the bio oxidation stage. So what you're recording is basically (inaudible) on the sulfite material.

OK, so it's quite different at this point?

Barry, our test work is indicating -- at the (inaudible) recovery is in the range of 87 percent.

OK, so that's a heck of a lot better than ...

It is indeed yes.

Yes, just to follow-up on Mike's question, on the grades at Boroo and the process of reconciliation, what was the anticipated grade for the quarter? You came in at five grams, but what was the reserve grade there?

4.6.

4.6. So almost a 10 percent positive reconciliation then?

Yes.

Correct, Barry.

OK, that's -- and then I must commend you guys for giving us quarterly guidance. You are alone in that camp. However, you give us some numbers and we like to play with them, and as terry pointed out, you know, we always look for clues that might be something that could be up and coming. At Kumtor, it suggests that the second half of the year costs are going to be 275 or thereabouts, and that's fine, but I guess my concern would be sure we see that as an omen for what could be happening in 2006 with respect to numbers?

No, I don't think so Barry, it's just Mother Nature, you know how ore bodies are.

Yes, OK, good enough then. Thanks a lot.

Your next question will come from the line of Victor Flores, with HSBC. Please proceed.

Yes thank you, good afternoon. Coming back to the cap ex, I was hoping that you could break down the cap ex by mine. How much of that will be Kumtor, how much Boroo, and perhaps if there's capitalize expenditures elsewhere.

OK, George, do you want to take that? Or David?

Yes ...

David, OK.

The capital is $35 million of which 26 is at Kumtor, and the balance is that Boroo. And of the 26 at Kumtor, we have about $6 million of sustaining capital, 4 million for Southwest development, eight million for the ultrafine grind, and eight million for the mobile equipment to expand the mine.

Right.

And at Boroo we have -- at the end of the year we said four million of sustaining capital. That number is unchanged, but we recently identified some opportunities to improve productivity, quick payback, high return on investment, some that George has alluded to in terms of the drilling and the trucking and the mill and the like, and that aggravates $4.8 million. So that's how you get the eight or $9 million at Boroo.

Right, excellent, thank you very much.

OK Victor.

Your next question will come from the line of Hathan Hodelli (ph), with Simon Partners. Please Proceed.

Good afternoon gentlemen, just a couple of quick questions, a lot of my questions have already been answered. The first, I guess, would be towards -- probably towards George. George, have you outlined the type of capital cost range Gatsuurt would come in that? And I guess given that it's so close to Boroo, obviously we've talked about the synergies and infrastructure, would it be something similar or slightly discounted to what the initial capital on the Boroo was, if you are looking at something in terms of similar size?

Yes, we're envisioning a real similar plant to Boroo, with the exception that we'd be having a bio oxidation process added onto that, and you know obviously costs have gone up for steel and such, so there's going to be some escalation there. By oxidation plant, the pilot tests we're going to do this year will help us determine retention time and capital cost estimates for that, but I think if you look at Boroo and add-in some inflationary issues, and then the bio oxidation circuit, you know, you're -- the capital requirements are going to be very similar.

OK, thank you George. And I'm just looking at my other questions and they have all been answered, so great quarter. It's nice to see someone actually surprise on the upside. Thank you.

Right, thanks Hathan.

Your next question will come from the line of Mike Jalonen, with Merrill Lynch. Please proceed.

I guess I've been called worse, but I just had some questions on the exploration program update area, just you mentioned the Southwest zone, Kumtor area, you have two drills active, completed five exploration holes, testing for the Northern strike extent as a positive, just wondering how those holes tested out, assays or thicknesses.

The holes that we've completed our sort of testing for projections, and we prefer to not give out a lot of that information at this point in time. We have had some encouraging results, but I don't think I'll elaborate on that.

Mike, we're still drilling.

OK. About the Boroo mine, where you have 55 holes, there's a lot more data there. I guess around the vicinity of pit six.

Yes, again -- I guess in summary, we are quite encouraged by our exploration programs and what we intend to do is during the course of the year to announce those results in detail, but right now, it would be premature to be doing that, Mike, and we have spent about -- a think it's five million in the first quarter in exploration, of the 22 million we have allocated, so we do expect to get a lot more drilling accomplished.

OK. Thank you.

Ladies and gentlemen as a reminder to register for any additional questions please press one four. The next question will come from the line of Steve Butler, with Canaccord Capital. Please proceed.

Yes George, a couple questions for you, and first to start out with, what's an appropriate steady-state milling rate assumption for Boroo? Was Q1 a decent results or can you take the mill even higher?

At Boroo our first quarter throughput average for the quarter was essentially at our forecast level, and that was 240 ton per hour, 5300 tons a day. Late in the quarter, as I mentioned, we changed the grade to a side mill out (ph) and that has enabled us to see higher throughput, and so for the remainder of the year we're forecasting 260 ton per hour or 5600 tons a day.

OK, and how many operating days in a year for you (ph)?

365.

All right. I don't need to know any more than that, OK. And then at the end of your presentation you had referred to a couple of -- or maybe three initiatives. I think I only wrote two of them down, I'm not a shorthand expert, but you talked about improved mine productivity at the Boroo, I guess you just addressed that, and mine fleet rebuild at Kumtor. I may be missed the other one, but can you mentioned the impact of -- on operating costs or otherwise of rebuilding the mine fleet at Kumtor?

Well, the third project that I talked about was that throughput. You know, it's a grade change in the increase in mill throughput at Boroo, and in terms of the rebuild program at Kumtor, during the last year we had started a minor component rebuild program in the mine department, and we were successful late in the year. Caterpillar was having difficulty with -- worldwide with engine rebuilds, so we've embarked on a program to do mainframe rebuilds of our truck fleet engines in-house, and have been successful, seem lower costs, and we are going to a full rebuild program at Kumtor on the mine fleet now, and we've projected the savings from that project in the year-end numbers that we've released.

OK, and in terms of millions of dollars or dollars per ounce do you have a measurement there?

For the year we're projecting $800,000 savings from that program.

OK. Thanks George.

You bet.

The next question is a follow-up from the line of Terence Ortslan, with TSO & Associates. Please proceed.

Len, just remind me -- sorry, do you need a separate Stability Agreement for Gatsuurt do you?

Terry, yes we do. We will be embarking on negotiating of that this year.

OK and ...

But having said that, there are certain criteria that we can expect from the Stability Agreement that is legislated, so you know, we know approximately what it's going to be.

Do you want (ph) to piggyback more on Boroo or are you going to be piggybacking more on the (inaudible)

Well, where the only company that has a Stability Agreement in Mongolia, so we have no choice but to piggyback on it.

OK. Thanks.

Thanks Terry.

There appear to be no further questions at this time. We'll now turn the call back to you. Please proceed with your presentation or closing remarks.

Thank you operator, and thanks all of you for participating in our conference call. We look forward to talking to you next quarter. Thank you.

Ladies and gentlemen that does conclude the conference call for today. Thank you for your participation. We ask that you please disconnect your lines. Have a nice day.