New Gold Inc (NGD) 2018 Q4 法說會逐字稿

Good morning. My name is Jessa and I will be your conference operator today. At this time, I would like to welcome everyone to the New Gold Fourth Quarter 2018 Results and 2019 Outlook Conference Call. (Operator Instructions)

Ms. Anne Day, Vice President of Investor Relations, you may begin your conference.

Thank you, everyone, and good morning. We appreciate you joining us today for New Gold's 2018 Fourth Quarter and Year End Earnings Results and 2019 Guidance Conference Call and Webcast. On the line today, we have Renaud Adams, President and CEO; and Rob Chausse, 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 that is found in the presentation.

Today's commentary includes forward-looking statements relating to New Gold. In this respect, we refer you to a 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 2 provides additional information and should be reviewed. We also refer you to the section entitled Risk Factors in 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 the presentation, there are a number of endnotes 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, and thank you all for joining our conference call and webcast today. The fourth quarter was a turning point for the company as our operation at Rainy River continued to improve and as we repositioned this operation for efficient and sustainable mining. The New Afton Mine delivered another quarter of solid performance. As a result, New Gold reported a very encouraging fourth quarter and we will build on that success in 2019. We began 2019 with a renewed vision for the future of this company that is supported by a focus on driving profitable mining at all of our operation, and we remain committed to create sustainable value for our shareholders. During 2019, we will complete all remaining construction and mill upgrades at Rainy River, advance the development of the C-zone at New Afton, and renew our focus of organic growth by launching exploration program at both operations. Please note that this session is not intended to be a full technical session, but we are committed to hosting full technical session at both of our operations before the end of Q2.

Now I will turn the call over to Rob Chausse, CFO, for a quick review of our Q4 and year-end operational and financial results.

Thanks, Renaud, and good morning. Before I get started, I just like to note that throughout this presentation I'll be speaking to our classified operations, specifically New Afton and Rainy River.

Slide 5, the company produced 97,000 gold ounces and 20.8 million pounds of copper in the fourth quarter. Gold production primarily consisted of 77,000 ounces from Rainy River and approximately 19,000 ounces from New Afton. Higher gold production as compared to the prior year quarter is primarily due to having a full quarter of operations at Rainy River. Operating expense per ounce at Rainy was 55% lower than the prior year quarter due to improved operational performance. Consolidated all-in sustaining costs for the quarter were $688 per ounce, 4% lower than the prior year, again due to improved operating results at our sites.

Moving to Slide 6. For the full year, production was 315,000 gold ounces with Rainy River producing 227,000 gold ounces, and New Afton contributed 77,000 gold ounces. New Afton has also produced 85 million pounds of copper in '18. As noted for the quarter, higher gold production for 2018 as compared to the prior year is primarily due to a full year of operations at Rainy River. Operating expense per ounce was 42% lower than the prior year, and again, result is due to a full year of operations and improved performance during '18. Operating expense per ounce for the full year at New Afton was 7% lower than the prior year. Improvement was primarily related to higher recoveries. Full year operating expense and all-in sustaining costs for New Gold's continuing operations was $648 per ounce and $961 per ounce, respectively. Both were higher than the prior year periods due to start-up challenges experienced at Rainy River during 2018.

Turning to our financial results on Slide 7. Fourth quarter revenue from continuing operations was $157 million driven by sales of approximately 84,000 gold ounces at an average price of $1,230 per ounce and sales of 19.7 million pounds of copper at $2.96 per pound. Q4 revenue was 24 -- 27% higher than the prior year quarter due to production increases related to the ramp up of Rainy River, partially offset by lower copper production and lower realized gold prices. Full year revenue was $604 million, higher than 2017 due to increased production from Rainy River. Operating cash flow before working capital adjustments was approximately $75 million or $0.13 per share for the quarter and $265 million or $0.47 per share for the full year, both higher than the prior year quarter and full year due to the full operations at Rainy River -- full year operations at Rainy River.

The company recorded a net loss from continuing operations of approximately $728 million or $1.26 per share during Q4 compared to a net loss of $0.34 per share in Q4 '17. Full year loss was $2.12 per share versus a loss of $0.19 in 2017. Included in the Q4 loss is an impairment charge of $671 million. This amount is comprised of a charge at Rainy River of $453 million and at Blackwater of $218 million. Rainy River's valuation was impacted by revised operating and economic parameters, specifically increased CapEx and the application of the lower in-situ value. The Blackwater charge resulted from applying an in-situ metric valuation approach for reserves and resources. This approach incorporated values based on recent comparable market transactions. Detailed disclosures of the company's impairment losses are included in the consolidated financial statements and related notes.

After adjusting for these onetime charges -- for onetime charges, particularly the impairment, net earnings were $22.7 million or $0.04 per share compared to a net loss of $21.5 million or $0.04 a share in the fourth quarter of 2017. Q4 adjusted earnings also includes a $21.4 million noncash tax recovery related to changes to our deferred tax balances. When compared to the prior year, the company's adjusted net earnings were primarily impacted by an increase in operating margin, offset by higher depreciation. Again, our MD&A has additional details on any of the non-GAAP measures that I've discussed.

Slide 8 provides a breakdown of our 2008 (sic) [2018] capital expenditures. Our total sustaining capital for the quarter and year respectively was $31.7 million and $179 million. Spend was primarily related to tailings work and capitalized mining costs. Growth capital was focused on project development.

Moving to Slide 9 to discuss liquidity. At December 31, 2018, we had approximately $104 million in cash and no outstanding balance on our facility. The outstanding balance was paid off with proceeds from the Mesquite sale. And with the completion of the Rainy River security requirements, our liquidity is approximately $393 million.

Lastly, in Q4 the company implemented a hedging strategy where we entered into gold and copper price option contracts to reduce exposure to fluctuations in gold and copper prices during the completion of the remaining mine construction at Rainy River and the relaunch of the development of the New Afton C-zone.

With that, I'll pass the call back to Renaud.

Thank you, Rob. As per my opening comments, I'm not -- this is not intended to be a full technical session. I believe the company has released this morning pretty details and notes on the press release on outlook and guidance for 2019. So I would rather limit my comments on the keynote to help you better further understand our plans and strategy as we move forward in 2019.

So I'm on Slide #11. And just as a keynote, although 2018 has been a year with practically no drilling at our site, we are very pleased that we have practically replaced our reserve at New Afton and the Rainy River from our last release. At the Rainy River, mostly as a result of updating -- slightly update on our open pit design, but also because we moved to the gold equivalent basis rather than just gold basis. And at New Afton, it's a result of continued optimization of the block cave under B and C-zone, the block cave, as we worked very hard in optimizing our plan for the development of the C-zone.

On Slide #12, one very keynote here. I'd like to point out the direct processing reserve of open pit at Rainy River of nearly 66 million tonnes at 1.2 grams a tonne, we'll speak later on of the medium and high grade, but 66 million tonne at 1.2 grams a tonne. This is enough basically to provide -- to supply the mill with 24,000 tonnes a day for nearly 8 years. This is a key aspect as we continue and we will talk more later about what strategically this means for us.

In the underground, while the grade is relatively low at 3.5 grams a tonne, need to understand that this is comprised of a very low-grade zone at nearly cutoff grade of 2.2 grams a tonne, but also better zone at a continuity of the higher-grade zone. So again, we'll speak more about it. So in seeking for a key element that really differentiates Rainy River from the other asset, I think it's the ability to truly extract and melt the average grade of the 1.2 grams a tonne of the medium and high grade.

So I would leave you with a question remark. What would be -- today be for from the logic operation if they would be operating at 1.2 grams a tonne for the next years to come?

On Slide #13, just a quick note on the New Afton to help understanding the lower grade of 2019. As you can see, the reserve are separated between the A/B zone and the C-zone. You could appreciate that the C-zone shows a pretty bright future with nearly 0.8 grams a tonne of gold and about 0.8% of copper. But meanwhile, we'll have to continue to deplete the B-zone with a focus in 2019 on the B east cave that has approximately 13 million tonnes, but about a 0.45 grams a tonne and a 0.8% copper. This is the main supply for 2019 and explains the lower grade after 2019.

I'm on Slide #15. We'll speak more about the gold build of each asset, but as a general comment on Slide 15, the really key message here is our -- is that 2019 is really and truly a pivotal year for the company as we reposition for the long-term success.

We do appreciate that we are presenting to our shareholders a fairly aggressive plan, but I would also call a little bit of an expensive plan. But I think on a back of the last months with the success at both assets, we're very encouraged by the future of this company. And while it is an aggressive plan, it is also considered necessary as we really reposition those assets for success, and we reposition New Gold for long-term success and delivering also shareholder value. One of the key highlight we could summarize in a very -- very limited point. At Rainy River, it is really a result of a lower grade and a higher strip ratio as we transition to the Phase 2 that drives a higher operating cost. We'll speak more about the sustaining capital, but very aggressive sustaining capital that drives the higher all-in sustaining cost. The strategy here is really to put behind all those construction item and really return.

As we could appreciate in Q4 2018, they are very promising numbers when you combine grade, lower cost, and less sustaining capital that drive profitable value. At New Afton, the key aspect is slightly lower grade in gold than 2018 will drive a higher operating cost. As we launch the C-zone comes the need to also launch the B3 zone. We access the C-zone, but first we have to go through the B3 zone. The B3 being the sustaining item and the C-zone is a nonsustaining item. As a result, our all-in sustaining cost at New Afton would also be higher than 2018 and the combination of the growth capital of $40 million, $45 million as we launch the C-zone as well. On a global consolidated basis, the increased gold production at Rainy River will be somewhat offset by the lower gold production at New Afton for about the same gold production of our operating assets in 2018. But overall all-in sustaining costs, as we discussed, is a result of more capital deployed at both assets.

On Slide #16, we'll speak more about each of those points, but basically the 16 summarize the main 2019 key objective for Rainy River. All in all our 2000 (sic) [2019] plan for Rainy River will address every single aspect from the completion of all the construction item as part of our capital program, optimization of our pit and the mill operation, we definitely going to relaunch the drilling program with a view to extend the mining life of mine rather than just reclaiming stockpile and we're going to relook at our life of mine to optimize and deliver we believe has a room to optimize the over -- the overall outlook of this asset. On Slide #17 -- sorry. I've already spoken of the main key driver for the production operating cost and sustaining capital of Rainy River for 2019, but a quick note on our operating -- open pit operation for 2019. The total tonnes mined in pit to increase by nearly 20% compared to 2018 as we will continue to improve the productivities and we continue to increase the mine fleet.

The total ore mine will slightly decrease over 2018 as we will be focusing more on moving more waste. As we transition to the Phase 2, it is very important that we prepare and expose the ore for future success starting in 2019 -- 2020. As a result, an increased strip ratio is planned for 2019 as we transition to the Phase 2 and which is the main focus at this stage. One key point though is the mine has been, unfortunately, I should say, but as a result of the change of the design and the tailings comes the need for much more -- providing more rock for the nonasset generator. And as a result, the mine has been the main provider of that rock, which has been a significant distraction for the mine. Even though we are mining outside the pit; to provide that rock for the tailing, it has been a distraction while we try to optimize the pit. Unfortunately, this practice will continue in 2019, but will provide more tonnes from outside of the pit with nearly 5 million tonnes that would be mined outside of the pit.

We'll speak more about the plan as we move forward in '19, but it is definitely a priority for us to source for nonasset generating rock outside of the pit as we move forward so we could operate and optimize the pit operation as a mine operation and not a quarry to provide rock for the tailings. On Slide 18, this is really the key slide for Rainy River that drives the most value. We've talked a lot about the achievement of the Q4. We still have a lot of work to do. I would say we'll speak first on the availability. This has been from far the main issue at the Rainy River with significant downtime at our main equipment all over the year and Q4 was no exceptions with significant downtime around the SAG mill and the ball mill. We'll disclose and talk plenty about it in our disclosure of Q4. We have now replaced the trunnion of the ball mill. This was completed last week. And we continue to address some other issues and continue to optimize as we advance with the objective to reach 90% plus availability in the second half of the year.

And again, this is the most important aspect because as we disclosed in Q4, we really don't believe there is an issue with the capacity per se of the mill. We've achieved nearly 26,000 tonnes per day of run rate in the Q4 and this was done basically with using only about 70% of the power available at the SAG and the ball mill. Furthermore, we have the pebble crusher that was not even used. So all in all, we are already seeing a pretty interesting and high rate -- run rate at the mill. We're not using all the power available. It is really the ability for us to reach a steady state and a high availability, which will really drive our average throughput of 24,000 tonnes a day plan. And again, we don't see any issues with the capacity. It's our ability to stabilize the operation that will drive the average throughput. The biggest achievement to date has been definitely on the recovery side. We thought that providing this -- this bar chart at the bottom of the Slide 18 will help in the understanding.

Both aspects are very important. We need to continue to improve the losses in solid so we reduce, which is mainly a result of our ability to grind finer and maintain -- and maintain the carbon -- the load on carbon within the circuit. On the solution side, it has been the main -- the main aspect of improvement over the last few months as you could appreciate in the dark brown. We have significantly reduced the losses in solutions. We're not done yet. We've seen already a 91% recovery achieved in January and quite frankly, we still see some improvement possible and continue to reduce the solution -- losses in solution and as we use the more power available to us towards grinding finer rather than more throughput, there is also another opportunity to continue to reduce in the solids. So very promising. A lot achieved to date, but much more to come.

On Slide 19, before we move to the reconciliation, we thought we would -- we speak of that in the Q3 disclosure and just to put a little more color and understanding around how we mine the pit. I think it's fair to say that in the first half of the year there was a bit of a misunderstanding of the ability of the pit to deliver at a high grade. There is a difference between not capable to reproduce the high grade from understanding that it's impossible to selectively mine strictly the high grade or strictly the medium grade. We'll show it about on the reconciliation side, but this slide provides a better understanding. In 2018 there was enough high grade in term of tonne to provide -- to supply the mill. But as we could see on this slide, it is impossible to selectively separate only the high grade from the medium ore and low grade. This is all reserve. It all has to be mined in mill at some point in time so we're not talking about further dilution.

We're just talking about that typically when you try to put a dig-shape around the high grade, there will be always a percentage of medium and low grade that will be part of that design of dig-shape and eventually blast. So if we move on to the Slide #20, this provide really the detail of the reconciliation of the full year. So how you should be looking at those numbers. The first row, the first series of the table that compare the grade control block model with the resource block model. So basically, we could appreciate from the high grade, medium, and low grade an overall 13.6 million tonnes at 1.02 grams a tonne compared to the block model of 12.2 grams -- 12.2 million tonnes of 1.05 grams a tonne. So all-in-all if reconciled extremely well from the blast hole grade control to compare with the block model, there is pretty much a bang-on reconciliation. Then comes the -- putting the dig-shape around those blocks before blasting.

And again, as we could appreciate in the high grade, we actually beat the model in term of quality and grade and total ounces. The overall dig-shape in the reality compared to the block model also shows some gain in terms of ounces and tonnes. So all in all, the mill processed 6.5 million tonnes of 1.25 grams of tonne over 2018 and this compare with the depletion of block from the block model of 7 million tonnes of 1.25 grams a tonne. So again, we do not see any issues or fundamental issues with the resource model or the ability to mine this deposit at the reserve grade. There is still further upside as we continue. We believe we continue -- we can continue to improve our dig-shape reduce dilution as we move forward and this is mostly our ability to build on information prior to planning and execution of the pit, mostly by increasing our drill inventory using RC drillings or just improving our current operations with the drill -- the blast drill.

So more to come, but I thought it would be important to provide. As I made the comment on the reserve of the 66 million tonnes available at 1.2 grams a tonne comes the need or to secure or improve our belief that we could actually deliver this grade in the future. I'm on Slide 21. So all-in-all what we'll be doing here is provide the summary of the key strategic item to be focused on as we continue and work hard in 2019 to improve our life of mine and we optimize. The starting point is really to take the 66 million tonne at 1.2 grams per tonne and truly optimize the pit design and the pit operations to focus first on delivering a life of mine over the next years that would optimize the outcome of this 1.2 grams a tonne at a reasonable strip ratio. With that will come the need to optimize the sustaining capital. So looking at this 66 million tonne, what is really required and only required to mine, process, and dispose the tailings on those 66 million tonne.

So with the idea to provide a basic foundation of profitability coming from those ounces, then will come the review of the underground mining where we'll be looking at optimizing the extractions of the possible stokes from underground that would fit within this plan and only if we could enhance -- further enhance the profitability of the plant. All-in-all we believe that using the best practice in the -- the best practice of the industry, relooking at the most important component of our sustaining capital namely the constructions of the dam. Everyone knows that back in time that these change, significant increase in the rock needs and cost to build the stages of the tailings, and we believe we could optimize those as we move forward. But all-in-all we're very encouraged and excited with this opportunity to relook at our life of mine and deliver an updated plan before the end of the year and preparation for our 2020 exercise with the objective to start delivering free cash flow in 2020.

I'm on Slide 22, not much more to say, I think this slide is pretty self-explanatory. Again, very important to understand that about 75% -- 72%, 3/4 of our total capital in 2019 is really to complete what we call the construction capital. What do we call construction is at this stage of this operation, all those items should have been already done. When you operate an asset and you seek profitability and you seek efficiency, those items should have been already done and behind us and we should be looking at the second part on the sustaining capital. And as you could again look at and compare with the Q4, what would be this asset today at a higher-grade lower sustaining capital and efficient operation. This is what we'll be driving in the future. I'm on Slide #23, just quickly on the C-zone as we move forward. C-Zone -- C-Zone and the New Afton story. Our 2019 key objective, we'll kind of continue to operate this asset in a very profitable way.

The big item of course in 2019 is the decision to launch the C-zone plan and develop and protect our future. I'd like to remind everyone that the New Afton generated over 800 million tonnes of -- $800 million of free cash flow over the last 6 years. So it is really our intention to continue and protect this business and improve this business as we move forward. We believe that this asset has much more to offer beyond the C-zone, but we need to start somewhere and we put the plan together that we believe makes the most sense for our shareholders where we'll be executing the development of the C-zone where we believe we'll be doing it in a way that the cash flow generating by the asset will be sufficient to cover it for the need of capital. We'll speak more about each of those planned item on the 2019 key objective in the next slide. On Slide #24, this speaks of the guidance of the 2019. Again, in 2019, we'll continue to deliver strong operational and financial results.

As discussed, our grade will be -- gold grade will be slightly lower in 2018 -- 2019 compared to 2018. But all in all our unit cost will remain in the neighborhood of 2018 and will continue to deliver strong result. Our sustaining capital will slightly increase compared to 2018 as a result of launching the B3 development, which is part of our sustaining; but also and as discussed, the decision to launch this development of the C-zone which is captures of the nonsustaining capital. On Slide #25, one of the key item of New Afton has been the tremendous commitment of the team to always challenge themselves and improve the assets and find a way to reduce the cost and improve profitability. The ore sorting strategy is one of them. As an example, I had a chance to visit and look at it myself, very impressed. Of course as any other mine, the team is focused to optimize the underground operation by splitting the course, the high grade from the lower grade, as the mine has mined and excess capacity of the mill.

But also this ore sorting, which is a device installed on the belt of the ore coming from underground, is also and will continue to contribute to an improved grade. So we're just showing on this Slide 25 an approximate improvement of the copper grade as a result of using the ore sorting. It's not up to speed, it's not perfect yet. We'll continue to optimize in 2019 and as we move forward. But this is one of the examples of what the team is committed to create as a continuous improvement strategy. On Slide 26, just a breakdown of our capital. Not much more to say more than an increase -- an increase slightly on sustaining and nonsustaining, but I think this is -- this is pretty clear. I would rather spend more time on the Slide #27 to discuss the C-zone development. This -- the launching of the C-zone, if you -- everyone recall, in 2015 the company released a 43-101 that was including the development of the C-zone.

Since then, nothing has been really done in term of development itself or pushing the decline on the ground, but a lot of this time has been used to optimize our plan compared to the 2015 approach. So we're not up -- we're not releasing today a 43-101. We're making a decision on launching the C-zone and starting to execute in 2019 all the on the ground aspect of the decline that would eventually bring us down to the C-zone. We'll continue to obviously to work in optimizing our plan on surface derisking. But all in all, the most important aspect of it is we believe that the team has found a way to execute the C-zone and been capable to pay for it using the cash flow generating by the mine before we re-entered a very strong free cash flow once we're done and start operating and extracting from the C-zone.

You remember from the reserve slide, the C-zone has a better gold grade, a pretty interesting and higher copper grade, and will provide a lot of free cash flow for this company. But meanwhile in understanding the financial situation of New Gold, it was very important for us to launch this development of the C-zone with a strong belief that the asset is capable to pay for. So all in all using a $450 million assumption of the nonsustaining for the C-zone and a total sustaining capital approximately of $185 million for the total life of mine -- remaining life of mine, we believe that at a metal price of $1,275 of gold and $2.50 a copper pound at an exchange ratio of CAD 1.30 that the asset will be capable to generate over the period of '19-'24 enough cash flow to convert the cost of fully implementing the sustaining and nonsustaining capital. So therefore at a current spot price not only we'd be capable to generate enough cash flow, but we would also be in position to generate some free cash flow. So all -- how this cash flow will generate? We'll speak more about the optimization in the release of an updated life of mine.

But using the detailed 2019 plan and the best assumption and approach of how we would deplete, we could say that a growth capital of '19 is estimated for the $40 million to $45 million and which consists basically of underground activities, exploration decline, purchase of equipment and infrastructure. The growth capital in 2020 will be pretty much consistent with 2019 as during those years expected to deliver strong free cash flow. And the growth capital is expecting to then increase significantly for a period of '21, '22. '23 which at some -- at which point we could be cash flow neutral and the operation is then expected to return to positive cash flow as we come -- as we deplete the remaining of the gold capital of $450 million in '24, '25. On the sustaining capital side, we -- our capital requirement for the B3 zone in 2020 will be pretty similar to 2019 with the remaining 1/3 of the capital requirement of the B3 to be spread over '24, '25.

So all in all we've -- the plan has been done. So in '19-'20 we continue to generate free cash flow out of the asset, potentially neutral cash flow for a period of 2, 3 years and then we return to the free cash flow as we move forward. On Slide 28, this will be -- complete the operating section before we talk about. So it is obviously our intention to release or to update our technical report in 2019. So all in all we'll take the -- the new approach is really a fully integrated compared to the 2015, which was somewhat a decoupling of the C-zone from the B and the (inaudible). So the approach here is to really optimize the whole integration of the C-zone so we minimize our cost and capital as we execute. We'll have an updated geotechnical study update that would address this and corrective actions. We feel very strong about all progress that's been done. The improvement of the cave and improvement of the control are subsiding.

The tailings update, the in-pit disposal using -- taking an amendment tailing approach will be also part of the plan and we would update as well on stabilization of current and old tailings. Of course 2019 is a big focus on the permitting and time line and we'll continue on the capital and OpEx optimization with the view to release a new updated mine plan somewhere towards the end of 2019 in preparation for the 2020. On that, for the 2019 exploration the next couple of the slides, I would introduce you and ask Michele Della Libera to go through the next couple of slides and speak of our plans of exploration for 2019. Michele?

Thank you, Renaud, and good morning to everybody. The plan for 2019 for exploration is to resume in aggressive manner the activity. We had ISOs during the last couple of year on exploration, but we progressed on really conceptual study and definition of target. And I'm pleased to restart drilling this year, in particular at Rainy River, where we have already defined a target close to the mine and the mill side. That is the Intrepid North, which could help to unlock resource for the life of mine at Rainy River. And in particular, we are looking at a similar architecture -- geological architecture north of Intrepid that could be similar to this -- the start lenses that we have at the known mineralization; ODM, HS and 433; that we are already starting to mine. And we have also 38,000 hectares of premolding around the mine. And we are working hard to define new targets -- additional target that will be drill ready at the end of this year in particular to the north where the historical mine file show occurrences of really high grade gold, which may be related with (inaudible) mineralization with high grade up to 98 gram -- 100-gram tonne gold.

Moving to New Afton. After the success of delineation of C-zone, we are planning to drill underneath C-zone and see if the mineralization down plunge of the C-zone ore body is still consistent. And we are optimistic that we can expand the mineralization down deep and down plunge of the known C-zone mineralization. Potential is also as at Rainy River on regional -- on our regional claim holdings and we did a lot of work during the last couple of year to unlock and as the target definition regionally and we are thrilled to start drilling in particular in the Cherry Creek zone that is only 3.5 kilometer to the west of the mine -- New Afton mine where we found really strong geochemical and geophysical signature for both the high grade epithermal gold mineralization and deep seated copper gold porphyry.

That's really highlight of the exploration that we will start this year. And thank you for your attention.

Thank you, Michele. And on that, that completes the technical presentation part of the call. So I would like to turn the call back to the operator for the Q&A portion of this call. Operator?

Thank you. (Operator Instructions) Your first question comes from the line of Dan Rollins from RBC Capital Markets. Please go ahead.

Thanks very much. Renaud, just a couple of quick questions from my end. The Rainy River costs that you've outlined -- costs on Slide 17, are those Canadian or US dollar?

No. They are US dollars and they pretty much reflect the achievement in the Q4. So of course, we will continue to improve and work hard in reducing our costs, but it was important for us to put out the plans that we feel strong that we could deliver and again they somewhat like a reflection of the Q4.

Okay. If I just take a look at putting a 75% exchange rate on that mining cost, seemed to be quite high relative to where your peers are. I understand you're still in the ramp-up phase, you're still moving a lot for coring basically for the tails. But if you can get…

I can tell you that they were quite higher than this at the Q1 and Q2. So we're very positive that we would continue to improve. But again, no false promises and make sure that we could deliver.

Okay. And then again, I guess we'll get some clarity on this later in the year. But not to go back to the previous economic study that was released last year for Rainy River, but based on your commentary about the ability to sort of mine the high grade and the medium grade at Rainy River together. There's a couple of years in that model where the direct open pit feed is north of 1.7 gram a tonne. Is that still a reasonable estimate for the Street to assume?

Well, part of the optimization definitely for us is to relook at this mine plan and find a way to smooth. If you're averaging 1.2 gram out of the medium high grade, the last thing you want is to move from a 1 gram to 1.5 gram, 1.6 gram. I think there is not much we can do for 2019 as we are now transitioning to the Phase 2, but part of the optimization is really to try to smooth towards the next years the extraction processing to a smoother -- a rather smoother grade closer to the average reserve grade rather than up and down every year,

And then maybe one for Rob. Obviously, I know Renaud has made comments about the assets potentially being free cash flow breakeven in 2020. When do you see yourself as a company -- given the corporate overhead, the exploration spend and the interest that you're accruing now. When do you see yourself as a company generating positive free cash flow?

I would suggest probably closer to the end of 2020 and into '21. That's the objective.

Alright. And any thoughts about rolling the protective hedges if we -- further out into 2020 to give yourself a little bit more comfort in case we do see some more volatility in the gold price and to protect the balance sheet?

Yes, sure. We'll continue to assess and as we develop our plan this year and see what capital and what our objectives are, we'll assess and take the -- take prudent steps to protect the downside where necessary.

Your next question comes from the line of Anita Soni from CIBC. Please go ahead.

Currently I'm on speakerphone, sorry. So my question is with regards to the segregation of materials. You mentioned that you're not going to be able to segregate these materials and there was a misconception last year. What do you envision as your mining rate for next year -- sorry, for 2020 and the types of grades that you'll be able to deliver going forward?

We are very positive that again like if you go back -- the mill is really the driver here more than the mine. I mean we've been adjusting the mine more than the other way around to be frank. 24,000 tonnes a day average is what we're comfortable the mill using a 26, 26.5 run rate, 90%, 91% availability will give you. So you go back to the mine, is the mine capable to deliver that 24,000 tonne average segregating -- somewhat segregating the lower grade, yes. So that's the fundamental for the open pit is to be able to deliver 24,000 tonnes average of medium high grade spotting in '20 and continue to segregate the lower grade and waste of course from the total tonnes. We should be and we have to be capable to average the reserve grades at a medium high grade over the next years to come as an average grade to the mill.

The underground is on the excess of it and the underground will have to have the capacity to enhance the profitability and free cash flow over the short period of time where we're going to be integrating the best stoke and I really want to make sure that the underground is part of the mining and doesn't come the main contributor or we turn this asset into an underground mine once the open pit is depleted. That has never been the idea here and we're -- I'm not a strong believer in that plan. So you could yield a 24,000 tonnes averaging the 1.2 grams per tonne. This is the objective from 2020 and on and anything beyond that will be contribution from the underground should the plan make sense.

Okay. Then my second question in terms of the write-downs you took and the reserve statement as it stands. There wasn't really a huge impact to the reserve statement for Rainy River given the write-down, but when you look at the carrying values of what your -- in your financials that you filed, there isn't much that's allocated to the depletable assets the reserves left at Rainy River. So I'm having trouble trying to understand the disconnect between the fact that the reserves were somewhat untouched, but the value of the reserves in the financials has been taken down.

Yes. So I'll speak to the in-situ valuation, which are ounces outside of our current life of mine plan. So we took those down to $75 an ounce and that's what's being carried on the balance sheet from a in-situ value. And then obviously there was the CapEx impact of tailings, cost increases, et cetera, impact on it from reserves that centers in on it.

Yes. And as we discussed on the reserve side, like Rob said, like big impact on the impairment has been the revaluation of the in-situ portion of it which are outside of the reserve. And the second is, as explained, we've been capable to slightly pretty much upset the depletion by moving to the gold equivalent basis. So all in all, we've used the depletion basis for the December 31. As we continue to improve, the plan in 2019, we'll see the potential impact, but I'm very comfortable that using a depletion moving to the gold equivalent and readjusting the value of the in-situ was the right way to do it.

Okay. So then I'm a little -- still a little confused then because the -- are the remaining $75 an ounce included in the PP&E category or is that what would be in the depletable, nondepletable because it seems like (multiple speakers).

Now, we're talking about the exclusive the $75 an ounce applied to the MI and inferred that are exclusive of the reserve.

Okay. Well, I think we'll probably have to take that discussion offline. But I'll leave my questions at that.

Absolutely, happy to follow up with you offline because we could probably spend a...

A long time, yes. Thank you. I'll take -- let someone else on.

Happy to do that. Okay. Thanks.

Your next question comes from the line of Nick Jarmoszuk from Stifel. Please go ahead.

Question for you on the 2019 Rainy River sustaining CapEx. It's higher than what was in the 43-101 last year, looks like some of it was being pushed from 2018 into 2019. Was there any pull from 2020 into this year as well or were there some new incremental sustaining CapEx items?

A little bit to a certain degree. When you really look at the face of the construction, I think it's fair to say that the experience of 2018 have shown us that the tailing construction is more expensive than the -- what the technical report has addressed. I think we've learned a lot from the experience of 2018 we feel. Then when you look at all the items, there is still some sort of a growth capital. The Wick Drain, for instance, the stabilization of the -- we've learned as well a lot from '18. We have started to execute that aspect. So all in all, those 2 items. When it come to the geotechnical aspect, we've learned from 2018, we felt that we needed to adjust the capital aspect. That's why we want to put this behind us, move to the sustaining capital. But you're absolutely right, we see some optimization as well. Maybe the tech report wasn't addressing enough capital at the mill to continue to properly commission and to improve. As a result, can we beat the technical report as we move forward in term of mill performance, we'll see. But those are the items that has been adjusted if you -- if you will in 2019. As we move forward and you return to the sustaining, should you be capable to optimize the further stages of tailings. As I discussed, we're comfortable that we would be returning to a more -- a much more reasonable sustaining capital moving forward.

So to be clear, can the 2020 sustaining CapEx be lower than originally budgeted or was there generally cost inflation within the tailings estimates?

Well, again we need to go through the optimization of the life of mine to perfectly -- to perfectly answer that question. But as I discussed, if you -- if you do your stage 2, if you do your water treatment plan, if you do your stabilization and you build all your infrastructure and you increase your fleet and if you're capable to optimize your mine, the answer is yes, you'll be capable to limit the need of sustaining capital for the mining of those open pit -- on the open pit medium high grade. The answer is yes, but you need to put all this capital behind and you need to keep improving every aspect so you really focus to what is absolutely needed as sustaining capital to maintain, extract mine and mill and dispose of those tonnes as we move forward.

Okay. And then another question. In terms of the liquidity profile, what's the minimum -- minimum amount of liquidity that you're comfortable with and is there a point at which you start thinking about raising some equity?

I kind of -- I was kind of expecting that one. Look, we're not here to discuss the raising of equity at this stage. I mean our commitment here is truly to deliver the maximum per share value. For those of you that are familiar with my approach, my commitment is to maximize the per share value. This is -- this is really the ultimate commitment to our shareholders. So the use of equity here will be in our case or in our view the last resource to continue to unlock the value. I think it's fair to say that we would never want to see our liquidity even close to be below the $100 million. That is for sure. And we are more than satisfied that we could execute all of 2019 and maintain our objective. We'll see as we move forward.

So then just a follow-up on that. If raising equity is the last option, would you consider looking to liquidate the company as an option instead?

We are too early stage or this is definitely not the call to discuss our detailed plan. We did put the comment though. I mean we know we've done some liquidation of asset. We believe that the future of this company is number one, make your asset profitable, make your asset capable to generate cash, make your asset capable to pay for the investment and strategically we look at how you address the debt. Not the other way around, not liquidate, not cut your -- the corner, not run the asset inefficiently. So this is a focus of '19 and if we are capable to deliver on our plan, the future will look completely different of the current outlook of this company and then we could sit down and talk about how we address the future.

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

Hi Renaud and team. Thanks for taking my questions. Just a couple here. You mentioned the Wick Drains are kind of underway. Can you give any update in terms of how they're performing and how basically the geotechnical kind of project improvement is overall kind of trending or any change in thought of how you approach it?

Yes. Very, very encouraging. I think the team has done a very good job. We've used mostly the waste dump experience to learn and build that above the geotechnical. We all know what happened in the past, I'm not going back there. This triggers like a significant change in the design and then it was about do the right thing right and then learn from it. And we've done quite a bit of work in the geotechnical work and I can tell you that from the approach or the vision of a year ago, the stabilization looks much more promising. The spacing of the Wick Drain has been optimized. So it looks better than it was looking probably like 6 months ago or even a year ago. And on that, we'll build on that to partner with experts to readdress and relook at the tailings aspect as well. So it is not the worse off, that's for sure. It's slightly improving as we move. And again, on the Wick Drain, the design has been optimized and looks better than it was looking like 12 or 6 months ago. And we'll use that a lot, Michael, to return and address the design and detailing as well. I'm a firm believer and I cannot assure that. Of course this is a very important aspect, but I'm a firm believer that there is a way to optimize the tailing aspect as well.

Okay. And just over the New Afton with the ore sorting program there, is there any improvement on the -- you kind of focusing on the copper, is that how the ore sorting kind of works? It identifies rock that is higher copper content or -- and is there any improvement on the gold grade mined versus milled or does that tend to be fairly stable?

I would say there is a slight chance, right. I mean the reading is and the optimization is on the reading on the copper side. As you improve the copper, there is probably an upside here as we move and as we improve, absolutely. But at this stage, the strategy is around the copper and depending on the source and where it comes from, there is definitely a chance that you improve on the gold side as well.

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

Thank you. First question is on New Afton C-zone. In the slide it says assuming project CapEx of $450 million and sustaining CapEx of $185 million. Are those the numbers that the company expects to incur for the project?

So far I would say from the optimization to-date, there is some aspect we will continue to work, John and his team, like it's a nonstop and in progress optimization. But as we speak and as after like a 1.5 years of optimization, this is what we see will be potentially achievable. We hope to not have to increase that number. We hope that we can continue to optimize. But this is the assumption at this stage and the starting point of optimization to deliver the updated life of mine towards the end of the year.

Okay. And for Rainy, the current view that the asset will be generating free cash in 2020, is that assuming the underground mine plan to recommence this construction I guess late this year or at some point next year?

Well, this is exactly the question -- the question mark here. I mean that the reason why we delayed or postponed the plan for underground is the need to return to the fundamental. The fundamental for me is the mining has to occur during the mining and then there is an extension of the life of mine that should be mostly an organic profile rather than a reclaiming of the low-grade stockpile. So we will answer this question as we move forward. But I'm a firm believer that the open pit only is more than capable to generate free cash flow and when it comes to the underground, we will have to find a way to execute those plan where we don't have to write a check, as Rob said, with the view to deliver really free cash flow starting in '20. We have to. This is the ultimate objective here.

Okay. So just more simply, is there capital -- project capital associated with the underground in 2020?

As we speak, yes, but that has to be further confirmed with the optimization of our life of mine in 2019.

Okay. And then last question, your comments beforehand on the financial position and I guess the view of raising equity. Has the company been in discussions to potentially relieve covenants with its debtholders and royalty streamholders for 2019?

Well, our facility is at 4.5 and that was done in the fourth quarter. And so no, there hasn't been any further discussions beyond what we did and what's disclosed in our financial statements and where our leverage ratios and so on we expect to be in line with our current covenants and requirements.

Your next question comes from the line of Don MacLean from Paradigm Capital. Please go ahead.

And I guess I recognize there's a lot of influx here. Maybe one number that would be helpful. What is the current book value now for Rainy River post the write-down?

It's approximately $640 million.

Okay. And everything being influx, that must been an interesting discussion how to come up with that value with the auditors. Can you give us a little color on that?

Actually the discussion, we ran our life of mines in our budgets and we took in the views of the technical groups into the model and the number came out as it was and we certainly on the in-situ values relied on market values in previous transactions and everything -- all of our estimates, assumptions, economic or otherwise were well within the range of the market. So yes, it really wasn't a difficult discussion at all. We stuck to the plan -- the current plans and facts.

Good. And just on the unit cost going forward, Renaud, you talked about 2019 being sort of based on Q4 actual. But if we look at 2020 and onwards, are those numbers for 2019, are they reflective of what you would expect going forward after 2019 or do you expect (multiple speakers).

No, definitely not, Don. I mean we can't. I mean if you look at where we -- we started the year compared to where we ended the year, the open pit is definitely not optimized yet. We've done a lot of progress. Well, remember -- I would tell you that we've started much higher than that. We landed where we are now. We build out 2019. Absolutely I'm more than optimistic that we will continue to optimize. You're well aware of the peers' numbers, they are double in size so there is a bit of an economy of scale here. But as we optimize, decouple the pit from the need of the tailings and we really focus on optimizing the pit, we get the mill up to speed with the total tonnes benefit the economy of scale and optimization; absolutely optimistic that this cost will continue to reduce and optimize for 2020 onwards.

Okay. That's great. And then another sort of big picture number. The sustaining capital in the August 2018 study I believe was CAD 1.34 billion and there is $230 million in 2018. So that would leave CAD 1.1 billion in 2019 onward. If you kind of look at the plan now, there's been a shift of more capital into 2019. But is the overall number liable to be in the same general ballpark?

You know what, this is the main focus to be frank of the 2019 optimization, Don. I believe there is a lot of capital build in there that could be optimized so I'm really, really looking to optimize this capital as a part of the exercise. I believe that a lot of this capital is depleted for ounces that are maybe question mark about what they really bring. So we will be very diligent and I'm with you on that. I'm looking at the total. When I joined this company, I look at the tech -- and look at the tech report and looking at the total capital and didn't really like it. Yes, feel pretty comfortable we can optimize this plan. But the priority at this stage if you want to optimize an asset, and I've been there, I've done this just a long time enough, you cannot optimize if you do not build the side once for good for success. The tailings is currently not as it should be. You don't have a warehouse and maintenance facilities, but you want to optimize your maintenance practices. It's all linked. Built properly, I'm not saying the world-class, I'm not saying like the best of all. We're talking about provide your employee, provide this asset with the proper infrastructure and optimization will come. That I feel strong. With optimization will come as well the need for less capital and the need to doing things like a better way without the need to deplete massive capital. Optimization of the use of the mining fleet will trigger the need for less equipment. This is how -- where I'm coming from. This is what I like and capable to do and I'm with you, way too many much capital in this plan.

Great. And then one just last question on the recovery at Rainy River. Once you've addressed your in solution losses and you're talking about a finer grind and you get your 90%, 92% availability so you have a stable mill. Do you think you can achieve the 92%?

Of the recovery or on availability?

Yes.

Well, you see like if you look at the technical report -- if you look at the technical report at the grade of more or less the grade of the Q4, the technical report refers with the metallurgical testing and about 91% recovery, which we have already achieved. So theoretically speaking, if January you would have your solution down to maximum 0.5% losses on the total recovery and you would have been grinding finer, you would have outperformed the technical report. So yes, there is a possibility to continue to improve and outperform on the back of what we see today because we're still not optimized and we have -- we see fairly good result.

Your next question comes from the line of Trevor Turnbull from Scotiabank. Please go ahead.

Yes, Just I guess a question with respect to C-zone and some of the permitting required. Going back through some of the old technical reports, it looked like the C-zone's biggest issue was really just an amendment to the mining permit, but the amendment had to do with whether or not those historic tailings from the old Afton mill would be impacted by the subsidence of the C-zone. And I just wondered since it's an amendment, can you talk a little bit about what the regulators are going to look at there? Is this something that's been done before where tailings potentially are impacted by subsidence, but if these are dewatered, is that really a big issue? Because we get questions on this and it's -- it's not clear whether or not this is something to worry about or more a formality on the permitting side?

Yes. I have John Ritter and his team online at New Afton. But the short story is that they will be the dewatered and stabilized in place. That is what we see today. But John, if you -- if you want to add a little more color to this, please go ahead.

Hi. You're correct, Renaud. We continue to work with our regulators and First Nations partners on stabilization. We've been working with them over the past year and they realize that we're taking the right approach for stabilization. As more information comes in, we feed it to them to be proactive. So right now, the question is when is the correct time to stabilize with the regulators. So we're working on that boundary limits as we speak.

And maybe just forgive my ignorance, but when you talk about stabilization, obviously dewatering is a part of that, but what else does that entail? Does that include moving anything or just reinforcing containment? What's that exactly refer to?

Yes. As we advanced from the previous tech report, we had mentioned we may move some tailings from the historic. We've now done a lot of work on Wick Drains and the loading of the historic facility. So we plan to keep that area intact and just dewater that area.

And I guess just the last question with respect to this. Is this something that's been done before that you're aware of or in B.C., have these type of situations been amended this way?

What we did is the oil sands industry does this quite a bit. So we sent a team up there. We also went down to Oakland, California, there's a large facility where they do what we experimented with. Plus we did our own stabilization program as well. We also have an internal review board comprised of 3 world experts that bring in other global Wick Drain opportunities. So we feel confident in this approach.

Okay. I appreciate that. Maybe switching gears. I have a quick question for Rob. Rob, you mentioned with respect to the carrying values at Blackwater that you had moved to I think $1 per ounce kind of number. I looked in the MD&A, but couldn't seem to locate it. Can you give me a sense of what that metric is for Blackwater now?

Yes, it's $30 an ounce.

Your next question comes from the line of Steven Butler from GMP Securities., Please go ahead.

Question for you on the -- coming back to the tech report and we saw the reference in there to life of mine strip for Rainy River of about 3.7:1.0. I think that that's obviously still a good number to use. That's the first question. The -- and the strip ratio in 2019 in the tech report was expecting to be about 5.66 or call 5.7:1.0 versus you're about 3.1:1.0 here. So is there any key aspects of trying to reconcile that? I mean obviously it's a different number, but is there anything beyond that 3.1 strip that's actually in capitalized?

No, it's not so much of -- it's not so much of that. The -- like the execution, if you will, has been slightly like delays overall. As we relook at the open pit in 2019 in optimization, we feel that there was no need like to further like push too much on the strip in 2019. I think the 3.1 is well aligned. We continue to mine outside. So all in all, we continue to increase the total tonnes. We really want to put the 2019 Stage 2 tailings behind us. We feel if you're looking at the grade delivered, the amount of tonnes that would be delivered to the mill, that's pretty much aligned with the tech report and the total weight. That's a mix of optimize plan with a bit of a delay compared to the 2018 execution, but nothing to be concerned about the ability to deliver in the future.

Okay, Renaud. And then the other question there was on the operating costs. As you said, you were hoping to reduce your site cost here as you go forward and optimize more fully. The operating costs in the tech report was around $270 per tonne and here we are at $325 to $375 for this year. So is it -- is it mainly just productivity improvements that will drive down your expected unit costs? As you said to Don earlier, you do expect to reduce your site costs. It looks probably -- primarily on the mining side plus I guess the fixed component against processing and G&A. But particularly on the open pit costs, Renaud, what gets you down to a lower level from this year, productivity or anything else?

Three main aspects and as we discussed in the press release, the use of the equipment -- the efficiencies and use of the equipment is way too low. As we want to optimize; your trucks, your shovels and your drill will have to be operating at the best in class efficiencies. That is key. You want to compare with the best, you have to operate as good or better than the best. And currently the use of our equipment efficiencies overall, recall we are still way too low. A lot of that has to do with the distraction of operating the pit as was kind of a mix of feeding the mill, but also almost as a quarry to fill the tailings. So that's the second aspect we need to decouple this. The pit has to be designed, has to be optimized and operate as a pit and when you generate, your nonasset generator rock will be contributing to and the difference -- variance will have to come from pit decoupled from the operation, number 2. Number 3, cost drivers. Cost drivers is your ability as per the technical report to control your consumption and your price and both are being addressed as we speak. The main cost driver is on the procurement side, optimize our procurement practices using the volume, maybe partnering as well with some peers around. And the second one is obviously to control of your consumption. I would say we're doing very well on controlling the consumptions. Maybe the tire is one of the aspect that as we continue to improve the road. So all of those 3 items been optimized knowing that we started the year at a much higher than the $375 as you pointed out. Yes, I'm pretty optimistic that we're going to continue to decrease those cost.

That concludes today's Q&A session and as well the call. Thank you for participating. You may now disconnect your lines.