Kinross Gold Corp (KGC) 2016 Q2 法說會逐字稿

Thank you for standing by. This is the Chorus Call conference operator. Welcome to the Kinross Gold Corporation Q2 2016 financial results conference call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. (Operator Instructions).

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

Thank you and good morning. With us today we have Paul Rollinson, Chief Executive Officer; Tony Giardini, Chief Financial Officer; and Warwick Morley-Jepson, Chief Operating Officer.

Before we begin, I would like to bring to your attention 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, our news release dated July 27, 2016, the MD&A for the period ended June 30, 2016, and our most recently filed AIF, all of which are available on our website.

I will now turn the call over to Paul.

Thanks Tom, and good morning, everyone, and thanks for joining us. It was a strong quarter for us on many fronts, particularly in regards to cash flow and our overall balance sheet strength. We generated free cash flow in Q2 more than $200 million, bringing our cash balance up to approximately $970 million as of June 30. This was largely a result of stronger gold prices; strong performance from our US, Russian and Brazilian operations; benefits from low oil prices and favorable foreign exchange rates; and continued discipline around our CapEx and OpEx.

As you know, in a global miming portfolio, there are always puts and takes, and events outside of management's control. Our diversified portfolio, spanning 10 mine sites in a wide range of climates and geographies, can give us the flexibility to offset a temporary disruption at one site, with strong performance at another.

We demonstrated the value of this diversification again in Q2. Solid production at our US operations, our large mines in Russia and Brazil, compensated for the reductions in West Africa and in Chile. As a result, overall production was down only slightly from Q1; and as of the first half of the year, we remain on track to meet guidance. We are also on track to meet guidance on production, cost of sales, and all-in sustaining costs.

I would like to now provide update on Tasiast. In June, the Mauritanian government restricted a number of expatriate employees from working at the site. As a result, and in the interest of safety in the environment, we decided to suspend operations on June 18. At the same time as us, a number of other foreign-owned companies experienced similar difficulties with ex-pat work permits.

I am pleased to report that Kinross and the government of Mauritania have resolved our ex-pat work permit issue as part of an agreed Mauritan plan (sic - see press release, "Mauritanization plan") to increase the number of local workers at Tasiast, which is required under Mauritanian law. We have begun to re-mobilized the workforce and we expect normal operations to resume in August.

Our agreed Mauritanization plan underscores that while we may have differences in time to time, the Mauritanian government is supportive of Tasiast; and that when key issues arise, we can work together constructively to resolve them.

Notwithstanding the temporary suspension, we have continued to move forward on the expansion of Phase 1. However, there has been some minor slippage in regards to the construction schedule, and there is a possibility that the ramp-up to full production could extend from Q1 into Q2 of 2018.

Turning to our recent Nevada acquisition, I would like to thank everyone for their interest and positive commentary coming out of the mine tour we held at the end of June. It was important to us that the analyst community and our investors have an opportunity to see firsthand why we made this acquisition, and to interact with the members of our strong technical and operating teams we have in Nevada.

It's clear to us -- and, I believe, to those on the tour -- that there is significant potential to add ounces and extend mine life with infill drilling and further exploration at Bald; PSM optimization and productivity improvements at both sites; and further work on Phase W at Round.

In late June, Bald Mountain's final EIS was issued by federal regulators, and we expect the final plan of operation to be approved by mid-August. This is great news, and will allow us to complete modest infill and metallurgical drilling which we anticipate will provide some [mission] information to convert a substantial amount of Bald's formerly announced of estimated mineral resources into metal reserves.

The permit also covers an expanded mine plan; numerous underexplored pits; and provides significant flexibility for future growth, including, for example, additional heap leach capacity beyond what's required in our current mine plan. It's clear to me that we are making good progress in realizing the upside potential and our Nevada mines, and we look forward to updating you as things advance.

To sum up, Q2 was another solid quarter, as strong performance from North America, Russia, and Brazil, combined with the rally in the gold price and helped us to deliver strong financial results.

With that, I will turn the call over to Tony.

Thank you. As Paul mentioned, we generated over $200 million in free cash flow in the second quarter, due to a combination of factors including: solid production from our largest operations, stronger gold prices, ongoing savings from lower oil prices and favorable foreign exchange rates, and lower-than-forecast capital spending. We also received a $22 million working capital adjustment related to the Nevada acquisition.

During the quarter, gold averaged $1,260 per ounce, and we realized an average gold price of $1,266 per ounce. Year-to-date, we have realized an average gold price of $1,223 compared to the average London PM fix price of $1,221. The Company also sold approximately 15,000 more ounces than it produced during the quarter, largely attributable to our Russian operations catching up on unsold metal from Q1 during the early days of Q2.

In terms of oil and foreign exchange rates, we benefited by approximately $15 per ounce on the cost of sales year-to-date versus budget, with gains coming from the oil price, the Russian ruble, the Chilean peso, and the Canadian dollar. As for capital expenditures, we spent $254 million in the first half of the year, out of a total forecast of $755 million for 2016.

Year-to-date, we are underspent on CapEx compared to where we were tracking in 2015. However, much of our growth capital, which largely relates to Tasiast Phase 1, is back-end-loaded and currently scheduled to be spent in the second half of the year. We are reviewing the timing of our planned CapEx spending for the balance of the year, and expect to provide an update in the third quarter.

Also of note, we have updated our 2016 guidance for other operating costs and for depreciation, depletion, and amortization. Other operating costs are now forecast to be approximately $95 million compared to the previously stated $45 million, largely due to unanticipated costs related to the suspensions at Tasiast and Maricunga, and other non-cash items that we expect to adjust out of earnings.

DD&A is now forecast to be approximately $350 per gold equivalent ounce compared to our previous forecast of $375 per ounce. Our cash balance now stands at $968 million, which is just below where our cash position was prior to the Nevada acquisition in January. And our total liquidity is now just under $2.5 billion. This provides us with a comfortable margin to pay down $250 million in senior notes due in September.

In July, we extended the maturities on our $1.5 billion revolving credit facility and our $500 million term loan by one year, to August 2021 and August 2020, respectively. As a result, we have no debt maturing for the next four years. With a strong balance sheet and plenty of liquidity, we have the financial flexibility to move forward on a number of organic growth opportunities within our portfolio.

While we can't predict the gold price, we have been both agile and disciplined in our approach to managing our business and the balance sheet by being opportunistic in acquiring the Nevada asset at an attractive time in the cycle, adjusting our hedging strategies to capitalize on lower oil prices and favorable foreign exchange, all while consistently focusing on cost reduction and operational excellence.

With that, I will now turn the call over to Warwick for highlights of our operating results.

Thank you, Tony. As Paul mentioned, our US, Russian and Brazilian mines all performed well. Overall production was largely in line with the first quarter, despite some challenges in West Africa and in Chile. This performance was underpinned, as always, by our constant focus on our safety standards, and the safety of all our employees and contractors.

Starting in Russia, Kupol and Dvoinoye once again delivered, with strong production and low costs. Increased oil processed, coupled with the continued benefits from the weaker Russian ruble, contributed to the lowest production cost of sales we've seen since Q2 2011. As we mentioned last quarter, we also continue to advance efforts to add production at these world-class assets.

We just completed construction of the ore haulage road to the Moroshka Project, which is located approximately 4 kilometers from Kupol. We remain on track to begin mining at Moroshka in 2018. At the September Northeast target near Dvoinoye, located 15 kilometers away, a haulage road has also been completed, and a camp facility has been established. Production is expected to begin in early 2017.

Now moving to the Americas, we have had a solid showing from Round Mountain, Kettle River-Buckhorn, Fort Knox, and Paracatu. At Bald Mountain, we have [passed] some of our initial adjustments related to the mine plan we inherited. We have a strong team on the ground, and have been breaking records in terms of our mining rates as we initiated [our CI] programs. We are now getting into better grades, and expect to see those ounces making their way through the heap leach pads over the next 2 to 3 months.

We expect performance to improve with each passing quarter in 2016, which, as I will remind you, is a transition year for Bald with 2017 and 2018 forecast to be much better years for the operation.

Turning to South America, I do want to update you on developments at both Paracatu and Maricunga. As I mentioned in the first quarter, sufficient rainfall at Paracatu continues to be a concern. The region received approximately 20% less rainfall than the historic average during the latest rainy season, which ended in April.

Based on current calculations, it is likely that we will have to curtail operations at Plant 1 during the second half of Q3 until the restart of the rainy season in late October. This could result in a potential loss of approximately 70,000 ounces for 2016. This possibility, however, was factored into our 2016 production guidance.

We have undertaken a number of initiatives to identify alternative water sources which include: securing water [craters] from nearby farmers; locating sources of underground water; draining water from our tailings facilities; and increased water catcher areas and ongoing water conservation activities at site.

Now turning to Maricunga, I am pleased to say that the mining and crushing operations were restarted on July 9. You will recall that mining and crushing had been suspended in early May following a series of orders from Chile's environmental authority, the SMA, curtailing the amount of water being pumped from the water field to the site. During this time, we continue to operate the heaps, producing just over 44,000 ounces in the quarter.

In the ongoing regulatory proceedings, we have appeals pending before the Chile's environmental tribunal. After taking into consideration Maricunga's cost position and future capital needs, in the context of the Company's other capital priorities we expect to suspend mining at Maricunga in the second half of the fourth quarter. This timing is subject to the ongoing regulatory processes in Chile.

Turning to West Africa, Paul has already provided you with an update on Tasiast, so I will focus on Chirano. In Q2, we continued to work through the transition from the Akwaaba mine to Paboase. We noted in our first-quarter conference call that Paboase is a lower-grade ore body; and as we moved underground, we encountered some challenges opening new mining areas.

However, in March, we instituted a recovery plan and I believe we have turned the corner at the site. We are seeing an improvement in the mining output. And we expect grades to improve as we move from the peripheral areas of the ore body towards the center of the deposit.

As the recovery plan gains momentum, this should contribute to a decrease in production cost of sales which has increased in the last two quarters. We are very focused on getting these costs down, although Chirano will have certain higher costs going forward, owing to an increase in taxes and levies and the price of electricity which were introduced in January.

In summary, we are moving in the right direction at all our operations. Despite certain challenges during the quarter, we continue to be on track to meet our Company-wide guidance for the year, which is a testament to the diversity of our portfolio and the strength of our operations.

I will now hand it back to Paul.

Thanks, Warwick. And again, just in closing, I would underscore that diversity in our portfolio continues to be a significant advantage in managing our business. Q2 was another strong quarter for Kinross, with solid production and good cash flow generation.

We are definitely benefiting from the strength in the gold price, both in terms sheet and when it comes to our share price. And our share price has also benefited from our attractive growth opportunities.

And with that, operator, I would now like to open it up to questions. Thank you.

(Operator Instructions) Andrew Quail, Goldman Sachs.

Thanks very much for the update. Just a couple of quick ones here, firstly on Chirano. That Paboase where you are going underground, and we are talking about great improving there, Warwick, is that -- do we see something back to sort of the reserve grade? Or are we gradually going to get back to close to the 2 grams a ton for the next few quarters?

We do see ourselves getting back to reserve grade. You would have seen that Akwaaba was certainly a higher-grade deposit than what we do have at Paboase. It is in the order of about a 10% difference. But the grades will certainly improve. And if we compare our 2015 grades across the mine to that which we have seen in 2016, we would be below the -- that figure of about 2.4, 2.45 in 2015 by about 6%; 6%, 8%.

Okay, and Paul, maybe just one. We obviously don't talk too much about the La Coipa restart at all. Is that giving you -- obviously you've got some new assets in the portfolio and you have undertaken Tasiast. Is that something that's not on the table anymore?

No, it's just I think from our point of view, it's a good news story. As I have said in previous calls, the reason it's a good news story is we went from sort of a money-losing operation, suspension, exploration drilling, proof of concept -- that's all come in economic. We do have a pre-feas, all good. The only place where we'd like it to get better is we want to add some reserves and extend the mine life.

But Warwick, maybe you want to add just what exactly (multiple speakers).

Yes. Thanks, Paul. Just in support of what you just said, we have continued with exploration drilling. And year-to-date, we have drilled some 5,000 meters which we plan to drill 12,000 over the course of this year. So things are progressing there, and we do also continue with the permits that we would hope to come through in 2017 possibly into 2018. It's not in our hands, obviously. But we certainly are working very well together with the regulatory body in getting that sort of (technical difficulty).

And last one, thanks, so looking at the portfolio, a couple of your assets doing really well and sort of subsidizing some of the other ones. I mean Russia is a standout. Is there a scenario, Paul, where you see maybe you guys actually divest or sell some of the underperformers? Or -- I look at something like Maricunga if it's going to be suspended, is there a point where you guys can sell it?

Yes, that's good question. We don't need to sell anything, given the strength of our balance sheet. Maricunga was very much a capital return decision. We have been talking about whether or not we would proceed with the next lay back for quite some time. As you know, there is between [2P, M&I and Ferg], there's almost 6.5 million ounces in the ground up there.

It's really just a question of competition for capital in our portfolio, and we've had unsolicited expressions of interest. But at this point, we haven't made a decision. And it's not -- with the balance sheet we have, it's not necessary that we -- we are not in a situation where we need to sell assets. So we are thinking about what might be best there, but we haven't made a decision.

Okay, that's very much, guys.

Jorge Beristain, Deutsche Bank.

Just on Maricunga, I had a question. If you do the shutdown in the fourth quarter, how does that affect any future heap leach ounces that you may recover there in the shutdown phase? I read something that there could be some water restrictions which would impede an orderly shut, so if you could just comment around that.

Maybe -- that's right. I will hand over to Warwick here, but it's actually as -- you're right. Obviously we don't need as much water in renting out the heaps as when we've got the full mining operation going.

But maybe Warwick, just expand.

Yes, I think I would start off by saying in any form of closure, we certainly have the support of the authority in having sufficient water to be -- to ensure that we satisfy all our environmental obligations. Assuming that we are able to continue with the water at the level required to do the rinse to those heaps, going forward, post the suspension of mining operations, we have said before that we see some 100,000 ounces on those heaps and that would come out through the rinsing process over a period of 2 to 3 years.

Well, I guess what I am asking is I would differentiate having sufficient water to do an orderly environmental shutdown versus perhaps enough water to just keep rinsing the heap. So I was just wondering if there would be any possible risk to not being able to recover that 100,000 ounces.

Yes, well, what I am saying is there are two scenarios which you quite rightly defined. Water is required together with the process of rinsing to withdraw those 100,000 ounces over the 2 to 3 years. If we are limited to satisfying environmental conditions alone, then certainly the ounce production would be less than that.

Okay, thank you. And the other question I had was just related to your update on the other operating costs going up to $95 million. Can you just comment on what the split was between cash and non-cash on the previous $45 million guidance? And now that you have increased it to $95 million, what the cash/non-cash split is?

Sure, Jorge. It's Tony Giardini. The increase in $95 million is really largely related to the reclassification of costs associated with Maricunga and with Tasiast as a result of the suspensions that we had during the quarter. So what we saw was roughly $22 million, $23 million. Those would have actually been cash costs that would have incurred during the quarter.

But what we did was we reclassified them to other operating costs and we've adjusted them out of our earnings, although we [hate to] to adjust the amount of cash flow. So that was a primary change.

The other items are really a number of gives and takes, with the majority of those being non-cash items during the quarter. What we can do is we can just chase down the balance of that and do that comparison between $45 million and $95 million.

When we look at it on a full-year basis, we see about $40 million of those items being cash items over the course of a year. But what I want to do is just look at where the original $45 million was, to see if that 50% breakdown is more or less the same across the board. So we can chase that down and we'll get back to you.

Appreciate it, thanks. I will get back in queue.

David Haughton, CIBC.

Thank you for the update. I've got a question on Tasiast. Just wondering if there -- if you've got a delay in Phase 1, whether it has got any implications for the startup, if approved, of Phase 2.

No, not really. We are just getting going on the Phase 2. And, while we conservatively guided because of the delay we've had with the shutdown into Q2 of 2018, Phase 2 to is a long way off from there. Having said all that, obviously we will be doing everything we can to tighten up the timeline as we go here.

Okay (multiple speakers).

If I could just add to what Paul said there, we did see advise that we would take the decision to pursue the study on Phase 2 during the second half of this year, and so that's really where we are right now. And then further to that, phase 2, the completion of phase 1 really doesn't have much reference to the start of the study on phase 2. Because phase 2 lead would be driven by long lead items rather than the completion or commissioning.

Also related to Tasiast, we were meant to have seen quite a substantial free strip by now. And I presume, as part of the timing of labor availability, that that has been pushed out also by another quarter or so. Is that a reasonable way to look at it?

Yes, I mean that's exactly right, David. Obviously with the site shutdown, we don't have people to drive the stripping program. And again, we will do everything we can here to pull that back in, but that's why we are being conservative in terms of schedule.

Just thinking about that, it looks like quite a bit of the work, whether it's labor related or capital spend related, is going to get pushed out. Does that mean, then, that 2017 is a very significant CapEx year for it? Can you do that catch up in 2017?

I will talk to the timeline, and then maybe somebody can jump in on the capital. But the way I look at the situation from afar is we basically got a two-year schedule, and out of the gate here, we've had a 5 to 6 week shutdown. So out of the gate, we are sort of 5% impacted on the overall schedule. Not all of that is one for one, because we have continue to advance the project.

But as you point out, in certain areas where we need physical access to the site, we've had some slippage. But, again, I think we're going to do everything we can to accelerate and claw that back.

Tony, maybe just to speak a bit more about the capital spending.

Sure. As you know, we had updated our guidance from when we moved forward on Tasiast phase 1, so capital is expected to be somewhere around $760 million for the course of the year. And we are certainly tracking below where we had expected to be over the course of the year, as you rightly point out.

On the sustaining basis, capital is roughly [430], and we continue to believe that that is the appropriate amount for sustaining capital for the year. So, while we may be somewhat underspent on sustaining, we expect to catch up during the second half. And, as you rightly point out, it's really about growth capital, how much of that capital will not be spent this year, but could likely be spent next year.

And so, that's something we are going to evaluate over the next several weeks, and we will likely have an update on capital spend for the balance of this year.

With respect to 2017, we really haven't provided any guidance other than the guidance we provided with respect to the acquisition of Bald and Round on a forward-looking basis. So we haven't really looked at the cumulative capital budget at this point. And we will reassess that and see what, if any, implications there are on that budget.

But I think it's fair to say if there is some slip on capital spend at Tasiast in the current year that that will likely be pushed into 2017. But we haven't really completed our budget work this point in time.

All right, if I may just a question on Maricunga, please. With the closure, is that likely to trigger any impairments or rehabilitation charges?

No, the value that we have for Maricunga sits at about $180 million right now, and as you know, we are obligated to test for impairment on a trigger event basis. At this point in time, we don't have any trigger event, because no decision has been made with respect to the possible suspension of the asset. And if in fact we do make that decision in the near-term, we will assess at that point.

Regardless, we will be obligated to test for impairment on an annual basis, so we will be doing that at year-end, and then we will have a better indication of a compared to expected cash flows from the asset. I think is Paul pointed out, there is a lot of gold at Maricunga, and part of the consideration is that cold is not going anywhere. It is still in the ground. There's value associated with that. And we will have to couple that against a whole bunch of other considerations if, in fact, we get into that assessment of carrying value from an impairment perspective.

With regards to reclamation, the reclamation expense, or the liability, is included in our ARO liability we've already recorded on the balance sheet. The spend actually occurs over a very lengthy period of time. And it really wouldn't trigger any incremental cost associated with reclamation of the asset because those costs are spread out over a very long period of time.

I think when we look at the suspension of the asset, we see holding costs in the neighborhood of $3 million to $10 million a year, so those are probably going to factor in some of the impacts that we would expect to see with respect to reclamation. But we don't see a one-time large cost on reclamation coming up, if in fact we suspend the asset. As I said, we will revisit the impairment scenario when we do our testing for that asset.

Very good, thank you for the answers.

Stephen Walker, RBC Capital Markets.

A couple of questions. Paul, first of all at Tasiast, the phase 1 -- the contractors -- I guess what is the ratio between Kinross employees and contractors? And will the contractors be exempt from the Mauritanian requirements? Or will they be able to meet the Mauritanian requirements for employees from in-country? Will that become an issue once you start mobilizing contractors for the plant and other (multiple speakers)?

Yes, good question. Look, I think the point here is, as I think you've picked up on, our focus really has been, in the first instance, resolving ex-pat work permits at the operation. And that is resolved. And that was a work-in-process event that we were already on. And to some extent, as I said in my opening remarks, we made the decision to suspend the mine and just get that resolved and agreed. So we are really happy we've done that.

The government acknowledges that the phase 1 expansion is a different animal, and we have had engagement with the government in that regard. So to your point, we are very comfortable that at this point, they will look at that completely differently than they do at the existing operation.

Warwick, I don't know if you want to elaborate.

Yes, Stephen, just to give you a little bit of support in what Paul has said, as far as the numbers are concerned, we do have an [owners] team, and that owners would be a smaller 10 to 15 people. So the contractors themselves would by far have the majority. And they are very clear to find processes which are contained in our mining convention, and the contractors will follow that. We have not had any problems with that in the past. The contractors would need to present themselves to the government of Mauritania in the normal way, and we foresee that those work permits would be granted as and when required.

That's helpful, thanks Warwick. Maybe Warwick, while I have got you, could you talk about the grades that you could expect to see from the new discoveries around Kupol and Dvoinoye? Gold, silver grades from these new discoveries in line with current head grades -- better, slightly lower -- do you have a sense at this point? Or is it still too early when we look at grades going forward?

Certainly we already have a mine plan. As I said for September Northeast, we see ourselves mining in the first quarter of 2017. It's a very small deposit. We have given advice that it contains some 80,000 ounces, and it has got an average grade of about 22 grams, 23 grams per ton. That's gold. The silver ratios in that area have been typically a 1-to-1, which quite different if we look at the Kupol environment.

As far as Moroshka is concerned, there we have indicated we've got a total resource of about 180,000 ounces. And there, the average grade is just below 20, in the order of 17. And the ratio there, gold to silver, is closer to 10-to-1.

So Kupol 2017 production should be relative (multiple speakers)?

No, no. I did say in my script that the Kupol project, Moroshka, would be coming online in 2018.

Okay, in 2018, okay, but slightly better grades than currently being processed.

Yes, but please do keep in context the size of those two deposits.

Great, thank you. Paul, just to come back to Maricunga, the SMA is being challenged by a number of the operators in Chile, some of which have been successfully challenged in the courts. Obviously you've been back and forth with them at Maricunga. Is this one of those death of 1,000 cuts that is just going to nickel and dime you until you shut the thing down? Is that your sense on how this is going to unfold? Or do you think at some point the courts are going to say hold it now. They are operating and environmental permits in place that have been approved by previous government agencies, and cease-and-desist.

Is that where this is headed? And I know you may not want to talk in detail about that, but just give us a sense on what that outcome could be. And then just as a follow-up question, is the state -- is the Chilean state defense counsel an NGO? Or is it a separate government agency that is now challenging with those two lawsuits that they have filed?

Sure. Look, Stephen, again, as you I think indicated, it's hard to speculate. We are certainly not alone in Region III Chile in terms of dealing with this regulator. We have disagreed in the past. We have appealed and we have won on issues in the past.

In this particular instance, again, we vehemently disagree, both from a technical and a legal point of view, and we are pursuing that. But I can't speculate as to how this will play out within the government.

Our focus on Maricunga is strictly one of economics at this point. And much like La Coipa was back three, four years ago, the team there has been a great job in terms of lowering costs, and really getting that operation into a cash flowing position. But, in our portfolio, it is still relatively high cost and low in the portfolio, a low cash flow contributor.

So, we will continue to do what we need to on the legal front, but it's really more about the economics for us as to how far we want to go. So it's more -- I wanted to get into the death of 1,000 cuts comment. That's not how we are looking at it. We will continue to push on the legal front, but really for us, it's competition for capital.

And the Chilean state defense counsel?

Well, SMA is a government body, if that's what you're asking me.

Okay, I will follow up. That was very helpful. Thanks, Paul.

Steven Butler, GMP Securities.

Do you have a reasonable estimate of the timing of which you would do the temporary suspension at Paracatu? I know it is built into your guidance, Paul, for the year, but is there a number of weeks or are we talking about a month? Or what's your best estimate of a temporary suspension at Paracatu and the timing of that is either Q2 or Q4?

Again, I think you hit the nail on the head. We have factored in what we think is worst-case into our guidance. So that's the important point. And as Warwick pointed out, we've got a number of efforts underway to source additional water beyond just rainfall. So I am actually hoping we will do better than what worst-case is budgeting.

But just as to specifics and timing, Warwick, maybe --.

Yes, glad to, Paul. Steven, I can give you some indication of what we put into our estimation to get to that 70,000 ounces which I spoke of earlier. It's really a function of current water levels in our reservoirs. It's also a function of whether we receive any rain during this dry period.

However, the numbers that we put into our forecast would be the cessation of operations in our Plant 1 from the latter part of August until mid-October. Also, I think it's important to note that our Plant 1 operation contributes about 20% of our total production. That would be the effect.

Okay, that's very clear, thank you. And remind me again, Tony, the phase 1 CapEx for 2016, what was your original estimate for the year for Tasiast before this work stoppage issues?

Right. While we had the stripping costs that we had included as capital initially, then we upgraded the capital, though, by $160 million when we announced in late March that we were moving forward with Tasiast. So I think as Warwick has mentioned, on the stripping side, there will be some impact in terms of just not being at the site for a period of time. And on the phase 1 capital, it's really going to depend on how quickly we are able to mobilize and get back up and running. But as I'd indicated earlier, there is an expectation that some of our capital won't be spent this year.

Right, okay, Tony. And then Warwick, I think you mentioned Bald Mountain, you should see stepwise or maybe not quite those words, but meaningful change in operating cost profile as you go throughout the period in 2016. I know shipping costs have been high -- correct? -- as well as the inventory replenishment. So is there a -- are you seeing any improvement or enjoy in the cost per profile into probably the end of July?

Maybe at Bald right now is really a focus on the movement of tons, and so our cost per ton profile is pretty consistent. We are obviously moving from what would be our cutback, which is capitalized into our operating waste orebody. And that -- the extent to which we are going into the orebody right now is increasing almost on a week by week basis.

So we do see the numbers just over $1,000 an ounce basic reducing as we increase in our ounce production. Ounce production for this last quarter, you would've seen these in the order of about 53,000 ounces, which is certainly a lot better than it was in Q1. And you see Q3 and Q4 increasing from those numbers. So you will see the numbers on the cost side decrease with increase of ounces.

Okay, that's it. Thanks guys.

This concludes the question-and-answer session.

Thank you, operator, and thank you all for joining us today. And we look forward to catching up in the future. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect your lines. Have a pleasant day.