New Gold Inc (NGD) 2018 Q3 法說會逐字稿

Good morning. My name is Krista, and I'm going to be your conference operator today. At this time, I would like to welcome everyone to the New Gold, Incorporated Third Quarter Results Conference Call. (Operator Instructions)

I will now turn the call over to your host, Anne Day, Vice President, Investor Relations. You may begin.

Thank you, operator, and good morning, everyone. We appreciate that you joined us today for New Gold 2018 Third Quarter Earnings Results Conference Call and Webcast.

On the line today, we have Renaud Adams, President and CEO; as well as Paula Myson, our CFO. Other members of the management team have also joined us and will be available during the Q&A period at the end of the call.

Should you wish to follow along with the webcast, please sign in from our homepage at newgold.com. If you are participating in the webcast, you may type your questions online through the interface.

Before the team begins the presentation, I would like to direct your attention to our cautionary language related to forward-looking statements found on Slide 3 of the presentation. Today's commentary includes forward-looking statements relating to New Gold. In this respect, we refer you to our detailed cautionary note regarding forward-looking statements in the presentation. You are cautioned that actual results and future events could differ materially from those expressed or implied in forward-looking statements. Slide 3 provides additional information and should be reviewed. We also refer you to the section entitled Risk Factors in the New Gold's latest MD&A and other filings available on SEDAR which set out certain material factors that could cause actual results to differ. In addition, at the conclusion of this presentation, there are a number of end notes that provide important information and should be reviewed in conjunction with the material presented.

I will now turn the call over to Renaud Adams.

Thank you, Anne. Good morning, everyone. And thank you for joining us for our third quarter 2018 review.

I'm very pleased to join this company. I've joined the company on September 12 at a very critical time, as the company is repositioning itself as a leading Canadian-focused gold producer. With nearly 14 million ounces and nearly 1 billion pounds of copper, two operating assets and one exceptional [shenality] in the Blackwater project, the company is well positioned in Canada to turn the corner and readdress value creation for our shareholders. Key to this repositioning is surely the addition of Mr. James Gowans to our Board of Directors, enhancing significantly our technical expertise at the board level.

In the short term, the sale of the Mesquite Mine improved significantly our short-term liquidity and financial flexibility, while simplifying our operational structure and supporting our new vision of repositioning New Gold as a Canadian focus based on long-life assets. Using our improved performance in September at Rainy River as a new baseline, we are now more than focused and committed to continue to improve the performance to eventually meet the spec of Rainy River.

New Afton delivered another exceptional quarter and is surely well positioned to meet or even exceed our guidance in 2018. The short-term focus is to complete in optimizing the B3 and the C-zone development scenarios, focusing on a potential internally funded, while supporting a strong cash flow over the next short term. The decision is expected in late 2018 to potentially advance the development in early 2019.

We are also actively engaged in improving the outcome of our Blackwater technical study. We call it the de-risking opportunity, where potentially the use of technology and/or phased approach would improve the economics. On a positive note, the company is expecting an environmental assessment approval in 2019.

I will now turn the call to Paula Myson for the third quarter operational and financial highlights and results. Paula?

Thanks, Renaud, and good morning, everyone.

We'll be starting on Slide 4 of the slide deck. And on production, first we'll talk about it on a continuing basis.

On a continuing operations basis, consolidated production was 77,500 ounces, significantly above the prior period. That's because, on a continuing basis, New Afton would've been the primary contributor to gold production in the 2017 comparative period. So the large differential is due to the fact that Rainy River was not commercial in Q3 2017. On a total production basis for the quarter -- that would include Mesquite -- our total gold production would've been 114,025 ounces.

Breaking down the consolidated production a bit. Total production at Rainy for the quarter was 55,538 ounces, which included a 5-day shutdown we took for some mill modifications. Post the shutdown, Rainy had its best-ever monthly production of 25,500 gold ounces in September. That operation is well positioned to meet the lower end of the revised 2018 production guidance.

During the quarter, New Afton produced 19,916 ounces of gold and 21.7 million pounds of copper, slightly lower than the prior period. But that was due to a planned decrease in the ore mined. Finally, at Cerro San Pedro, it produced 2,079 ounces of gold in the quarter. That, too, was a planned decrease and resulted from the mine finishing active mining late in the second quarter of 2016 and transitioning to residual leaching.

At the end of Q3, we discontinued the [cyanide] addition to the heat leach pad, and a staged closure process is underway. Therefore, we took a write-down of inventory at Cerro San Pedro of $12 million. And that was included in the operating expense of that operation for the quarter.

Consolidated operating expense was $644 an ounce. That was up from $527 in the prior year quarter, mainly due to the inclusion of the operating expenses at Rainy in its ramp-up year and the $12 million on heat leach write-down at Cerro San Pedro I mentioned earlier.

On the all-in sustaining costs. Consolidated all-in sustaining costs increased compared to the prior year. And that was primarily due to an increase in operating expenses and sustaining capital at Rainy, as construction of certain of the infrastructure on the site continued during the quarter. The impact of Rainy on AISC was partially offset by lower AISC at New Afton, where they've benefitted from both higher copper price and lower all-in sustaining costs.

If we move to Slide 5 and look at the financial highlights for the quarter. Revenue of $147 million was $54 million higher than the prior year quarter. And this reflected higher gold sales volumes and the higher copper prices. But there was a net loss of $2 million or nil per share on a continuing basis during the quarter. There was a net loss of $166 million or $0.29 per share. If we included the impairment loss for Mesquite, that would be net of tax of $162 million. And that again was related to the sale of the Mesquite Mine.

During the quarter, we entered an agreement for this sale in late September, which means that the Mesquite Mine met the qualification of a discontinued operation at the end of the period. The proceeds from the sale and the closing adjustments then compared to the carrying value. And that resulted in the $162 million impairment loss. For clarification, the write-down actually appears in the discontinued operations line on the income statement.

There was an increase in the operating cash flow per share that corresponded to the higher gold production. And operating cash flow for the quarter was $0.12 per share. That was up from $0.08 in the prior year period. That again reflects the addition of Rainy operating margin to the very steady operating margin we achieve at New Afton.

Moving to the capital slide, on Slide 6. Rainy River's sustaining capital expenditures for the quarter primarily relate to capital stripping and the construction of certain site infrastructure. And that includes the tailings dam. Rainy River growth capital was related to the payment of working capital for project development and advancing the underground.

We're trending below what we estimated the 2018 capital at Rainy would be on the sustaining side. The slower spending is due to a combination of three factors: deferrals, reclassifications, basically from CapEx to OpEx; and the slower drawdown on working capital. At New Afton, sustaining capital primarily related to tailings dam raises and equipment purchases. New Afton growth capital primarily relates to the study costs related to the C-zone.

Moving to Slide 7, on the capital resources and liquidity. We ended the quarter in a very comfortable liquidity position, with $129 million of cash and $124 million of capacity under our credit facility, for total liquidity of $250 million. During the quarter, we took steps to strengthen our balance sheet and enhance the financial flexibility of the company. That strength and flexibility will mainly be bolstered by the sale of Mesquite for proceeds of $158 million, which is expected to close in the fourth quarter.

Mesquite is part of our security package for our $400 million revolving credit facility. And upon closing of the sale, Mesquite will be removed from the security package, and Rainy River will be added. And the term of the $400 million facility will be extended 1 year to August 2021.

We'll direct about $60 million of those proceeds to reduce the outstanding balance on the credit facility. And until the Rainy River security is perfected, which -- it's a process we expect to take until late 2018 or early 2019 -- the maximum draw on the facility will be $225 million. We are very comfortable with that, since we have a healthy cash balance currently, which, at the close of the transaction of the Mesquite sale, will be further supplemented by the cash proceeds from the sale.

And with that, I'll turn the call back to Renaud.

Thank you, Paula.

I'm on Slide number 8. And I'd like to take some time here to go through the two main assets and discuss some more specifics about the results of Q3.

At Rainy River, the third quarter results were surely positively impacted by a notable improvement in September, post our August mill shutdown. In September, we have achieved an improved mill availability and throughput resulting in the best-ever 25,500 ounces produced. So based on this new improvement in productivity and a focus on the cost drivers, and a very disciplined capital allocation, we see ourselves meeting the low end of the production guidance while meeting our all-in sustaining cost guidance.

As we continue to improve the milling performance will come the need to improve the mine performance. So we are on time with the preparation of the next phase, while the ore mine will meet our objective to support the segregation strategy, maximizing the grade at the mill.

So as we improve the mill, increase the throughput, will come the need to also increase the ore mine to support this strategy. We will focus on the mobile equipment availability. But more importantly is the need to track and improve the efficiencies and the use of our equipment. And we have launched this approach, and they will become a priority in the fourth quarter.

In the short term, we're also evaluating the near-mine exploration potential. Rainy River is seen as a mine with 4 million-plus ounces of reserve. But as we move forward will come the need as well to improve our [midterm], pushing in the future the need to reclaim their low-grade stockpile and improve our view on what is beyond the current reserve. So I'll speak more about this in a minute.

On Slide number 9, grade reconciliation. I thought it would be important to pause here and take the time to really looking at the grade reconciliation. As I was following the story of New Gold, in part of the second quarter disclosure was an important conversation about the grade reconciliation. In Q3, I'm very pleased to show you that when it comes to the resource model versus our blast hole, the result were reconciling. And the assets were surely reconciling very well.

As you can see on the Slide number 9, taking the result of the grade control, the overall grade at a 1.03; the most important are the high grade at 1.54 were reconciling very well with the resource model. This is the Q3 result. And as we advance, we will continue to be very transparent and demonstrate the importance of the fact that we don't see a significant issue or even an issue with the resource block model.

The key here is how do we take the resource model and make it a very efficient mining approach while minimizing the dilution sources. On that blasting movement, the narrow shapes on the large mining shovel, the suboptimal mining directions -- all those contribute to a higher-than-planned dilution. And this will be the focus starting in the fourth quarter 2018, while we would be working actively and minimizing the source of dilution.

Another very important aspect as well is if you compare the ore shape and grade control from the geology compared to the milling. As you could see, the mill processed 1.6 million tonnes at 1.21 grams a tonne. And this reconciled very well with high-grade mine of the 1.26 grams a tonne.

So in short, in the third quarter, we have not seen a difference between the [assay] from the block model compared to the grade for the blast hole. In the short term, we have brought to site an RC Drilling. And we're using this approach to improve on a few aspects. One of the limitations we have is the lack of information ahead of drilling in [Bendford]. So the RC Drill will be serving in the short term on the low, medium and high grade to validate and improve the grade control practices while they would serve to improve our near-term mine plan. We have about 10,000 meters planned for 2018, and we will report in the next quarter on the significant result out of this drilling program.

On Slide number 10, mill performance. There is really three aspects of the mill performance: throughput, recovery and availability. What we have seen in September post the August shutdown, where the site was relined, elution circuit was upgraded, the carbon elution circuit screens were replaced; we've seen a significant improvement in the overall availability. All those issues that we were dealing with were contributing to the very low availability prior to the shutdown. We've seen as well an improvement in the overall recovery in September. And as we move forward, the importance will be to reconcile and to improve in the three fronts.

I'm also very pleased to say that from October 1 through October 14, the plant has operated at an average of 24,000 tonnes at an average availability of 95%. So the question, if the mill has the capacity to support 24,000, the answer is yes.

But as we move forward, it is important as well to understand that maintaining 24,000 tonnes a day at the same time of maintaining the target of 95%, we're not quite there yet. We have identified the main issues, and we're working on improving.

As an example, we are working with experts and relooking at the configuration of the lining, configuration of the SAG mill. We believe that configuration could be improved, which will contribute to the better operation of the SAG mill, where we would be maximizing the throughput, operating the crushing plant as well in a better setting and operation, and where we would also focus on the overall grind.

So as a result, we will continue to work in the backend of the circuit as well, continue to improve. But overall, we do not see any issues with the capacity of the mill. It's how do we optimize, take the backend optimization and the frontend optimism where we would be maximizing the throughput. But also very important is the need to maintain the overall grind and the 75 microns or lower.

All that are part of our short-term priorities. And again, I'm pleased to say that we feel very comfortable we have identified all issues. And Q4 will be a priority to address those.

On Slide number 11, just want to show a bit of the potential of the near-mine when it comes to exploration. What we're showing on Slide 11 is the Intrepid Zone, one example of potential new resources that could be added. Why Intrepid Zone? Well, first of all, this is the first zone that will be intercepted in the underground strategy. We have over 1 kilometer to the north of favorable geology that are similar to the Intrepid Zone itself. But the limited drilling to the north by the predecessor claim owner -- and now we do own those claims. And we believe that it exists a big potential to expand the Intrepid Zone further to the east.

So as we are looking at Rainy and extend the life of mining [improve] in the short midterm will come the need as well to return to a strategy of a drill bit. My experience in the past has been that more than 50% in improvement in organic growth and value creation come from the drill bit. And I believe that it's time for New Gold to return to this fundamental strategy.

On Slide number 12, on the New Afton. What an exceptional quarter again in New Afton. With already nearly 59,000 ounces produced and 64 million pounds of copper, the New Afton asset is very well positioned to meet or even exceed the production guidance. Our costs remain extremely good, and we're trending to be [even and] below on the all-in sustaining cost guidance.

The whole focus on the New Afton line is to really work in solidifying our future. The C-zone is the near-term future of the New Afton. And the focus is really to complete the best scenario, unlock and execute, and potentially start in execution in 2019. As we continue to manage our cash flow will come the importance of how we would execute and pay for the C-zone. We see a potential scenario where they would be internally funded from the asset itself, while potentially maintaining an interesting cash flow in [2019], the time that we complete the turnaround of the Rainy River.

Just as we do in Rainy River will come the importance as well to return the fundamental strategy on the exploration potential. And on that, on the next slide, I'll speak about it.

I'm very pleased as well to see that the gravity jig installation is in progress, while on time for a commissioning in the Q4, which will support our strategy to maintain a high recovery at the time that we will be dealing for a short period of time with the [serpage in] ore coming from the east cave.

On Slide number 13, we're showing again the short-term potential of how we could extend the resources at New Afton. From the C-zone drilling exercise, we know that the zone remained open at depth. So in 2019, one of our short-term objectives in using the underground approach -- we have angles and positioning from underground -- we will be testing the extension of the C-zone to potentially put together what we would call the D-zone. It's early stage, but I'm very pleased to say that the zone remains fully open. The [assays at depth] below the C-zone as we know it today are as strong or better in the C-zone than what we see in the main zone of the B-zone.

So as we continue to unlock the value, work on execution of the C-zone will come the importance to work for the future and prepare [the] future. So just as we do at Rainy River, we will return in the fundamental of the drill bits at New Afton, creating a longer future.

And on that, I'll turn it back to the operator for the questions.

(Operator Instructions) Your first question comes from Rahul Paul from Canaccord Genuity.

Renaud, it seemed you spoke about the reconciliation [but] the resource model. But I just wanted to clarify. There was a concern previously that the overall ounces and grade were fine, but the distribution seemed to be more uniform; i.e. less high grade, more low grade. Is that not the case? And if that's the case, do you see any signs to suggest that you could effectively carry out the segregation and stockpiling strategy to maximize grade to the mill?

This is really a key item here. And the way I look at it moving forward is really to go step-by-step. The first thing here that is very important is, is there any major issue or any issue at all with the resource model per se? This is very key, obviously. Our strategy is to segregate from the medium and low grade and benefit as much as possible in the short term and midterm to operate the mill using the high grade. So what I see here is I know there's been some concern. We did not see in Q3 any area where we were mining where there were a disconnect on the high-grade zone from the resource model to the actual grade control. As I mentioned, beyond the resource model comes the mining and the actual grade mined versus the grade control. So with Slide 9, you see that on the high grade, for instance, we had like a nearly 1.6 million-tonne mine, average grade of 1.54. And then the overall result of the mining is 1.8 million at 1.26. So important to understand here that the more tonnes and lower grade is not a result of the resource model per se but as a result of the mining out of the resource model. So the key here is the dilution control, as I mentioned. I do not see, we have not experienced in Q3 -- I know they've been mentioned in the past. But obviously, if you take a resource of 1.5, and if you do not control your dilution sources, you would not reproduce a reserve model that is considering 5% across the board of dilution. So we need to optimize this. And to optimize this, you need information ahead of you. So as I joined the company, there were about like -- call it like very short-term drilling inventory. How could you maximize if you don't know what is ahead of you? So you would plan always in the short term using only the resource model. So the RC Drilling and the ability to put the drill at work and create a drilling inventory will maximize your online patterns, your mining practices, control of your blasting. All this is key to reproduce an overall dilution in the mining practices that meets the reserve model. But the fundamental here of the Q3 finding is when it comes to the resource model, we have not seen difference in the high grade, midgrade and the low grade. So its optimization world that I see down the road is creating drilling inventory ahead of us, so we can maximize our plans and practices and working on source of dilution. But the fundamental of an asset is the resource base. The most important in here is, is there anything wrong with the resource model or what we call total tonnes and grade? And what we saw in Q3 is we have not experienced that variance between the actual and the resource model. This is the first step that is extremely important. Could we maintain this in the future? We would again continue to be very transparent as we move forward. But the resource model is one thing, and what you deliver to the mill is another thing. And as you can see on the high grade, from 1.5 down to 1.26, there is room there to continue to improve on the mining dilution and practices. So you're maximizing your high grade delivered to the mill. So that's what I can say at this stage. This is a priority. This is something we're working actively on to minimize the grade and be as close as possible to the resource once it's blasted and deliver it to the mill.

And then, one more question. You provided a leverage ratio of 3.3 at the end of Q3. Presumably, that would be before the Mesquite sale. Can you tell us what that number would be, if you were to take into account the sale of Mesquite?

Rahul, the actual impairment gets adjusted out of that calculation, so it doesn't have an impact.

What I was trying to get at is I know it's on an LTM basis. Would you adjust up the EBITDA contribution from Mesquite as well?

Yes, you can. I'd have to get you that number. I don't have the isolated Mesquite EBITDA, but we can get you that.

Your next question comes from the line of Dan Rollins from RBC Capital Markets.

Renaud, just on the throughput improvements that you saw on grade in September, how has that translated into October? Obviously, we know, when you have these ramp ups, you get a couple good months, and then you have a setback, and these aren't a straight line up. But how is October performing relative to September so far?

So as I mentioned, the most important thing when I came onboard was like -- okay, so we just talk about the grade control. The second thing, the second noisy item, if you will, coming out of the second quarter disclosure of the company, is what about the capacity? If you're not meeting your average 24,000, what is it? Is it the mill capacity, or it's actually the incapacity to maintain the mill running of at or above 93%? In October, from October 1 through October 14, the mill did average slightly above 24,000 tonnes a day at an availability of 95. So at this stage, what I can say is there is no capacity issue. The mill is capable to do the 24,000. And quite frankly, once it's optimized, it would do more than that. I'm very confident of that. Why? Because we're not using properly the full power in the grinding circuit. We have a pebble crusher that hasn't been even commissioned. So you have a SAG mill that does not produce pebble that already produce 24,000 and grind 24,000, 25,000 tonnes. But the issue here is because what we believe is a configuration issue of the lining system. So we're cheating a bit in the short term. We're operating the crusher at the [close] setting. It works. But this machine is not designed to operate at that setting. And as a result of that, you have the higher downtime in the crushing, which impact the overall. The SAG mill is not meant to operate at the lower throughput. And it's also contributing to more downtime around like fixing and changing liners and grades. So what we see down the road will be the need to maximize the lining configuration. I can tell you by experience and by comparison with other assets in Canada and what I've worked overseas, the lining configuration is way different of the standard here. So I see a lot of opportunities to modify the lining configuration, improve the use of the SAG mill, use the pebble crusher as it should be used, optimize around the ball mill; and, very, very importantly, of course, is to meet the spec at what the size, the grind, that we're sending to the leach. So yes, the capacity is there. But we haven't been able to maintain the 93 and above, which is key. So to your question, yes, we've done 24,000 average in October. But we also, after that, had to stop and correct a few issues around the crusher. And that will be the situation. We know the capacity is there, but we need to be sustainable. And we need to be sustainable in cost as well. There is no point in trying to do 24,000 in the short term if we operate at $3 above our turn. So all elements have to match. But I'm very, very positive. And I think as we optimize, we're going to show actual capacity exceeding this. There's nothing wrong with the capacity of the mill. Is configuration and optimization, which would allow to operate properly within the cost and at a decent availability. And I consider that a SAG milling operation should be in the range of the 93%. And this is what we've been struggling to maintain. So it requires some optimization. Optimization equal -- if you change the lining configuration, well, then you're going to have to order these new liners. And that would take probably 10, 12, 14 weeks to receive the new liners and change. But the fundamental of having operating for 14 days consecutive at 24,000 tonnes is key here. So to me, box is checked on the capacity. It's not checked yet on the availability, and it's not checked yet on the recovery. Because they all have -- they're all inter-looping. It's all together. But very positive. And as we move forward, we would deliver the very, very efficient milling operation. And I just talked about the mining as well. It's a work in progress.

If you were to just benchmark yourselves right now, obviously for September/October, would you say you're probably at a steady-state 85% availability, 88%? And therefore, that incremental will come over time? Just trying to figure --

Yes, I think it's fair to say that at this stage, we have to look at ourselves, on a sustaining basis, that we're not at the 90-plus. We have reproduced it, but not on the sustainable. I think it's a fair approach to say that at this stage I see ourselves still towards the 87, 88 recovery overall at -- if we push at throughput -- availability is not there yet. I think your range is fair. As we advance into Q4, we'll be -- the key priority is we need to be able to clearly articulate, before the end of Q4, what are exactly we going to do to address early in 2019. And it's, on the sustainable basis, recovery throughput and availability. And I'm very positive we could achieve. But as you said, we're not there yet. We just increase significantly the knowledge about what has to be done.

And then, just one last for me. What's the rough amount of capital that still needs to be invested to get the B3 zone up and running and the C-zone fully developed?

I have to refer you back to the technical study. I mean, the last disclosure that the company refers to nearly $400 million for the B3. There's been some inflation. But on the other hand, we have also worked on optimizing the scenario. So we remain positive that we would be within that range.

But basically, the spending really needs to start next year to get this thing to nicely fit in with the depletion of the B3 and the main B-zone?

This is correct. There is three key elements, of course, internally funded. They would be, as you can imagine, even though you execute starting in early 2019 is like not the capital would all happen in the Q1. So we see still an interesting cash flow out of the mine, potentially 19, 20. Then you have to make sure you remain at a good production profile during those years. So you maintain the internally funded approach as much as you can. You address the best scenario possible, not only underground but on surface, and how you address the tailings, how you address the environmental, the sustainable approach, the block cave as well, technically speaking, underground and surface. So this is the optimization we're working on. But you're absolutely right. The best scenario to maximize the output of it will be an early 2019 execution.

Your next question comes from the line of Mike Parkin from National Bank.

I'm just wondering if there's any major outages at Rainy plant for the fourth quarter.

Plant, no. It's an optimization approach. You may want to refer to the 5-day shutdown we had. No. Unless there would be an equipment that would require a specific, no, I wouldn't say that there is like a plant approach. But we know, as I mentioned, we're still not entirely there. And there would be some need around the crusher, for instance. We have premature change of parts in the crusher as a result, as I said, of not operating in the short term in the proper. So those are all elements that contribute. But to say that we have, like we did in the Q3 a plant shutdown, no.

And then, looking at New Afton -- is there any thoughts -- I recall correctly, if you go too far to the west on the C-zone, the [surface] guidance could impact the tailings facility. There any way to redesign it so there's a crown pillar in place and focus more on like a deeper section of the C in the C-zone in allowing you to go further to the west?

Well, we don't really need to go further to the west. I mean, the C-zone is well defined. The simulation model is well defined as well, how the cave will behave. Don't forget that you have the other, like the current cave above, which will contribute, of course, in the whole design and, technically speaking, how the cave and the C-zone will behave. There is an approach, of course, as a mitigation, you would reinforce the tow of your actual tailing that is all part of the technical approach to how you manage like going deeper. I believe in that aspect, we're pretty solid. We understand very well how the cave would behave, how we would -- not just from simulation, but remember that this team has a tremendous experience and years of operating. I believe, honestly, as we speak today, as we see today, with the mitigation on the tailing side in preparation for the C-zone in supporting and reinforcing the tow part of the tailing. We're in pretty good shape technically. Then comes the need of how you address the tailing of the C-zone and so forth to the capital spending, is there any optimization. But when it comes to control of cave, this is not where we see technically the issue.

And you're still thinking you need about a year to get Rainy to where you want it? Or are you feeling more encouraged with having more kind of weeks under your belt?

No, I wouldn't say -- surely not a year for the milling. I mean, like I said, by Q4, I will be pretty, pretty good in understanding what would be the final touch. And I think it goes really around completing and operating the backend like full automations and training, a lot of training on our personnel as well. I mean, this is not a surprise. We have a bit of an experienced team. I mean, we have a lot of operators that join us. We're focusing on creating a local workforce. So we got to be strong in training and developing our people, and making sure we transfer knowledge. This is key people. You know me. I'm very strong on the people side of the business. So we need to maybe do a little bit of better job on the training side and transferring knowledge, and training our personnel. That's one thing. But when it comes to understanding the technical and the execution, no, I don't see a year of completing. But they will need maybe a need to reorder some different liners. But Q4 will definitely set the bar to be Q4 strong, surely much stronger than Q3. And as you advance, then you would meet your new spec. And hopefully, it won't take, like you're saying, a year. And we're going to see that within couple quarters, hopefully.

Your next question comes from the line of Jacques Wortman from Eight Capital.

I've got three different, separate questions. The first is the strip ratio in Q3 at Rainy River was 2.36. And that increased in September to 3.78. And we do have a higher strip in 2019. I'm just wondering where you think the strip ratio might be in Q4. The next question -- just go through them quickly -- Rainy River CapEx, the guidance previously set, I think, in July was $245 million for sustaining plus project CapEx. Year-to-date, you're at about $139 million. So I just want to get a sense of what the planned CapEx is for Q4 at Rainy River. And is any of that CapEx that hasn't been spent going to be deferred into 2019 or later? What is the new sort of CapEx, roughly speaking, guidance for 2019? And then, last question is with respect to New Afton supergene ore. You're expecting supergene to come into the mill feed starting next year to 2022, and peaking at 40% in 2020. You've got a gravity recovery circuit, pressure jigs, magnetic separator. You're looking at commissioning. I guess the question is, what's the potential impact to gold and copper recoveries with the increase in supergene ore? And what's the CapEx of all this new equipment? And I guess, what's the CapEx for 2019 as well?

Let's address the first on the strip ratio, Q4. As I mentioned, in order to support -- the most important thing here is to support cash flow, support production costs. So mining the ore at the minimum level to support the segregation strategy is good. As because the mill has not delivered on the overall year of the total tonnes of ore required, because, as you know, were delayed. So not to look at the mining to date has an issue of the strip ratio [that] have been at the average 3.7. We expect more in September. I'm not concerned about the preparations of the next phase, but we will need to start. So I think September is maybe more representative of what we would like to reproduce in Q4. And the average strip of this asset is about 3.7. You obviously cannot be at 2 all the time. In September, we've seen an increase. And as we slow down on the activities on the tailings and the need of using, we'll have a better use of equipment in the mine as we move forward in the short term and slow down the activities on the drilling. We need to do a minimum of 2.5 to not delay on the strip ratio. If we could do 3 and catch up a bit, and even be a little bit ahead on the preparation of the next phase, as long as you deliver the level of ore that support the strategy, I will be happy. And that would support our strategy. In terms of CapEx, I will turn it back to Paula. But I would say yes, of course. But beyond those numbers of we're not spending the capital, Paula would explain where and what potentially could be transferred 2019. But also, more than ever, we need to be extremely disciplined on how we allocate capital. There is a human factor, making sure we have the proper infrastructure in place. There is the real true sustaining [rate] is absolutely required to operate an asset on a sustaining basis. And there is also the value creation. In the value creation, we need to secure that the dollar spend creates a return to shareholders. So I will turn back to Paula to talk a bit more on the variation here.

Sure. So you are correct. In July, we talked about Rainy River CapEx on the sustaining side being roughly [$210 million] and the remainder on the growth side. So let's talk about sustaining first. The two primary elements of that are really the cap stripping and what we call the infrastructure spending. So that would be everything relating to tailings and sediment ponds, that type of activity. That is approximately 60%, 65% of our spend. On the tailings side, we still have until mid-November to really work on the dam. At that point generally, under normal weather conditions, that's when we have to stop. So we're not quite through that process yet. But if I have to characterize, we're definitely going to trend below the $210 million guidance. I would say deferrals in that amount primarily on TMA -- and I'm taking a bit of a [flier] on when we'll seek activity -- it's probably about $10 million to $15 million that will be a deferral. There's also, in the year-to-date and where we'll end up for the year, there's a bit of re-classification of CapEx to OpEx. And that primarily relates to mobile equipment maintenance. And basically, the work that was done didn't make the asset componentization threshold for capitalization. I'd characterize that as between $15 million and $20 million, and the rest is just a slower drawdown on working capital about $5 million or $10 million. So you're looking, overall, a range of probably $30 million to $40 million in less capital spend on sustaining side for 2018.

And of that, how much is going to deferred? Did you say you'd only go $10 million to $15 million?

$10 million to $15 million is our current guess. It's the best estimate we have. On the growth side, I would suspect that we'll probably hit that guidance number. That's a combination of the two elements in the growth are the underground and basically the payment of capitalized working capital that we had for project development. So that would've been the working capital prior to commercialization that was capitalized, and we're now paying that off. So I don't expect that growth number to be that far off. Now you asked for a 2019 estimate. We are working on that right now; we haven't provided that level of granularity in guidance. But that'll be out in the normal timing in terms of the 2019 guidance. But we don't have that right now. And I'll preempt -- I know I'll turn it back to Renaud on the supergene. You don't want me answering that question. But on the capital side, there really wouldn't be a lot of extra capital to deal with the supergene. It's very minimal, and it would've been included in all of the sustaining this year. We're pretty much prepared for it. So that's not going to have an impact on the capital side. So Renaud?

Yes. And on the supergene, to make it like a very short story that's basic, that everyone would understand, with the completion of the mining in the east part of the cave in the current cave, let's call it maybe an average of 10% of the ore is classified as supergene, right? So that means what? That means you need to adjust a little bit your metallurgy to make sure that you're not lowering your overall recovery as a result of the native copper part of the ore. So this is a very low capital in order to maintain to me the [recalibraters]. As the supergene will come will come as well potentially some zone with maybe better grade. And whatever would be the outcome, it has to be seen here more as a preventive, more than a super big capital project. And just want to make sure we've covered all of your separate points.

Yes, that was everything.

Your next question comes from the line of Steven Butler from GMP Securities.

A question, Renaud, coming back to Rainy River again. You mentioned the pebble crusher not really performing or in operation whatsoever. So what needs to be done to the SAG mill to enact the performance of the pebble crusher? Do you have to wait for the relining, et cetera, for the pebble crusher to start up?

We're not really need at this stage the pebble crusher. So to answer your question, I would say yes first. So the most important thing here is, let's go back here. Let's start with your crusher. Because this machine should be operating more towards the 5-, 6 inches-like setting. So you're in the 60% to 80% performance curve of the machine. And this is what it is designed for. If you would try to feed that size of ore through the current configuration, yes, you would probably have some limitations. So with the redesigning of the lining will come the opportunity to reopen the crusher. And most likely, you're going to start producing more pebble. And then, [you] have the machine that you're currently not using. So I would say there is no certainty at this stage that it would be required. But should we start producing more pebble, we have the machine in place. That's the way I look at it. There is a lot of opportunity as well to improve on the ball milling size, probably more towards the charge, the critical speed, the size of ball. As we improve on the SAG mill will come the need as well to adjust. But you're look at October to date -- yes, we do some good throughput, we're capable. But this makes sense if we also maintain the proper grind. And we know that this asset -- to meet the recovery requirement, you need to be grinding at an average 80% of maximum 75 microns. Not 90, not 100; 75. It's all optimization. It's not about capacity; it's about fine tuning.

And then, lastly there, on Rainy, you dilution percentage perhaps for September, or for the Q3 versus the planned, maybe you can give us a sense of actual versus planned dilution?

Well, the planned dilution -- I mean, if you really talk about planned dilution, you have to refer back to the reserve model. And the reserve model approach is basically taking your resource model and applying a bit of an average of like external dilution across, right? So now we're not there. But on the other hand, we're getting more tonnes, and we're improving. So we're more towards like the 12%, 15%, rather than 5%. There is a kind of a 10% here optimization we could improve as we advance. And we really control our practices. But this is what I can say at this stage. This is what I see.

Your next question comes from the line of Josh Wolfson from Desjardins.

I just had a question on unit cost expectations maybe heading into the fourth quarter, and if there's any more information you can provide, at least how the operation performed in September, when it would've been operating closer to steady state; and, I guess, in light of the capital changes, what sort of unit costs we'd expect to see as a result?

I can give you some general guidance on that, Josh. From an OpEx standpoint, of course, at Rainy, we expect to be above the high end of the guidance at Rainy. And that's primarily going to be volume driven, more than anything on the OpEx side. At New Afton, we expect to be well below the guidance, just given the performance year-to-date. And at CSP, or Cerro San Pedro, on a per-unit basis, the OpEx will be higher just because of that $12 million write-down of the inventory on the pad. But on a consolidated basis, those are all -- they move in different directions. So we would expect to be within the consolidated guidance range of 630 to 670 on consolidated basis for all ops. On AISC, again, we have that give-and-take. But Rainy would be -- we would expect it to be in the middle of the guidance range. Again, because any increase it has on a per-unit cost basis is actually going to be offset -- the volume is going to offset the cost on a per-unit basis. Or the CapEx, pardon me, is going to offset the volume. New Afton, on an AISC basis, they're trending to be at the bottom to slightly below their range, but I would say at the bottom of their range on an AISC basis. That's because of their gold sales volumes being a little bit up and the by-product revenue being quite strong in the year. Now, Cerro San Pedro, again due to its situation, is going to be beyond its guidance range for the year. But it's got a minimum volume. So on a consolidated basis, its impact is quite muted. So consolidated is probably to the low end of our guidance range for the year on the AISC side. So we've got moving part --

Sorry. And I guess, maybe specifically for Rainy River on the per-tonne unit costs, any sort of information you can provide on just mining costs, milling, admin, something along those lines there?

What I can say about it, of course, volume is the main driver on the milling. And, well, two things on the milling side, obviously, is you need to control the maintenance costs attached to the milling, which has been really big. Because of the tailing as well situation in the short term, where we are not quite operating properly on the tailing side and the (inaudible) destructions they use of more reagent there, the time we complete the tailing. So there's a short term where, if you compare like the tech report that refers more towards, let's call it, like a $10-a-tonne mill, and you're looking at our performance disclosed in the MDMAs, we're probably more towards like the $13. And that's a result of way-too-high maintenance costs in the short term, as I describe; and some operational practices that with time, as we complete the tailings, would improve as well. So Q4, definitely no shutdown, so probably less than the milling side on the maintenance. We surely hope for lower maintenance cost. But you would remain above the tech report in the short term until we improve. On the mining side, we're already doing quite good. And we continue to improve volume, would improve our dollar-a-tonne as we improve the performances. And the G&A, quite frankly -- this is not the main issue. I think (inaudible) as well as a result of volume on a dollar-a-tonne. So we are above the tech report, but we're surely trending in the right directions to get back within the spec. So long story short Q4, we see potential lower milling cost as a result of less maintenance. Mining will depend on the volume. But the better volume could be at par of Q3 or better. And the G&A should remain or improve as we mill more tonnes.

Maybe just to be very specific, are there any specific numbers that you can provide on how those were operating? Just because, even just looking at the mining costs, which performed -- the mining operation performed very well this quarter -- looks like we're expecting roughly a $1 decrease fully over the next 2 years according to tech report. I'm trying to just get a bit better understanding, if possible.

Well, I can tell you that the mining operations, like the big, big thing comes from the efficiencies. So you have a mobile equipment availability that costs money on the mainland side. When you fix that is big part of that drop. The second one is the operation and the need to improve the use of equipment. So we're currently lower than the specification. So every hour you use a machine is 80% of your variable cost, right? And if you're using the machine at a 20% use efficiency lower than the tech report, that's also the main contributor. The third one is the analysis of our cost drivers. Our cost drivers are anything that is a result of a consumption times the price. We're pretty good, actually. Actually, on the milling side and mining side, with the exception of the tire consumption, where we need to improve the overall life of tire as a result of improving roads and pit conditions. But in the overall, actually, on most of the cost drivers, we're actually beating the tech report that was filed. The issue comes more on procurement practices. And we are addressing, as we speak, the situation, where we're going to be partnering a little more, create volumes, create strategic approach, and firming up position on strategic procurement contracts. And this is -- I can tell you, a lot of our procurement practices are not enough securing those main consumables. So I'm very pleased. I mean, in my career, I have to deal mostly with consumption being above spend. We are actually doing very well on this. So as we improve, our fixed cost approach will be volume, will be driven by better volume. And on a variable cost is (inaudible) practices. I don't see anything wrong with the tech report dollar-a-tonne. But it reflects, of course, the proper efficiencies in use of our equipment. And it reflects, of course, the proper procurement of how we buy or purchase [this]. And it's all achievable.

This concludes the question-and-answer portion of the call. I will now turn the call over to the presenters for their closing remarks.

Thanks, everyone. If there's any further information you need, feel free to contact me. Thanks, and have a nice day.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.