Kinross Gold Corp (KGC) 2012 Q2 法說會逐字稿

Welcome to Kinross Gold Corporation's conference call and webcast to discuss Q2 2012 financial results. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions.

(Operator Instructions)

At this time, I would like to turn the conference over to Mr. Erwyn Naidoo, Vice President, Investor Relations. Please go ahead, Mr. Naidoo.

Thank you very much and good morning. Welcome to Kinross Gold Corporation's conference call to discuss our 2012 second-quarter results. With us this morning we have John Oliver, our Chairman, Paul Rollinson, our Chief Executive Officer, Paul Barry, our Chief Financial Officer, Brant Hinze, Chief Operating Officer, as well as Glen Masterman, our Senior Vice President of Exploration. Before we begin of this morning, I would like to bring your attention to the fact that we will be making forward-looking statements during this presentation. For a complete discussion of the risks, uncertainties and assumptions, which may lead to actual financial results and performance being different from estimates contained in our forward-looking information, please refer to page 2 of this presentation, the news release dated August 8, 2012, as well as management's discussion and analysis of the same period, and our annual 2011 management discussion and analysis as well as our AIF, all of which are available on our website. Now, I'll turn the call over to John Oliver, the Chairman of Kinross Gold Corporation. Go ahead John.

Thanks, Erwyn, and good morning everyone. In the wake of our announcement last Wednesday, I wanted to take the opportunity to personally introduce you to our new CEO, Paul Rollinson. Tye Burt made many outstanding contributions to this company, but in the end, the Board decided that a change was in the best interest of our shareholders. We were extremely fortunate to have someone with Paul's knowledge, experience and his skill set as part of our management team, to step in as CEO. Paul has been with Kinross for four years. He knows the Company intimately, and is greatly respected by his peers and his fellow employees. We have found him to be in incisive strategic thinker, a practical problem solver. He will hit the ground running, which was a very important advantage, given the immediate challenges that we face.

Some may think that because Paul was already part of the management team, you can expect more of the same at Kinross. Let me assure you the status quo is not an option. We are looking for a new approach at Kinross and we are confident Paul brings a different management style and different focus. Our goal is, as a Board is, to continue to build this Company, for Kinross to realize its potential for shareholders, through the capital and project optimization process that the Company has already embarked on, and through additional measures focused on enhancing our operational performance. That is the mandate we have given Paul, and that is how we will measure his performance.

An important fact that people should remember is that he is educated both in mining engineering and geology. This was a key factor in his selection. As you will hear from Paul, he intends to be closely focused on operations and the basics of our business. And that is something we are very keen to encourage. On that note, it is time for me to let him speak for himself. So let me introduce our new Chief Executive Officer, Paul Rollinson. Paul?

Thank you John, for the kind introduction, and good morning to you all. I am honored to be here today as CEO of Kinross to talk to you in the context of our second-quarter results. I would first like to acknowledge Tye Burt's contribution to Kinross over the past seven years. Tye has significantly upgraded the portfolio, expanded the production, tripled the resource base, and put in place a solid team of people throughout the organization. Many of you on the call today know Tye well, and I hope you will join all of us at Kinross in wishing him the very best in his future endeavors.

Today I will provide you with a brief overview of what I see as my key priorities in the coming months. I will then ask Paul Barry to provide an update on our quarterly financial results, and Brant Hinze to provide an update on operations and projects. You also have seen this morning that I have promoted Brant to the role of President and COO. This appointment underlines our renewed focus on operational fundamentals and reflects the excellent work that Brant has done since joining the Company. I have also expanded roles of two other key members of our senior leadership team to streamline our management structure and to increase the efficiency of decision-making. Geoff Gold will assume responsibility for corporate development, in addition to his existing responsibilities as Chief Legal Officer. And Jim Crossland, who becomes our Executive Vice President of Corporate Affairs, has added investor relations to his existing portfolio of responsibilities.

Kinross has a solid foundation in its people and its assets, and a tremendous potential to generate value. At the same time, our industry is facing some serious challenges with cost escalation, both in new projects and in operations. As well, many producers are encountering difficulties in delivering on project schedules. And all of this has created an erosion of investor confidence, which many gold producers have seen reflected in their share price. Kinross, obviously, has not been immune to these problems and there are no easy answers to solving them.

That said, I believe that we took a very important first step earlier this year when we announced our capital and project optimization process, which adjusted our framework for growing the Company in a much tougher global environment. The Board has given me the mandate to continue to advance that process, and as John said, that does not mean continuing with the status quo. What it does mean is taking that process to the next level. We need a rigorous bottom-line driven analysis, and a disciplined process in everything that we do.

There are three basic principles that will guide our strategy as we move ahead. Number one, managing for value. This is an overarching principle that has to apply to decision-making at both with our existing operations and our growth projects. Our focus needs to be firmly on optimizing our free cash flow. I believe the rigorous analysis in the capital and project optimization process is leading us in the right direction to make prudent choices about every dollar we invest. Beyond projects, our next step will be to apply the same level of rigor to the decisions we make at our operations.

In general, I believe we need to be much more aggressive in our attack on escalating costs. Obviously, there are costs we cannot control, but on those that we can control, we are going to get straight to work. To that end, we are initiating a Company-wide cost reduction initiative, with a focus on reducing operating, capital, and other costs across the organization. We can leave no stone unturned in an effort to cut waste and build free cash flow across the Company. We are just getting underway with this initiative, and I expect to have further news to report to you in the weeks and months ahead. This value-driven approach may lead us to make some tough choices, but these are tough times for the industry and for our shareholders, and we won't shrink from doing what is in their best interest, even if it means a break from the past.

Number two, focusing on fundamentals. We must deliver on our key metrics at our operations. They are the foundation of our business, and the engine for generating the cash we need to deliver a return to our shareholders and to fund growth. We have a solid portfolio of operating mines, and we need to get them firing on all cylinders. Right now we have some operations that are performing very well. For example in Russia and in North America. And some operations that are not where we would like them to be. For example, in West Africa. I also believe that even operations that are meeting expectations, may have the potential to deliver more.

One of my first priorities in the coming weeks will be to visit our people on the ground in the regions. I intend to ask a lot of questions and do a lot of listening. I hold particular interest in operations and I intend to spend a great deal of time working closely with Brant and our operations team to support them in their efforts to improve performance. Getting the fundamentals right also applies to how we work as a Company -- ensuring our people are focused on the right priorities; improving our decision-making and efficiency; becoming more entrepreneurial; challenging conventional wisdom; and remaining open to new ways of doing things. This will be key priorities for me in the period ahead.

Finally, number three, taking the time to get our projects right. Our capital and project optimization process has underlined the need to ensure we have both the right scale and sequence for our projects. It is also important that they are properly suited to evolving realities of the industry. And fit the parameters of our strict capital allocation framework. At Tasiast, we have made the decision to proceed with the pre-feasibility study for a smaller mid-size mill in the range of 30,000 tons per day. With capital costs rising everywhere and cost overruns a common industry theme, we see potential and manage it to a smaller mid-size mill configuration that we can develop with lower capital and less execution risk than a bigger mill, and potentially with the ability to expand down the road, depending upon market conditions and capital availability.

At Tasiast, we are not operating or offering today an updated timetable for project development. Although some delay is likely while we complete the 30,000 ton per day PFS. This underlines our intent to proceed cautiously and deliberately at Tasiast, and at all of our projects. This may be viewed as a more conservative approach, but I believe it is appropriate given where we are as a Company, and given the challenges facing the industry as a whole. That said, Brant will be talking more about this. I am pleased with our progress at Tasiast, where we have a solid team. I have the honor of meeting Mauritania's President Aziz, a few weeks ago. I'm very impressed with his administration's expressed desire to support the mining industry and to promote for an investment generally. I believe that Mauritania has the potential to become of the world's great mining jurisdictions.

In Chile, at Lobo-Marte, we are also looking at the option of a smaller scale operation than what we had previously envisaged. And given that Lobo-Marte is further back in our development pipeline, and in the interests of reducing our capital spending, we've taken the decision, effective immediately, to limit spending on the project to permitting and further study work. So those are a few of my top of mind thoughts as I enter this new role. Obviously these are very early days for me, and I look forward to having more to share with you in the coming months. I would like to now hand the call over to Paul and Brant, who will fill you in on the details of our second quarter. Starting with Paul Barry, our Chief Financial Officer.

Thank you, Paul. Second-quarter revenue was $1 billion, driven by consolidated sales of 641,000 gold equivalent ounces. Second-quarter attributable production cost of sales from continuing operations was $725 per gold equivalent ounce, up 27% from Q2 2011, primary due to increased processing, lower grade ore, and higher input costs such as energy, labor and consumables.

Attributable byproduct cost of sales was $658 per gold ounce. Kinross margin per gold equivalent ounce sold was $843 second quarter, a decrease of 4% compared to the same period last year, primarily as a result of higher production cost of sales per ounce for the quarter. Second-quarter adjusted net earnings from continuing operations were $156 million or $0.14 per share compared to $223 million or $0.20 per share in the second quarter 2011. Second-quarter adjusted operating cash flow for continued operations was $271 million, or $0.24 per share. Q2 net earnings from continuing operations were $116 million or $0.10 per share compared with $244 million for the same period last year. Reported net earnings were lower, mainly due to lower production, and increases in production cost of sales, which were offset by higher realized gold price.

Kinross continues to maintain a strong liquidity position. Cash and cash equivalents at June 30 were approximately $1.3 billion. Capital expenditures were $431 million for Q2, compared with $409 million in the second quarter of 2011. The increase was due mainly to project-related expenditures at Tasiast and capital mine development at Fort Knox and Round Mountain.

Turning now to our production and cost outlook for 2012. Due to the disposition of Kinross, 50% interest in Crixas, we have removed Kinross' share of Crixas full-year production forecast of approximately 70,000 gold equivalent ounces from the consolidated 2012 production forecast. As a result, we now expect to produce approximately 2.5 million to 2.6 million gold equivalent ounces this year, compared with our previous forecast of 2.6 million to 2.8 million gold equivalent ounces. Production cost of sales is expected to be $690 to $725 per gold equivalent ounce as a result of higher production cost of sales per ounce in West Africa and South America. As detailed on slide 7 of the webcast presentation, we have made some adjustments to the production ranges of our regional guidance as South American guidance has been adjusted to the sale of Crixas, and West Africa has been reduced for its lower-than-expected production from Tasiast.

Due to expected higher silver production from continuing operations in 2012, we've also revised our byproduct guidance from continuing operations to 2.35 million to 2.45 million gold ounces, and 9 million to 9.5 million ounces of silver, with byproduct cost of sales expected to be $605 to $655 per gold ounce. We have also adjusted our DD&A guidance. It is now expected to be approximately $235 per gold equivalent ounce compared to our previous guidance of $200 per ounce. Overall, we remain on track to be within our full-year production forecast, excluding the adjustment for the sale of Crixas. I'll now turn the call over to Brant Hinze.

Thank you, Paul. Driven by strong results at our operations in North America and Russia, Q2 gold equivalent production increased 8% and production cost of sales decreased 2%, compared to Q1 2012. In North America, the production increase at Fort Knox and Round Mountain, compared to Q1, was a result of improved heap leach production. Production cost of sales improved for the region compared to Q1, mainly due to higher production. We expect North American production for the full year to be at the high end of production guidance range for the region, as we expect production to increase in the second half of the year, mainly due to accelerated heap leach processing and improved mill processing grades at Fort Knox.

At Kupol in Russia, production improved significantly in the second quarter compared to Q1, as a result of record high mill throughput and improved gold grades, offset by the gold to silver ratio. We expect 2012 production to be the high end of Russian regional production guidance range. In West Africa, regional results for the quarter were negatively impacted by lower-than-expected production and higher costs at Tasiast. Performance at Tasiast in Q2 was impacted by several factors, including lower-than-expected mill grades from the Piment ore body, lower-than-expected dump leach production, (inaudible) and the illegal work stoppage in June which resulted in four days of lost production. With respect to lower-than-expected mill grades in the Piment ore body, we are undertaking further analysis to better understand the variability in gold grade that has been encountered in abandoned iron formation type ore currently being mined in the Piment pits.

It is anticipated that mill grades in the second half of 2012 will be lower than previously expected and that Tasiast production for the second half will be lower than planned. We do not expect that similar grade variability will be encountered in the green-schist style mineralization in the West Branch ore body. Leach production at Tasiast continued to be impacted in the second quarter by the near surface cell site in the West Branch. This material was placed on the dump leach, and affected gold production from the leach pad. We are now stockpiling this off-site material to be blended and milled at a later date, and the leach pads are now percolating as expected. Additionally, we expect that dump leach production in the second half will be negatively impacted due to inefficiencies in the existing water pipelines which are reducing the amount of makeup solution available for leaching. We have constructed and commissioned an additional water pipeline, drawing water from the current ore field and repairs will be made to existing pipelines. We expect that water availability will improve as we progress to the second half of the year.

Chirano's production for the quarter was lower than Q1 2012, as a result of lower plant throughput which is due to crusher and mill maintenance issues, and periodic electric power outages. Second-quarter results of our South American operations were lower year-over-year, mainly due to anticipated lower grades at Maricunga and lower silver grade at La Coipa, as well as a less favorable gold to silver ratio impacting the equivalent gold production. Production at Paracatu increased year-over-year, due to higher mill throughput, however the mine experienced lower grades and recoveries, which contributed to a higher unit costs. We expect production at Paracatu to increase in the second half of the year due to higher anticipated grades and expected improvements in recovery and operating efficiencies. La Coipa production is also expected to improve in the second half, as the operation shifts from processing mostly lower grade stockpiled material to processing ore from the Can-Can and Ladera-Farellon pits.

We continue to advance the capital and project optimization projects with Tasiast and Dvoinoye as our key development priorities. At Tasiast, we analyzed a number of processing options with the aim of identifying the optimal processing approach for the ore body. Based on the extents of analysis and modeling if these options, we have elected to undertake a pre-feasibility study for the construction of a mid-sized CIL mill in the range of 30,000 tons per day with a potential for further expansion. The case for a mid-sized expandable CIL option is based on a better understanding of the Tasiast ore body and mine plans, a better understanding of the operating costs in Mauritania based on our two years of experience with the current operations, as well as the impact of current pressures on capital costs that we are experiencing across the industry.

Our initial analysis indicates that a more flexible and staged approach to the development of Tasiast, while resulting in lower production in the initial years may reduce initial capital costs and project execution risks while delivering a rate of return comparable to a larger initial mill. We expect to complete the pre-feasibility study on a CIL mill in the range of 30,000 tons per day in the first quarter of 2013. Heap leach testing will be completed in the fourth quarter of this year, and the results will be evaluated as part of an overall processing strategy. During the second quarter, we received approval from the Mauritanian government for the project EIA, which covers all proposed mining and processing activities that are expected to occur within the mine site boundary, under various development scenarios.

Construction of the Dvoinoye project progressed well for the second quarter. Underground development is progressing ahead of plan with 1,400 meters completed during the quarter, and is now 37% complete. Total underground development has passed 3,700 meters since it began in 2011. Construction of the surface infrastructure and facilities has continued as planned, and is 22% complete. Expansion of the temporary camp, the 400 beds, was completed successfully, and now accommodates all construction and underground and expiration personnel. Foundations for the permanent camp are near completion, and the construction of the facility has begun. Construction of the all-season road between Dvoinoye and Kupol has progressed well, and 51 kilometers of the total 84 kilometers are now complete. All necessary permits for the current scope of the underground development and construction activities are in place. Dvoinoye remains on schedule to deliver first ore to the upgraded Kupol mill in the second half of 2013.

At FdN, negotiations with the Ecuadorian government on an enhanced economic package are progressing with the objective of reaching balanced agreements on exploitation and investment protection for the project. In July, Ecuador's Ministry of Environment approved the EIA for the construction and operation of the underground mine at FdN, and the review of the EIA for the processing plant is continuing. At Lobo-Marte, we have completed a review to identify possible project optimization options, with the aim of reducing capital requirements and project execution risk. We are considering smaller project options for those outlined in the pre-feasibility study. Further capital spending will be limited to project studies and permitting activities. Project permitting continues and is expected to be complete in the fourth quarter of 2012. I'll now turn the call back over to Paul.

Thank you, Brant. I guess we will open it up to your questions.

(Operator Instructions)

The first question is from John Bridges of JPMorgan. Please go ahead.

I am fascinated by how the industry is changing before our very eyes. And in your own case. I just wondered if you could share with us how, if we could follow the money, how your target, bonus targets and things are focused by the Board. And to what extent they have changed from those of Tye?

Sure, thank you, John. What I think as John indicated, John Oliver our Chairman, my mandate from the Board is clear. It is to continue the capital and project optimization process, but also to implement additional measures to enhance operational performance. And the cost reduction initiative.

Is that driven by cash cost targets, EBITDA targets? Or how is that working?

It is early days. We're going to come back to you in a couple of weeks. I think it is not all about maximizing production. Or necessarily maximizing NPV. We're going to have to look at the mines on a case-by-case basis. Understand what our alternatives are. And for me, this seems really about optimizing NPV and margin.

What was changed from the package that Tye was working with?

I'm sorry, what was the question? What has changed?

I am just wondering how the targets have changed? What has changed?

Well I think again we are going to try to be much more aggressive on controlling capital, operating costs and looking for ways to optimize the assets.

So it is a financial criteria?

Well I think in terms of importance, we're very much focused on returns, yes.

One to Brant. I just wondered why the variability in end grade. I'm just wondering what you think is going on there?

What I will do to help answer this question a little bit more in detail is it turn it over to Glen Masterman, who can explain some of the variability issues that we may be encountering in the Piment. Glen?

John, we've only just identified the problem in recent times. What we can say at the moment is that the grade variability we are experiencing is restricted to our information style mineralization. The problem is only arising in the Piment pits at this point in time. Prolongation was unaffected and we have not mined enough of our reserves at West Branch to make a meaningful problem. The grade of variability in the iron formation is related to the complex nature of the mineralization, which is characterized by short-range discontinuous structures, resulting in high grade pods surrounded by low grade. We believe it is going to take us about six months to do our work before we are ready to draw meaningful determinations.

Since I've got you there, there was some positive commentary about exploration but no numbers. Could you fill us in a little bit on what you are seeing?

Sure, John. We have been exploring two focuses since we wrapped up the definition drilling program last year. We have been stepping out to the South along the mine corridor. At a target we are calling West Branch South, so a couple of kilometers from the main West Branch ore body. We have encountered some encouraging drill results, and obviously it is very early days, and a lot more work to come. We are pleased with what we are getting there.

And the North, or North of the mine, in an area known as a long strike following the Tasiast sheer zone, 10 kilometers North of the plant into the district. We have completed a first pass program of drilling and assessing a pretty extensive part of the structure there. And again, we are encountering positive results in the first phase of drilling. Are we have a number of targets emerging in that part of the world. And we are currently following up with some drill fences around the initial results to advance those targets. So again we are pleased with what we are seeing in that part of the world. And we will be in a position to report full results at the end of the year.

So there are no gold burning results yet, but you're getting sniffs.

That would be fair to say.

Okay, thank you. Good luck.

The next question is from George Topping of Stifel Nicolaus. Please go ahead.

Could you comment on the Bloomberg article from yesterday that you have hired an advisor to defend the Company?

George we don't respond to speculations in the media. Thank you. Next question?

The next question is from Jorge Beristain of Deutsche Bank. Please go ahead.

I guess my question is, if you could give us a ballpark as to what you are thinking if you go for the smaller mill option at Tasiast, which would be, I am assuming roughly 50% the size in terms of output. Could you kind of give us a ballpark, would this be 50% the CapEx costs that at last quote were $3.5 billion? Would it be about 25% less? Can you just can you give us a ballpark what you are thinking would be the capital outlay for a smaller mill package?

We can't. We are in the midst of doing the analysis. We will get back to what's our work is finished. We don't want to make any estimates or speculate at this point.

Okay. And I had flagged this a few quarters ago in my research. But given the importance of Tasiast in proving to the market that the resources in fact really as large as you believe, could you point us to the timing of when you're going to release updated drill results there, other than the vague commentary you included, that you're pleased with the results. But when can we expect to get updated drilling information from Tasiast?

Glen, why don't you tackle that one.

Glen Masterman here. As I mentioned earlier to John, we will be in a position to update all of our exploration internationally, inclusive of drill results, resources and reserves at the end of the year.

So basically the same as the answer that Tye had given six months ago?

Correct.

Thank you.

The next question is from Alec Kodatsky of CIBC. Please go ahead.

Just wanted to sort of circle back on a couple of questions on Tasiast with respect to some of the challenges that you are seeing. With the high claim material, how prevalent is this? You stated it's in your surface. I'm just curious how much of that resource is actually has this high claim material?

Okay and again what I will do is turn that over to Glenn to answer that. But before I do, I would note, as I have said in our opening remarks, we are not putting this material in the posted material on the leach pad right now. We are setting it aside and we will deal with it later. It will either be blended, if we have the appropriate rock competencies in the stuff as we go deeper into the mine, or it will be put through the mill. But I will let Glen give you a little bit more color there on the fell site material itself and the near surface high clay content material.

Thanks, Brant. We believe that the clay challenge in the fell site is isolated to the oxidized zone at the top of the fell site host. And as we mine deeper into fresh rock, we anticipate the problem will start to go away.

Okay so it is still sort of still to be determined as far as where it resides? And is that ultimately going to have, as you gain that knowledge, is there going to have an impact in terms of where you see the dump leach going in terms of scale?

Again, I would say that with the fell site material, recognizing that the near surface high clay content material is a bit of an issue for dump leaching. We would expect that a later date, we will put that through the mill circuit. As far as the dump leach itself, it will certainly impact. It has impacted the first half of this year, and it will continue to impact us in the second half of the year for a couple of reasons. One is, we were won't be putting as many tons on the leach pad and as a result of the issues that we encountered in the first quarter, we don't have the inventory buildup on the leach pad for leaching. So we will see an impact this year. As far as subsequent years, we will go into the planning process and we will make that determination as we go through the budget and planning season this year.

Okay. And I just want to clarify, it is a find issue within the heap that is causing the problem?

Correct. Finds with a very high clay content.

And sort of a similar question that Piment hit in the grade variability. Is understanding that, how important is understanding that to the eventual decision on sizing the mill and the economics?

That is a good question. And the answer is that they have no relation. What we are encountering in some of the current issues with the current operation has no relation to a decision on a future mill. Keep in mind that the future mill will be primarily designed for the green-schist material which we have not encountered yet as far as the mining. I can turn it over to Glen as well, to give some additional color on that.

So in respect of the green-schist, which Brant just mentioned, we are confident that the grade variability issue is not going to affect the green-schist sign and that is because it is a different style of mineralization, where we see the ore hosted by long-range wide and continuous structures. We have also done the work to understand the controls on grade distribution in the GST. And this is based on our extensive infill drilling in 2011, and that has put us in a position to model the mineralization with confidence and predictably.

Okay and I could just do one more follow-up before I pass it on. I'm just curious if anything has precluded a high-pressure grinding decision yet?

No. I would say at this point, HPGRs are all part of the optimization process and review. So I would suggest that it is not off the table.

Okay, I will give somebody else a chance. Thank you very much for the answers.

The next question is from Stephen Walker of RBC Capital Markets. Please go ahead.

Just, Paul, a question on capital spending here in 2012. I believe the total year budget was $2.2 billion, with slightly over $1 billion at Tasiast in various forms, infrastructure and obviously on existing operations. Can you give us a sense of, I guess twofold. What moneys will be spent on sort of for the balance of the year, what you hope to achieve in spending on the infrastructure and the operations at Tasiast this year, the dollar amount and the activities that you hope to complete?

Thanks Steven. Look, I would say this cost reduction initiative will be looking directly at those sorts of questions. We have just initiated it. But we will be looking at exactly Tasiast and all of our other projects and operations. And I plan to come back to you in the coming weeks here to flesh out in more detail how that capital budget will be adjusted.

Okay. Thanks for that. And in your initial comments, Paul you made or maybe I misunderstood this, you said some delay is unlikely for the Tasiast PFS, which is expected in the first quarter of 2013. Did I misunderstand that? Or is that just something that I misunderstood? Or is that what you actually are implying, that it may be late in the first-quarter 2013 before we get the details? Is that timing fairly firm in your mind?

No I think within the first quarter is fairly firm in our minds. But what we are trying to do here is really get it right. And we are not trying to be aggressive on our timing. We are trying to get the message across that we are here to get it right most importantly. But we are comfortable with the first quarter.

Understood. Maybe a question for Brant. With respect to the detailed engineering drawings that has been completed at Tasiast, the Denver Gold Show last year had a conversation with management at that time who suggested that 18% to 20% of the detailed engineering drawings had been completed. And I guess the question is two-fold, Brant. Where do you stand with respect to detailed engineering at this stage? Granted that you're kind of starting some of the analysis over from scratch, if you're looking at a 30,000 ton per day plant. Where do you stand on the percentage of detailed engineering drawings have done? And how much of the current work can be carried over into the new pre-feasibility study? What I'm trying to get a sense of is, do you have to wipe the slate clean? Or is there a percentage of some of the detailed engineering work that has been done that has carried into the PFS?

Yes, I can certainly comment on that. But let me first say that when we talk about a pre-feasibility study, obviously at a pre-feasibility level, we have a pretty intensive knowledge, in-depth knowledge of the resource itself. And we have got pretty advanced -- we have advanced a lot on our mine plans at this point. So what we have there and our knowledge there and our knowledge of the mine plan is probably more advanced than pre-feasibility level.

However, when you do go back to the plant and plant size, we have taken it back to a scoping study so that we can conduct the optimization process. And in that scoping study, which we have completed, we have done a full peer review on that scoping study and now we have approval from the Board of Directors to advance that to pre-feasibility. So the process of scoping, pre-feas and feas is ongoing. And then detailed engineering will come subsequent to that. So I would say that we are walking through the lead process, a proper process to, as Paul said, get it right. And we are not going to rush that along.

So it is safe to say well below 20% of detailed engineering and probably something close to 10% at this stage?

Well yes, again, from a standpoint of the study itself, we just completed the scoping study, and going into pre-fees. So depending upon what the ultimate selection is, that will determine whether any of the detailed engineering that was done before will apply. So I guess the word is it stand by as we go through the process.

Understood. Then, just one last quick question. With respect to the green-schist mineralization at depth, what -- where you have obviously wrapped mine plans around. What drill density have you drilled that down to? Is it 25 meter, 50 meter? In an area that you view as of the core mining. Where you want to start your core mining. What is the drilled density at, at this stage?

The drill density at the top of the green-schist zone is on average spaced on 35 meter centers. As we get deeper into the ore body, that spacing increases to 70 meters. And we are confident that, that spacing or in that spacing, because of our knowledge of the geologic continuity of the ore body, so we're able to step it out as we go little deeper.

Great. Thank you very much for that.

The next question is from Greg Barnes of TD Securities. Please go ahead.

I guess this is for Paul but also Brant. When do you finally draw the line in the sand to say at Tasiast, this is what we're going to build. Is it the middle of next year or next quarter next year, when do you put a stake in it?

Thanks Greg, it is Paul here. I guess the answer to that is once we finished our work. We have not finished our work, and as a result we are not in a position to make the recommendation. We are pursuing the pre-feas on the 40 but, we're still tweaking the 60 and looking at mine planning and phasing and optimization with that scenario as well. So I can't tell you when we are going to finish the work and be in a position to make a recommendation.

When you do make the recommendation, this goes back to Steve's question, does that mean that you are then moving into feasibility study?

Yes, absolutely. That is the process. Going from scoping to pre-feas. We will leave pre-feasibility work. We will make a recommendation to the Board of Directors and based on that recommendation and approval, we will move forward to feasibility study.

So that would take another 12 or 18 months after that decision is made?

Don't know. Again, what we are going to do is that the process determine the schedule.

Okay. I know you're still working on the heap leach plan. That seems to be taking very much a backseat. Is that true?

No I would not say necessarily that has taken a backseat. We have done a lot of work that is currently being done, a lot of test work that is currently being done in the labs for leach testing. We have done the high-pressure grinding work in Germany and we have shifted all the material to McClelland Labs in Reno, and they are doing all of the leach work for us. And we are at, various columns are at various progress as far as the leach cycle. So ranging from now just a few days to over 40 days of leaching. But it is too early. We don't have complete information. We do, as I indicated, expect to see most of this information back in the fourth quarter of this year.

Thanks, Brant. Finally for you, Paul, you said a couple times that now you are going to update us in a couple of weeks about your plans and to the cost reduction and project optimization's will be. Are you going to come out targets and rates of return and which projects you were going to shelve and which are going to move forward. Is that the idea?

Yes I would say, for seven days, my plan is to get out to the regions next week with Brant. And I would like to come back in a few weeks and outline a plan. And give more detail on direction and process. But we are not going to have this evolved to that degree in a couple of weeks. It is going to be a process we work on here through the fall.

So what do you plan to tell us in a couple of weeks? Just where you're heading?

Exactly. More detail on how we are going to go at this cost production initiatives.

Okay. Thanks Paul.

The next question is from Anita Soni of Credit Suisse. Please go ahead.

My question is regards to one of your earlier comments Paul, you commented on costs that you can control and costs that you can't. Can you sort of give us an idea of which costs fall in the can control camp in the ones that you feel you don't have any control over?

Sure, the obvious a set of can't control is oil prices and the steel and consumables and media. Those kinds of global commodities costs we can't control our own internal, or the people, our overhead, our G&A, our spend. Things within our control we will work hard at. Obviously, we have got to work within the bounds of global commodity requirements that we use in our business. We are big consumers of oil. We are the consumers the power. And we are big consumers of steel. And we have very little control of that.

Okay. With respect to the decision to stop spending at Lobo-Marte, it sounds like you were saying it was more tied to the schedule, that it was further down in your development pipeline. If the framework for sort of making investment decisions I guess now is more along the financial basis, would you not bring that back into the fray and put it sort of head-to-head against Tasiast and say perhaps this is what we need to focus on first, whether we had previously said that this would go ahead in 2016 or 2017 and perhaps this is the one way to accelerate, while we are taking our time to study Tasiast, this is one that we need to go. I mean why shelve Lobo-Marte for now?

Thanks for the question. Really the capital and project optimization process that we announced in January was really to make those kinds of decisions. And as part of that review and study, we have determined that the sequence -- that there needs to be a sequence, and that in that sequence, we believe that Lobo is one we would stack out behind Tasiast and FdN.

I guess what I'm driving at is what was the key drivers that made you decide that nobody did to go after Tasiast? I'm trying to understand why that decision on timing was made.

Well I think Tasiast has been a key focus for our company. We are well and truly into it. There's a lot of activity, a lot of spend. And do the work and the knowledge and understanding is much more evolved than is the case with Lobo-Marte.

Okay thank you.

And I would also suggest that we did not say that we are stopping site activity. So we are continuing to advance the permitting, and we're continuing to advance the studies.

Right. Thank you.

The next question is from David Haughton of BMO Capital Markets. Please go ahead.

Obviously, a lot of questions on Tasiast, so I will put my questions in on that theme as well. You have mentioned quite a few times you detailed understanding of the geology and the ore body. The introduction of the 30,000 tons per day option, is that as a result of the change in understanding of the ore body? Or is it more a reflection of the cost and the infrastructure demands?

I would offer up that the knowledge of the resource itself has been advancing. With the extensive drilling program that we had last year, and the full interpretation of that. And as well to the advancement of mine plans, our knowledge has been evolving on that resource itself. And I would also suggest, as Paul mentioned, looking at the cost pressures in our industry, in particular, we have seen what has happened with some of the capital blowouts around the industry. It certainly does have a -- does enter into our decision process.

Okay. Given the first part of your answer than Brant, does that mean that the higher grade portion of the ore bodies that would be best suited to milling is smaller than what you have previously envisaged and at the lower grade halo is greater?

No. It does not suggest that at all. And what I'll do is I'll turn it over to Glen so that he can add some additional information to this discussion.

Thanks, Brant. The ore body and I am referring specifically here to the green-schist zone which constitutes the bulk of the resource, remains unchanged based on our evolving knowledge and was communicated previously. So we still see a higher grade portion of the lower grade envelope around the ore body. And in other words, the gold is still in the ground. There is no change in that.

Yes and I would say that the change is in the approach that we take with it. And it has a lot to do with the mine planning and sequencing of the pit and the phases.

Okay. And there is a suggestion that it could be a modular kind of build so that you might get to a larger 30,000 tons per day eventually, depending upon cash flow and the ability to supply ore. Does that also then feed into the kind of regional work that Glen has been doing as well?

There is no doubt. We are in the early stages of our understanding of this entire district. We have got 80 kilometers to understand. And given that fact, it is just prudent on our part, if we do advance to construction at 30,000 ton a day, that we advance that with the thought of expandability. So I would suggest absolutely. We do need to consider this, if again we do make the decision to construct a 30,000 ton a day, we consider it an entry into the district.

Okay. And the infrastructure would have to be provided, accordingly than with the view of this perhaps being one of a multistage development?

Sure. Absolutely.

Switching over to Paracatu. Full mill coming into place this quarter. Would you expect the plant to get up to 41,000 tons a day current level through the back end of this year and into the early part of next year? Is that the kind of throughput that we should be thinking about?

Yes. I would say that with the addition of the fourth ball mill and recognizing that part of the reason for the fourth ball mill was to compensate for increases as we go deeper into the mine of hardness. But I would suggest that there is every expectation right now to achieve our goals with that fourth ball mill edition.

Okay, so much stronger 2013 ahead in comparison than to 2012 as a result of the additional grinding capacity?

As far as 2013, as we go through the budgeting and planning process this year, we will certainly give some guidance on that as we work through it.

All right. And finally on Lobo-Marte, had a few discussions there during the course of this call. But, are you still looking at this as a regional solution? Are you still trying to integrate this potentially in with the existing Maricunga and La Coipa projects? Is that going to add to the timeline of your decision-making on this project?

I would say that there are numerous opportunities to take advantage of synergies there. And Lobo-Marte, when we do make a development decision on that, would certainly be part of it.

All right. Thank you very much, Brant.

The next question is from Don MacLean of Paradigm Capital. Please go ahead.

Paul, you could have picked an easier seven days to start with. Good luck to you.

Thank you John.

And I think David Haughton captured the essence of question, but in the kind of market we have right now what we see words like a better understanding of the Tasiast ore body and possible potential for future write-downs, those are big net type comments and in this market, that tends to be read as fairly ominous. So what I was just going to ask you the guys to do was to give a bit more color and more character to that comment about the better understanding of the ore body and I think Glen has touched on some of that with his confidence about the green-schist. But has there been any substantial change to the view of what the resource quality, quantity was, compared to when you entered into the transaction with Redback? Can you give us a sense of maybe -- boost our confidence?

I will comment on I guess the character of the ore body and how that has evolved relative to when we took the keys to the project. And that is that it has lived up to our expectation in terms of resource quantity and quality.

Both in quality and when you talk about quality, are you referring to grade? Or is it the sort of continuity relative to the strip ratio, Glen?

Don, it is both of those factors. It is the continuity was one of the attributes that impressed us very early on. And we have established that deep-root in the ore body so we are confident about that. And the grade, the green-schist zone is the high-grade portion of the resource, and it has been modeled with a high degree of confidence and predictability.

I guess metallurgy has been a bit of a typically is an unknown when you step into these things. But it has been a bit of a concern. What portion of the green-schist zone would maybe come into this issue about clay, or the oxidized surface that might be impacted on the heap leach side of the equation, Glen?

Don, based on what we know at this moment in time, is that the green-schist ore body will not be affected by this clay problem. The play is developed at a very high level in the oxidized zone of the ore body. In other words, the top part of the ore body. As we get deeper into the fresh rock, the sulfide zone, the clay does not become an issue. The other point to note is that the clay challenge is isolated to a rock known as the fell site. We are not seeing it in any of the other rock types. All rock types hosting or such as the iron formation and the green-schist zone. So we're confident that it is not going to be an issue for us as we get deeper in the ore.

Okay. And maybe sort of on that side, Glen, I think when John Bridge was asking his questions about the exploration and sort of the final comment was no barn burning results at this point but lots of sniffs. If you look at the amount of money that has been spent on the exploration, I guess personally as an observer and I think a lot of us feel this way, we're kind of surprised that something else has not jumped out, that is of substance to this point. But maybe you could characterize as how well explored that trend is and your optimism on that front? On a scale of 1 to 10, how well explored is it?

On a scale of 1 to 10, I would say, in terms of effective exploration, it's a 5, so still a long way to go. And we are really just getting started in the type of district that takes many years to explore and be successful, and of course as we go, we are learning a lot about the geology, and how to target where the next ore body may be. I would just come back to my initial comments about the exploration work to the North of the plant in the area about 10 kilometers north. Our first pass of drilling along the Tasiast structure delivered very encouraging results on many of the sections that we drilled. As of the first pass, we are very pleased with those results. Obviously, a lot more work to come. And as I mentioned, in terms of effective exploration it is very early days.

Great. Will we wish you good luck on that. Good hunting. Thanks very much.

The next question is from Steven Butler of Canaccord. Please go ahead.

Paul, a question for you on FdN project. Do you guys have the sense of the timeline for concluding a revised fiscal agreement there? And what would you need, what would you prefer to see, obviously lower taxes overall. But is there a trigger here where you would say let's go ahead based on a 5% or 10% or just below 52% tax burden?

Look we're in the middle of a negotiation with the government, as you know, Steve. I think those negotiations are progressing well. We recently saw a bit of a trouble, where the government has acknowledged that it is considering changes to the windfall profits tax. So look, I think in my opinion, it remains one of the best undeveloped ore deposits in the world. It is moving along, but our spend and our rate of development will depend on a successful completion to our negotiation on the exploitation and investment agreement. But given the sensitivity of that, I would not want to speculate on specific triggers or details.

That's fine. Brant, and the team is striving for lower costs and maybe your biggest asset or least contributor for now for me is Paracatu, but costs at $914 bucks an ounce in Q2. And if we were to get to reserve grade if we were to get to about I think 79% targeted recovery, those costs on Q1 would have been maybe $800 an ounce. But are you thinking costs here can be lower than that ultimately longer-term? For the fourth ball mill drive unit costs per ton lower, or will it actually just represent more color can consumption and therefore higher cost per ton as an offset? Thanks.

I appreciate the question. Going into the second half of the year, we certainly see Paracatu performing better than the first half. We expect to see better grades there, we expect to see better recoveries. And we have got an enhanced team in there. We have supported the existing team with some real strong people. And we expect to continue to improve efficiencies out of that plant.

Keep in mind, and I think it is probably really important to note, that we have been building that thing for three years. And it is actually going to be a pleasure to have the fourth ball mill constructed and allow our people to actually get in there and operate the thing, and optimize that plant and focus on costs. And as Paul mentioned earlier, that is going to be a big theme for us across all of our operations, and all of our projects. To focus on costs, both operating and capital costs, and do everything that we need to do and that is rational to do in optimizing and improving costs. And that includes Paracatu.

Sure. You guys have any real costs are consider any real hedging?

We do. This is Paul Barry, the CFO. We have got a program to hedge our foreign currency exposure over three years, it's a rolling monthly program, about 75% of our reales exposure is hedged in year one. Some 50% in year two and 25% in the third year. I have had that in place now for about a year.

Okay. Thanks Paul. That's it.

This is all the time we have for questions on today's call.

Thanks everyone.

Ladies and gentlemen this concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.