OceanaGold Corp (OGC) 2017 Q4 法說會逐字稿

Good morning, and good afternoon, ladies and gentlemen and welcome to the OceanaGold 2017 Fourth Quarter Results Webcast and Conference Call. (Operator Instructions) This call is being recorded on February 22 at 4:30 p.m. Eastern Standard Time. I would now like to turn the conference over to Mick Wilkes. Please go ahead.

Thank you, and good morning, good evening to everybody. It's a pleasure to be here today to review our 2017 results and also to discuss a very strong finish to the year with record operational and financial results.

I'm joined here today by several members of our executive team, who'll provide specific commentary on the results from within their respective areas of the business. Scott McQueen, our CFO, will discuss our record financial results; Michael Holmes, our COO, will provide a brief overview of each operation and its performance; Craig Feebrey, our EVP of Exploration, will provide an overview of our 2017 exploration program. In addition to our 2017 results, I'll take you through our expectations and priorities for 2018.

Moving to Slide #2. Before we proceed, I do have to note that all references in this presentation adhere to International Financial Reporting Standards, and all financial figures are denominated in U.S. dollars unless stated otherwise. Also note that the presentation contains forward-looking statements, which, by their very nature, are subject to some degree of uncertainty, and there can be no assurance that our forward-looking statements will be proved to be accurate as future results and events could differ materially. Please refer to the disclaimer on the forward-looking statements in our presentation.

Having said that, we'll move on, Slide #3. We did have a very strong finish in 2017 on the back of a strong operational performance in the fourth quarter resulting in significant cash flow generation, which allowed us to reduce our net debt by USD 88 million in the fourth quarter alone. In addition to increasing our cash balance, we also paid $6 million in dividends, and I'm pleased to announce that the Board of Directors has also approved the first semiannual dividend for 2018 at $0.01 per share payable in April. So this, in my opinion, reflects our confidence in the business and our stated goal of returning wealth to our shareholders in the form of dividends.

A major contributor to our strong quarterly performance was the operational performance at Haile where throughput rates continued to increase. Production was solid at 50,000 ounces of gold, and recoveries were strong at 83%. Most importantly, the process plant was stable with mill availability in the mid-90s, which allowed us to push more material through, identify bottlenecks and continue to fine-tune the plant. We are in a good place now at Haile where we can push throughput rates at even higher -- even higher and continue to ramp up the plant.

Moving to Slide #4. For the year, we generated record revenue of $724 million and an EBITDA of $408 million and a record net profit of USD 186 million before adjustments. Our adjusted earnings per share on a fully diluted basis exceeded market consensus at $0.32 per share for the full year and $0.15 per share in the fourth quarter. The consensus was $0.26 per share and $0.11 per share, respectively. The cash flow per share adjusted for changes in working capital was a solid $0.62 per share for the year and $0.23 in the quarter, which compared to consensus of $0.59 and $0.21, respectively.

We continue to be focused on margins and returns. And as you can see from the graph, we achieved a solid EBITDA margin of 56%, which is near the top of our peer group. I'm also pleased to report that we delivered another year of positive returns on invested capital and the eighth year in a row that we've done so.

The consistency of our margins and our returns in the backdrop of what continues to be a relatively low gold price reflects the profitability of our business and how we make investment decisions. These results aren't an accident. Our business has been deliberately structured to deliver these benefits, and our 2017 results demonstrate that our business is fundamentally sound and we are well positioned to deliver long-term value.

I'll now turn over to Scott to give you some detail on those financial results.

Thank you, Mick, and hello, everyone. As Mick discussed, the company had a significant fourth quarter, which underpins a record financial performance. This allowed us to achieve a number of our objectives, including strengthening our balance sheet through debt reduction, which included $85 million in repayments against our drawn facilities, which saw the company end of the year with a low net debt position of $167 million. We also continued delivering returns to shareholders through a fourth quarter dividend payment.

Turning to Slide #6. As you can see, revenue for the full year was $724 million, a record for the company. This included $246 million in the fourth quarter, also a record quarterly result. We achieved these top line results despite a flat quarter-on-quarter gold price. And as such, the results reflect the strong underlying operational performance, including the successful first quarter of commercial operations at Haile.

As previously reported, we took the opportunity in Q4 to lock in the copper price of around $3.20 a pound for approximately 80% of our forecast 2018 copper production. This will reduce potential volatility in Didipio's 2018 revenue given the lower forecast gold production, which will see the effective gold -- sorry, see the effective copper byproduct contribution materially increase proportionally in 2018.

Moving down, you can see the full year EBITDA achieved was $408 million, including $149 million in Q4. That's a clear reflection of the high-margin structure of our business. In addition, we achieved a record annual net profit of $172 million. That's inclusive of the $18 million nonoperational impairment charge that we announced in Q1.

Turning to Slide 7. Here we can see the strong operating cash flow generated, with an impressive free cash flow after investing of over $100 million in the fourth quarter. As mentioned, the key use of this cash flow was to reduce debt with approximately $73 million repaid against our revolving credit facility during the fourth quarter. Our total credit facilities now stand at $230 million with $200 million drawn. In 2018, we expect to continue to reduce debt with another $50 million scheduled to be repaid.

In addition to reducing debt and continuing to pay dividends to shareholders, we also managed to increase our cash position quarter-on-quarter, from $61 million at the end of quarter 3 to $73 million at the end of 2017. So all in all, we're well positioned to continue meeting our debt reduction targets, funding our growth objectives and continuing to provide returns to shareholders in the form of dividends, which Mick noted. The first half 2018 dividend was declared yesterday.

Turning to Slide 8. Here, we provide an overview of the capital investment, which in 2017 is approximately 40% lower than the prior year. As you can see on the slide, during 2017, most of our investment in growth capital was employed in 2 key areas: Didipio, where we have completed the first panels of the underground, which is now delivering ore to the ROM pad; and Haile, in completing the construction and commissioning, which, as you know, wrapped up at the end of the third quarter with the commencement of commercial production on 1 October. In addition, Q4 Haile included the completion of some of the ancillary buildings and other works.

Pre-stripping and capitalized mine development was in line with expectations. As you can see, most of the pre-strip spend related to the Coronation North [positive upgrades] where we're currently mining and will continue to mine through 2018. Craig will discuss some of the strong exploration results we achieved last year, which reflect our reasoning for allocating a healthy capital commitment to continued (inaudible) mine exploration last year, particularly at Waihi, as illustrated near the bottom right of the slide.

With that, I'll turn over to Michael Holmes, who will discuss the fourth quarter operational performance.

Thank you, Scott, and good morning, good afternoon, everybody. As Scott mentioned, I'll briefly walk through the outcome at each operation in the fourth quarter, which will help position Mick's discussion on what we're expecting in 2018.

So if we look at Slide 10, starting with safety. As I've previously mentioned, we had great results since 2011 in our safety journey and maturity with the total recordable injury frequency rate, the TRIFR rate, reducing by 80%. Since 2015, our performance has flatlined at 3.99 TRIFR. Our workplace exposures have increased due to the commencement of high-risk activities with the construction, commissioning and operation at Haile and the commencement of the underground activities at Didipio, 2 activities that are not new to mining, but certainly new to these areas.

During 2017, we implemented a workforce safety behavioral program called Vital Behaviors. This program is designed to assist the workforce in making the right choices and demonstrating the right key behaviors when it comes to safety. This program is supported by our commitment to continue to build a strong and visible safety leadership.

Our safety leadership behavioral program, called the Gold Standard Program, reinforces this proactive visual -- visible safety leadership by measuring our supervisory contacts and effective interactions with our workforce in the workplace. With these proactive programs implemented and effectively used this year, we are working towards improving our TRIFR lag performance indicator.

Moving on to Slide 11, Haile in the United States. We announced on the third quarter call that the plant was operating well with increased throughput rates and improving recoveries. And I'm very pleased to say that Haile continued that trend, performing well in the fourth quarter with, as Mick mentioned, a solid 50,134 ounces of production, a 60% increase quarter-on-quarter, which resulted in a full year production of 118,466 ounces.

Higher throughput rates were achieved with 0.6 million tonnes processed in the fourth quarter. So annualized, that's at a rate of 2.4 million tonnes per annum compared with approximately [1.3] million tonnes processed in the first 9 months. This reflects the stable and strong performance of the plant at an annualized mill feed that has greater than -- that was greater than nameplate capacity. Recoveries improved to about 83% on average for the fourth quarter compared to an average of 70% for the first 9 months of 2017.

In 2018, we will continue the improvement in safety, as was discussed. We'll have -- we've had some downtime of the process plant for the first few days of the year during the unusual cold weather that affected most of the East Coast in the U.S. It has had a short impact on production. However, we've since been in full production, and our 2018 performance thus far is roughly in line with our budget.

Moving on to Slide 12, Didipio in the Philippines. I would firstly like to highlight the impressive safety performance at the operation with a reduced (inaudible) TRIFR rate from what was already a sector-leading 1.76 per million hours worked to a figure of 0.51, as well as the impressive improvement of the TRIFR rate for the underground project from 14 to 5.14 per million man-hours worked.

What makes this achievement most impressive is that the workforce was operating with some degree of uncertainty for the first half of the year. And from my experience, over my time in the mining industry, I found that during times like these where distraction can lead to carelessness, resulting in injuries, we were able to maintain the focus of the performance at Didipio to ensure that our safety was improved. And this is a true testament, I suppose, to the world-class nature of the mine.

In addition to the safety performance, Didipio delivered a record year of production and cash flows. As Mick will discuss shortly, 2018 will be a transitional year for Didipio with the underground rates and grades ramping up while we progress and process this year mostly from the lower-grade stockpiles. At the end of 2017, we had approximately 22 million tonnes of ore stockpiled, ready for future processing. This is a significant amount of stockpiles, which derisks the operation and is a sizeable asset on our balance sheet.

Moving to Slide 13. In New Zealand, Waihi delivered a consistent year with good production and cash flow generation. Waihi generated $55 million in free cash flow in 2017, which reflects the high-margin nature of the business. I also want to highlight that since taking over the operation following the transaction from Newmont in 2015, we've had improvements on the productivities and efficiencies and as a result, have reduced the unit mining cost by as much as 35%.

The continued focus for the company at Waihi is to deliver, as previously been mentioned, a mine life extension of a minimum of 10 years, and most of this is expected to be achieved through advancing the Martha project. Delivering this mine life extension at similar margins will further underpin the sound investment of approximately $100 million that we've made in 2015 when we acquired the asset.

Moving on to Slide 14 at Macraes. The operation delivered increased production quarter-on-quarter. Delays in accessing the high-grade ore from Coronation North resulted in lower production that we had originally expected. The good news is that those assets have been pushed into this year, and we are currently seeing the higher grade ore processed through the mill, and Macraes is off to a good start in 2018. Exploration success also continued in the Macraes Goldfield in 2017, and we'll be building on that as we move forward in 2018 as well.

I would now like to turn it over to Craig Feebrey to walk through some of the solid exploration results that we've achieved at the end of last year.

Thank you, Michael, and hello, everyone. Today, I'll be focusing on the drill results we published in November 2017. These results were significant and underpin the potential that exists at each of our operations and supports a healthy exploration budget allocated for 2018.

At Haile, an extensive program of brownfields drilling has continued since acquisition to improve our knowledge of the mineral resource and increase the resource base. In 2017, we continued our focus on understanding the potential for other significant underground opportunities akin to Horseshoe and tested the Palomino and Snake [shoe] targets, all located on the same trend. With respect to these, Palomino returned lengthy intercepts of 1 to 3 grams per tonne gold, within which are higher-grade intercepts, in general, between 3 and 6 grams per tonne gold. Both will be considered further as we advance the Horseshoe deposit.

In addition, in 2017 we commenced a more aggressive program testing extension opportunities to the current resource with positive results. Of particular note are extensions between Snake and Ledbetter, extensions to Mill Zone, widened sections of shallow mineralization north of Haile between Mill Zone and Mustang and infill and extensions to the Mustang resource. If we look at a long section, that's of the dotted line marked A, A prime through the 601-Ledbetter trend, which includes Mill Zone and Mustang, a number of these extension opportunities are evident.

Let's move to Slide 17. For those of you not familiar with the Haile geology, we see a strong relationship between the gold mineralization and the metavolcanic/metasediment contact with the majority of mineralization shown in this figure in dark brown with a 0.45-gram per tonne cutoff. And that mineralization is in the metasediments.

Drill traces in gray with mineralized intercepts greater than 0.45 grams per tonne gold shown in red. In this long section, you can see 4 areas, as highlighted within the red dotted ellipses. These have been identified through drilling that offer extensional opportunities to grow the resource. Exploration is continuing to test these and other opportunities with approximately 30,000 meters allocated to brownfields diamond drilling in 2018.

Moving to the next slide and to New Zealand. A significant proportion of the brownfield's budget is being invested in Waihi to advance the Martha project and further test the potential of this 1 million-ounce exploration target.

Looking more closely at the Martha target. The figure shown here highlights the Waihi open pit in brown, with the Martha underground target immediately below in the pit in the blue colors. In order to effectively test the underground target, we've been developing the 920-meter drill drive, now 77% complete; and the 800-meter drill drive, now 39% complete, as you can see, extending from the Correnso underground working to underneath the open pit.

In 2017, we drilled approximately 8,000 meters from the 800-meter drill drive, as shown by the blue drill traces, from a total of 38,000 meters of brownfields drilling. This year, we've commenced the 51,000-meter brownfields drill program. The majority of these meters is allocated to testing the Martha underground.

Moving to Slide 19. I'd now like to highlight in more detail the drilling conducted late last year from the 800-meter drill drive. Holes released in the last press release are annotated, while holes drilled but results are yet to be released are shown as the dark blue drill traces in plan.

In this figure, we have a [plan] view in the top left and a cross-sectional view looking to the northeast through the Martha and Empire veins. This is a typical cross-section showing a fan of drill holes targeting the Martha and Empire veins and some of the highlights from that drilling, clearly intersecting economic widths, with mineralization in each of the 4 holes shown on this fan. These results are consistent with our expectations and support our targeted exploration model. With approximately 38,000 meters drilled in 2017 and a further 51,000 meters commenced this year, we're confident we'll have a steady flow of results to share throughout the year.

Moving to the next slide, Slide 20, and to the South Island and the Macraes Goldmine, another example of where our investment in exploration continues to unlock value. And here, I'd like to focus on the Golden Point opportunity, a target within the Round Hill project.

The Golden Point target is located just north of Round Hill on the north-south trending. And so the mine grade here, which is depicted here in the aerial view on the left in red, represented by the drill intersections greater than 50 gram meters; Coronation North at the top of the figure and the Frasers Underground in the south, with a distance of around 10 kilometers between them. The figure on the right is a cross-section showing the old Golden Point open pit and historic drill traces colored by gram meter intersections, depicting well the shallow-dipping mineralized shear, extending up to 500 meters to the east.

Labeled here on the bottom of the figure are a number of drill intersections returned last year, providing increasing confidence and continuity of mineralization. Additional drilling is underway this year on Golden Point to further test the potential of this target and support the Round Hill project study. Finally, as I mentioned, we'll provide regular updates on these and other exploration programs as they progress throughout the year.

Now back to you, Mick.

Thanks, Craig, and the rest of the team. So now I'll spend some time to walk you through what our expectations are for each of the operations this year.

So I'm moving to Slide #22. Michael's mentioned that Haile had a very strong performance in the fourth quarter of last year. And for the most part, it continues to perform well despite the frigid temperatures in the first week of January. We're well placed now to drive further efficiencies and improvement to the operation. We see us achieving this through increased productivities and decreasing costs. Moreover, we have a stable process plant now, which we have had for the past several months, which will allow us to push throughputs and see other bottlenecks -- where other bottlenecks exist.

Next year's production at Haile was forecast to be better than 2017's with throughput rates above nameplates, leading to mill feed of around 2.7 million to 2.8 million tonnes with stronger performance. We expect some good cash flows from the operation, some of which will be reinvested into driving towards higher throughput rates and enhanced recoveries. Ultimately, we seek -- we will seek to achieve throughput rates up to 4 million tonne per annum as per the optimization study results.

This year, the main processing facility that will be constructing -- we will be constructing is a pebble crusher, which we identified in the optimization study. The pebble crusher will allow us to maintain high throughput rates when we are processing harder ore, which we expect from subsequent stages in the pits. Our plan is to have the pebble crusher installed and commissioned by the third quarter of this year.

The recoveries we achieved since the fourth quarter have been good, considering we're only achieving grind size of 19 microns. We have an opportunity to realize better recoveries through driving grind size to 13 microns or even lower. To achieve this, we've determined the need for additional fine-grinding capacity. In the latter part of last year, we evaluated our options, including whether we should keep the existing technology used at the plant or change it out to other technologies such as that used at Macraes.

And the option that we've chosen for a new fine -- is to put in a new fine-grinding circuit which would incorporate an Isa mill and a tower mill. We would keep the SMDs as -- the current SMD units as backup capacity. This will lead to lower maintenance costs, finer grind size and a more robust plant that will provide higher availability and throughput. This investment should deliver increased recoveries. We're currently completing the engineering and expect to have our new re-grind circuit in place in the first quarter of 2019. As Craig mentioned just a little while ago, the exploration potential at Haile remains very strong. As we continue to hit significant intercepts, our primary focus for exploration at Haile is on the mine targets in the short term.

Moving on to Didipio on Slide #23. Gold production in 2018 is expected to be half of what we produced in 2017, as previously guided. Last year's production was significantly higher than our standard annual run rate for the operation as we completed the open pit mining. And as usual, Didipio did not disappoint.

This year and into next, we'll ramp up the underground mining operation to its ultimate annual mining rate of 1.6 million tonnes per annum. Supplemental ore feed to the mill will be from mainly lower-grade ore stockpiles. As this year progresses, underground mining rates are expected to increase and grades improve. We do expect production in 2019 to return to normal levels of around 110,000 to 120,000 ounces of gold.

Moving on to Slide #24. And you can see here where we are with the underground in Panel 1. The gray development is what's been completed, the orange development is what's planned for this year and the blue development is what's planned for next year to get to the bottom of the mine. We have commissioned the pump station, primary underground water pump station, and it is fully operational. We'll now further increase the mining rates by opening up more stopes.

The first stope has been mined. You can see it in red on that picture. And that current -- that filling of that stope with paste fill is expected -- we expect to complete that by the end of this week. So the paste fill plant is fully commissioned and operating well.

The Panel 2 development at the bottom of the mine is underway and is tracking to completion at the end of -- by the end of 2019. So the underground at Didipio is going well. I'm pleased to report that and look forward to that ramp up this year.

Slide #25, moving on to Waihi. Lower year-on-year production this year due to lower grade zone in parts of Correnso and also mining at Empire and Daybreak. We expect that to continue into 2019. I'd like to point out that since acquiring Waihi in 2015, this asset has generated significant cash flow, including $55 million of free cash flow in 2017 and over $100 million prior to that.

We've material increased -- materially increased the resource in the short time we've owned the asset and have identified projects that can add additional -- an additional 10 years of mine life to this operation. Our focus for 2018 will be to advance the Martha project to permitting as we work closely with our communities, the regulator and other stakeholders and demonstrate to them the significant mine life potential at Waihi.

We are investing a large proportion of our exploration capital at Waihi with drilling at Martha, Gladstone, Favona and WKP. I should note that when we publish our updated resource and reserve statement at the end of March, we will restate the Waihi resource from 2016 as we're in the process of advancing the Martha project to permitting. Once we've initiated this phase of the project and completed some additional geological modeling, we will provide an updated resource and reserve.

The Waihi operation has been in operation since 1988 in its modern form. It has delivered significant benefits to many kiwis in the region and has been the major employer and economic engine for the town. During this time, the Waihi operation has been a responsible partner of stakeholders and had met or exceeded its regulatory obligations. Our expectation is that a mine life extension should yield the same benefits and continue to have the same, if not better, socioeconomic impacts while we continue to adhere to our stringent operating practices as it relates to health, safety, environment and social performance.

Moving on to Macraes in Slide #26. Michael mentioned that we're processing higher-grade ore from the underground -- from the Coronation North, and as a result, have had a good start to the year. With the higher year-on-year production, Macraes will deliver strong cash flows. In fact, I'd like to point out that at $1,200 gold price, Macraes could generate between USD 40 million to USD 50 million in free cash flow this year. At a spot price, it's even better. This is a significant cash flow from an operation many people in the market dismiss. We expect 2019 to continue to deliver strong operational performance at Macraes.

Exploration at Coronation North and other targets, as Craig mentioned, are designed to deliver some further expansion of the resource and mine life at Macraes. We have particularly -- we are particularly encouraged by the drilling at Golden Point, which has delivered some impressive intercepts, which improves the economics of the Round Hill project. That project has the potential to add an incremental 10 years of mine life to Macraes beyond the current mine plan.

Moving on to Slide #27 and our priorities for 2018. Although consolidated production is lower year-on-year, you shouldn't lose sight of the fact that we're entering this year in a strong financial position with a relatively low level of debt and strong cash flows that we're expecting for our business. We have quite a bit on this year for our business with exciting opportunities to create additional value for our stakeholders. And the onus, however, is on us to deliver, and I have full confidence in our ability to do so.

Operationally, we're focused on further improving our safety performance, particularly at our New Zealand and U.S. operations. With Haile being a new operation, we remain focused on building on the operating skill sets and delivering steady productivity improvements. Expansion plans at Waihi and Haile are very well advanced, and we will commence the permitting phase at Waihi shortly and in the second quarter at Haile.

Expansion plans at Waihi are real. The expansion project is not proposing anything that hasn't been done before at this operation. There is nothing in our plans that hasn't been permitted before. We have confidence that we'll successfully advance the Martha project forward and deliver an incremental -- an additional 10 years of mine life beyond the current reserve at today's strong margins.

Exploration across the business is a major part of our growth strategy. We have a significant mineral endowment from our -- at our operations, and we will be making prudent capital investments and locking additional resources from numerous brownfields and greenfields targets.

OceanaGold is not your prototypical gold mining company. To us, it's not just about the amount of gold we produce, but rather what margin each of those ounces are delivering and at what returns. This is why we're 1 of only 2 gold companies that has delivered a positive return on invested capital every year, dating back to 2010. And moreover, we make decisions based on long-term considerations, not short-term motivations based on short-term market sentiment.

I'd like to close with this slide, 28. 2017 has been a challenging year for the company. However, we overcame these challenges and delivered a strong finish. Despite the challenges we had, we delivered record financials, record production and record profitability. The share price doesn't reflect our performance or our outlook.

The last time the gold price was trading at these levels, our share price is CAD 5.50. Today, we're nearly $2 lower than that high. So what's different with our business today compared to the middle of 2016?

Well, Haile is constructed, commissioned and doing what it should, if not better than expected. Didipio continues to deliver strong cash flows. Even this year, it will generate good cash flow to shareholders. Waihi has strong margins, has increased the resource by 0.5 million ounces since 2015, identified 1 million-ounce target beneath the market pit, and I'm more encouraged today at extending the mine life by another 10 years than we ever have been. And lastly, Macraes is expected to generate very strong cash flows at least until 2020.

As you can see, we are well positioned to continue to deliver strong margins and returns. The solid cash flow generation expected from the business provides us with financial flexibility and allows us to continue to reduce debt, return wealth to shareholders in the form of dividends and make prudent investments in the business with the business's organic growth opportunities, including the Haile expansion and the extension of the mine life at Waihi. There is a real and significant disconnect with our share price today and where it should be.

This concludes our formal presentation segment of the webcast. I'll now take some questions, either the phone or turn it over to the operator to moderate the Q&A session.

(Operator Instructions) Your first question is from Michael Gray from Macquarie.

I've got 2 questions. By the way, great disclosure; really appreciate the slide deck and the detail. First of all, on Haile with respect to the additional grinding capacity and the ramp up to 4 million tonnes per year, what is your view on the enhanced recoveries you think you can achieve boosting from the 82.6%?

Taking into account the higher throughput rates, we do expect that we could get into the mid-80s.

Okay. And then for the Martha project, you've highlighted that there'll be a market update for the project in 2Q '18. Just wondering what the scope of that update will be. Would it be a technical report? What kind of details might we get? And also, I wanted to find out in terms of the 51 kilometers what the drill spacing is on the majority to infill and to what extent there is any [step-out] drilling?

Yes, I'll answer the first part of that question. I'll get Craig to answer the question around the drilling density. The process that we must follow is to consult with the community. Then we'll -- after that, we'll be able to submit our application to the regulators for an extension of the mine life. That -- those applications will include mine plans and areas where we intend to mine, and that information will then be available for disclosure to the market. The extent of the project, at least in the initial part of the project to be available. We don't intend to put out a 43-101 report until drilling is completed and resources are updated, but we'll give further advice and guidance of when that will come. Craig?

Michael, thanks for the question. With regards to the drilling and density, from -- we're drilling the Martha underground systematically on fans that the figure in 19 shows. The spacing there is dependent on which structure or which target we're drilling across. So as you can see in that figure, as we drill through Empire across to Martha, we're probably at a 50-meter or less spacing when we're drilling Empire, because the colors are closer obviously. As we move out, Martha is getting to around 100 meters. So we're going to move systematically from drilling the 800 meters from the 920 meters through the Martha target itself at around about that spacing.

Okay. And so what level of resources do you expect to get the majority indicated? Or is there going to be a large portion of inferred?

Well, there will be a large portion of inferred, but there will be a proportion of indicated and it will depend on how we continue to execute that program. There may be options to move more into indicated that gives flexibility moving forward.

Your next question is from Michael Slifirski from Crédit Suisse.

I've got a few. I'll start, first of all, with Haile, if I may. Interested in -- with the addition of sketch, crushing and fine grinding but getting scale. What your expectation is around the change to unit cost? So does that fixed cost leverage more volume on a fixed cost base offset the increased energy cost? Where do you see costs going?

Well, thanks for that question, Michael. I couldn't give you a definitive number, but we should see incremental improvements in the unit cost per tonne in the order of 15% to 20%. The power costs are relatively low at Haile. And what would be required, though, is some upgrade to the trends -- the substation to achieve that. Our confidence around getting to that milling rate is mainly having to do with the capacity of the mills over there, the SAG mill and the ball mill. And what we'll be doing is sneaking up on the target. We won't be putting in massive upgrades to get there, but rather systematically go through debottlenecking different parts of the plant as they are identified. The first and most obvious one is the fine-grinding circuit along with pebble crushing. And we certainly expect, once those are installed, to be achieving well above 3 million tonne per annum, but we'll have to see how it goes over the course of this year, and I think there's a fair amount of variable -- sorry, obviously the labor costs and other things are fixed within the plant and throughput increases will reduce our unit cost per tonne.

All right. Secondly, the results that Craig's giving you there, how do you see them in the context of your aspiration for 4 million tonnes? Does that endorse that decision and extend the life, maybe improve grade? Or does it -- are those results better than what you expected? And does that make you think about a further future scale increase?

No. The optimization study really looked at the upside potential of the project. We are constrained a little with the amount of land that we would like to take utilizing the area. So these are in-pit resources that have converted into reserves, and yes, the results have been better than we expected. I think it also demonstrates there's a lot of potential for further discoveries there outside of the current open pit. There could be -- there will be adjustments to the pit size, but I wouldn't be assuming that it's going to be another major cutback or anything like that at this stage.

Okay. A couple financial questions, if I may. So I'm going to go well beyond my normal comfort zone. First, with respect to tax. You said there's no tax now till -- in New Zealand till 2019. How do we model New Zealand tax? I want some guidance as to how we should -- whether we can model it or whether we'll rely on you telling us what you'll be paying. And the same for Didipio given that 5 years is up April 1. I think you said no tax till 2019. But is there some way that we can accurately pick what you'll -- what that revenue -- net revenue sharing might be from the '19 year?

I'll let -- hand that question to our tax expert, Scott.

Yes, thanks for that, Michael. That's pretty technical questions you're coming up with there at this point. But New Zealand tax, for modeling purposes, is straight 28% tax in New Zealand. There is broadly a rolling 1-year deferral that you should assume in cash flow in relation to the pooling arrangements we can put in place there. We, essentially, just defer it by 1 year. The Didipio question is a bit more complicated. Yes, the current tax holiday runs till mid-'19. We have an option to extend that for 1 year or 2. But once that rolls off, as you know, we'd assume we're a taxpayer like anyone else at that point. In regards to the calculation of the (inaudible) it's quite a complicated calculation, but essentially it's a net revenue calculation where you take of all other taxes, which we pay. At the moment, we're paying quite a number of taxes over -- even though we're in a tax holiday, we're paying in the order of $20 million a year of taxes in VAT and excised taxes, real property taxes and other things. All of those come off along with the income tax before you calculate if there's any additional share to go the government on that.

Okay. So just trying to put that together, the New Zealand, we take your P&L tax from this year at 28% and you pay that next year? Is that what you're saying?

Yes. Essentially, your modeling, you should assume a 28% tax rate with a 1-year deferral on the cash flow. So...

Yes, okay. And Didipio, you're saying now probably nothing till 2021?

That's quite possible, yes.

Okay. While I've got you, depreciation does my brain in. How do we project forward from what you've shown us in the December quarter, in that we've got Haile ramping up, we've got Didipio underground coming in. So I'm not quite sure how to model that. I know you talk about units of production. But some companies, when they say units of production, mean gold ounces. Some mean total tons moved. Some mean tonnes through the mills. So when you talk about units of production, what are you actually talking about? So any help there would be useful, please.

Yes, another fairly complicated area. But you're right. We -- broadly, the best way to model depreciation is to look at what you assume the gold ounce production will be over the life of mine and divide it by the capital and use that as the units of production. That doesn't apply uniformly because some assets, naturally, smaller assets within the group demand different bases. But there's no one size fits all. The best overall metric would be that gold ounces over life of mine divided by the capital.

Okay. So with respect to Didipio, where there's new capital for the underground, is there any sort of trick to getting that right, in terms of...

Well, that's -- yes, same calculation. You -- once you believe that asset's commenced, so the capital spent to that on Panel 1 will be depreciated over the life of mine based on the ounces, similar as we proceed with the remaining capital.

Okay. So digging a little deeper then, when does the underground actually start to impact the P&L from a depreciation perspective and a revenue perspective?

This year. (inaudible)

I know. That's vague.

Yes, but we would have to get you the answers in Panel 1 in the reserve. That information is not readily available, but we could provide that.

Okay. And then finally, with respect to interest, is there any interest that's been capitalized that we're not seeing at this stage, I guess, with respect to Haile and Didipio? And interested in some guidance as to how we, again, model that into this year where Didipio underground becomes commercial? How we see it full quantum?

No, there's no capitalized interest. It's all (inaudible).

Your next question is from Matthew Frydman from Deutsche Bank.

A couple questions for me, probably another one for Scott on tax again, to start with. But you received an $18 million kicker on tax from Haile in the quarter. Can you give us an idea of what we might expect going forward in terms of the tax profile of the asset? And also, any potential future benefits from recognizing losses or indeed, from the U.S. tax reform? And then specifically on that tax cut, has this changed your thinking about future investment in the asset given obviously the expansion opportunities and the exploration success that you've highlighted?

I think that's the first question in regards to the recognition of deferred tax asset this quarter. That's subject to any fine-tuning, as you always do, with some of the best estimate we can. That should be a onetime adjustment, and that reflects the history to date and the recognition of the deferred tax asset or NOLs that we see under the current -- or the new legislation in the U.S. Now the second -- I guess to expand on that, we, obviously being a mine that's just commenced operations and had a fairly high cost of development over a long period of time, we have carryforward losses and we also have the advantage of some generous new legislation regarding the ability to deduct our future capital expenditure. As a result, we wouldn't see any actual tax payments for a number of years, probably 3 or 4, maybe 5 years. But we'll actually be cash flow tax paying. But beyond here, from an accounting perspective, I expect to see just a normal calculation based on the typical tax rates. [Does that answer the question?]

So that would be -- sorry, so I was just going to say, that would be somewhere probably closer to 24% then, at a guess, given the, I think, in the tech report you had a tax rate of 38%?

Yes, it's 21% federal and 5% local tax, state taxes. And in regards to the question, I think, was around, would that affect our investment decisions, is that what it was, broadly?

Yes, that's right given that lower tax rate.

Well, obviously, any investments we make, wherever they may be, have to fit with our strategic plans and they have to deliver value. Primarily, that will come from the resource, taking into account the geographical location. Of course, a favorable tax rate is part of the final calculation of the value, but I wouldn't say that it's the key driver.

Sure. So it certainly hasn't accelerated any of your spending on exploration or the studies you're doing at that asset at the moment?

That will be driven by Craig's view of the resources, not by the tax rate.

Yes, understood. And then, secondly on Didipio, can you give us maybe a little bit more detail on how the advanced rates and the development of the panels is stacking up compared to your, I guess, your prior expectations or your budgeting and how you're thinking about the risks or the potential to the upside or the downside of the ramp-up of the underground given that clearly, the flex on metal production for the year is that requirement to draw down those low-grade stockpiles?

Okay, good question. The -- as I've mentioned before, the biggest risk with Didipio underground is the water. That's why establishing the pump station -- the capital pump stations is so important. So the capital pump station at the bottom of Panel 1 is now up and running, and that's a major milestone for the underground. So it's now pumping at nameplate, and that's allowed us to increase our development rates. The development rate will reassess the development rates for the lower panels, and we have done that, which is a slight change to the original plans from 2 years ago based on the experience that we've had in developing the upper panel. So that may change the location and therefore the design of the pump station further down. But other than that, ground conditions are good. There is plenty of water. We knew that, and we are just starting to open up the stopes now and we will proceed cautiously but confidently in establishing these stoping panels.

(Operator Instructions) Your next question is from Mike Parkin from National Bank.

Just a couple questions. With Haile, where's the primary ore source coming from this year and how has that changed throughout the year?

Michael, would you like to answer that?

There's 2 primary sources of ore, Mike, and that's from the Mill Zone as we continue the first phase of that and from Snake pit. So Mill Zone and Snake are the 2 that we're getting the ore from. We're also conditioning and taking the topsoil off the next zones, which will be Haile and Red Hill. But the 2 -- the ore zones will be coming from Mill Zone and Snake pit.

And then for that asset, is there any quarters that you expect to be weaker either on possibly like a grade profile or a major shutdown that we should consider in our modeling?

Well, we don't expect to have major fluctuations in quarter-on-quarter production other than to say that we do expect the throughput rate to steadily increase throughout the year. But in terms of gold production, it's roughly approximately 35,000 to 40,000 ounces a quarter.

Your next question is from Trent Allen from Citigroup.

This is just a more general question around Didipio. And Mick, you were talking about what's changed since the middle of 2016 in terms of the share price being lower than we think that it should be. Obviously, a key thing was the mines audit in the Philippines, which threatened Didipio and a lot of other mining operations in the Philippines. It seems that since then, things have improved or moderated and the DENR and the MICC are now sort of reviewing that mines audit. Can you give us any color on the potential timing of their findings? Have they been back to Didipio to have a look on what that process might be? Because some certainty there, I think, would have a positive effect if you get the result you want on, again, on the way you guys are trading.

Yes, thanks, Trent. You make a good point. Two weeks ago, I was up in the Philippines. I visited Didipio, and I also had some meetings in Manila. And I had 2 very good meetings with Secretary Cimatu. And I can say that the engagement with the secretary, and indeed his whole department, is better than it's ever been in my 7 years in the job. So I'm very encouraged by the progress that's being made, not just on our case, but also on reforming the industry in the Philippines towards the standards that are expected. So I think I'm quite hopeful that we'll see some positive moves there in the near term. And I know that the MICC audit process is progressing for us as it is for others, and I look forward to some positive outcomes throughout the course of the year.

There are no further questions at this time. Please proceed, Mr. Wilkes.

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