Kinross Gold Corporation (KGC) Q3 2015 Earnings Report, Transcript and Summary

Welcome to the Kinross Gold Corporation Q3 2015 Financial Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Tom Elliott, Vice President, Investor Relations. Please go ahead.

Thank you, and good morning. With us today, we have Paul Rollinson, Chief Executive Officer; Tony Giardini, Chief Financial Officer; and Warwick Morley-Jepson, Chief Operating Officer. Before we begin, I'd like to bring to your attention the fact that we will be making forward-looking statements during this presentation. For a complete discussion of the risks, uncertainties, and assumptions, which may lead to actual financial results and performance being different from estimates contained in our forward-looking information, please refer to Page 2 of this presentation, our news release dated November 10, 2015, the MD&A for the period ended September 30, 2015, and our most recently filed AIF, all of which are available on our website. I'll now turn the call over to Paul.

Thanks, Tom. And thanks everyone for joining us tonight. Operational excellence and balance sheet strength of the principles by which we manage our business and drive Kinross's value proposition. In the third quarter we continued to deliver on those principles which are necessary of running a sustainable business that is able to withstand gold price volatility. In terms of operational excellence, we saw very strong performance from Fort Knox, Paracatu and Kupol. This contributed to solid production in the quarter and together with benefits from lower oil prices and foreign exchange go down Q3 cost of sales to $668 per ounce, the lowest level in 2.5 years. We remain on track to meet our updated 2015 guidance for production, all-in sustaining cost and production cost of sales. Our strong operational performance and our ability to consistently hit our targets quarter-after-quarter is of course key to delivering on a second principle of our value proposition which is balance sheet strength. We've been very deliberate in our efforts to maintaining a strong balance sheet and that is why despite lower gold prices in Q3, we were able to pay down the $50 remaining on the Kupol loan while still preserving our strong cash balance of more than $1 billion. The gold price did however impact our earnings and going forward we remain fully focused on further driving down costs and maximizing margins. Our continued focus on cost reduction broadly falls into three categories; discretionary spending, operational improvements and the pursuit of low cost ounces. In regards to discretionary spending we have just completed another company-wide review of our corporate manpower spend and organizational structure with a view to significantly reducing costs and increasing efficiencies. As of November 5, we have instituted some significant changes including the 23% reduction in corporate manpower costs which is expected to result in annualized savings of approximately $20 million. We are also closing our Denver office which was the headquarters of our Americas region while Toronto where we reduced headcount by 15% is absorbing the regional responsibilities for our U.S. operations. The overall result is a linear, more efficient and cost effective organization. We take the same approach when it comes to the second category I mentioned operational improvements. Continuous improvement is hard wired into the Company's operational culture and over the years we have implemented a number of initiatives. From the mid to self performed mining at Toronto and other sites, two are blending at Paracatu. This have all led to meaningful reductions in cost per ounce. One of our latest initiatives involves Round Mountain in a new approach to solution management which has significantly enhanced performance of the heap leach. Over the past two quarters we have seen impressive results coming out of this site. In Q3 Round Mountain had its highest production in six years and its lowest cost of sales in three years. As of the third quarter, Round Mountain was the third lowest operation in the portfolio after Kupol and Fort Knox with the cost of sales at $687 per ounce. Going forward with this kind of margin focused innovation that we will continue to drive across all of our operations The third category I mentioned the pursuit of low cost ounces actually achieves two key strategic objectives, producing cost and growing out production profile. In the Q3 release we brought forward two potential organic growth projects that could enhance the production and cost profile of our portfolio. I’ll let Warwick speak to the La Coipa of pre-feasibility study results in greater detail. But this potential project contemplates a number of attractive components including the ability to leave with the existing infrastructure, relatively low execution risk, modest capital investment, exploration upside and location in an attractive jurisdiction. The second organic growth opportunity I would like to discuss is an potential two phased Tasiast expansion. Now as you know we have been exploring alternatives to optimize Tasiast since our decision to differ the 38,000 tons per day mill expansion. At that time, our decision was based on intent to preserve balance sheet strength given the low gold price environment. But rather than wait for the gold price to improve, and now we needed to get operating cost down as quickly as possible, we began pursuing alternative concepts to optimize the opportunity. Now we will not complete a feasibility study until Q1 2016 and therefore only able to share with you today the high level information provided in the news release. I am encouraged that an alternative path to growth is possible. The phase expansion concept is designed around the installation of an oversized expandable signal at the front end of the existing common using circuit. In the first phase, the existing mill throughput capacity would increase from the current 8,000 tons per day to 12,000 tons per day. In the second phase, the SAG could be fully utilized and supplemented with additional secondary processing capacity to further increase throughput capacity up to 38,000 tons per day. Based on the early detailed engineering work completed to-date, we see a number of potential benefits to this two phased approach. In the near term we expect the increase in production to lower cost, and turn the operation cash flow positive without a large capital expenditure. In the medium term, we will be able to more fully realize Tasiast growth potential but at a significantly reduced capital cost compared to our previous estimate of $1.6 billion. This financially prudent two phased approach, which leverages existing infrastructure to reduce capital cost is well suited to the current market conditions. It has the potential to achieve similar benefits as a single phase expansion but will significantly reduce financial and execution risk. In the meantime, as we advance work on those concept we continue to drive down cost at Tasiast. In September we reduced head count at the site by more than 220 people. Going forward, we see more opportunity to reduce labor costs at the site as we get set to renegotiate the collective labor agreement in the New Year. Head count reduction is not a decision we take lightly. However we are very serious about reducing costs and maintaining our balance sheet strength and liquidity. We ended Q3 with more than $1 billion in cash which provides us with the financial flexibility to manage the business in the current oil price environment, as well as pursue prudent growth opportunities. At the same time our operations continue to deliver. We had another standard quarter in Q3 with strong performance from all our mines. With that I'll now turn the call over to Tony for a review of our financial results.

Thank you, Paul. I will start with a quick summary of our operating and financial results. Gold equivalent production was 680,000 gold equivalent ounces with production cost of sales at $668 per ounce. Cost of sales was lower year-over-year and quarter-over-quarter, as a result of lower fuel prices, favorable foreign exchange rates and strong operating performance. Foreign exchange and lower oil prices is also been a benefit of approximately $45 per ounce to a cost of sales versus guidance with major benefits coming from the Brazilian reais and Russian ruble. The cost decreased year-over-year our financial results were impacted by lower gold prices. Our average realized gold price during Q3 was $1,122 per ounce versus $1,268 per ounce during the same quarter last year. Adjusted operating cash flow for the quarter was $207 million or $0.18 per share compared with $324 million or $0.28 per share in Q3 last year. Third quarter adjusted net loss of $24 million or $0.02 per share compared to adjusted net earnings of $70 million or $0.06 in the same quarter last year. This quarter's net loss was due mainly to lower margins as a result of lower gold prices. Given volatile metal prices, we continue to maintain a strong focus on capital discipline. In that regard we are below the run rate for revised guidance with year-to-date capital expenditures of $449 million. We now expect to be below our updated guidance of $650 million for the full year. With regards to tax expense for the year, we expect to be within our original guidance on an adjusted basis. However, meaningful changes in currencies over the course of the year, particularly with respect to the Brazilian reais resulted in significant moves in deferred taxes which are non-cash and normalized otherwise adjusted net earnings. Overall we added to our strong financial position during the first nine months of the year. At the end of the quarter, Kinross has a liquidity position of approximately $2.5 billion which consist of $1 billion in cash and cash equivalents and $1.5 billion of available undrawn credit facilities. As you can see, our balance sheet has improved during the first nine months of the year. We increased our cash position by $40 million and we repaid over $80 million of debt. Managing our debt continues to be our focus. At the end of September we retired the Kupol loan ahead of schedule by repaying the remaining $50 million. As a result, our net debt position decreased to $950 million. Our net debt to EBITDA ratio was stable at 1.06:1 which is well within our debt covenant of 3.5:1. As a result of our strong liquidity position, combined with our continued focus on generating cash flow and reducing cost, we remain in a solid financial position heading into the end of the year. I’ll now turn the call over to Warwick.

Thank you, Tony. I'm pleased to share with you the highlights of another quarter of strong operating results. With good production and cost performance over the first nine months of the year, all three of our operating regions are on track to meet or exceed the regional guidance targets. Our Americas region performed well in the third quarter, producing 379,000 gold equivalent ounces at a cost of sales of $718 per ounce. This was driven by strong performance at several mines in the region including Round Mountain which continues to benefit from the continuous improvement initiatives and at improving heap leach performance achieving its highest level of quarterly production in six years and its lowest unit costs in three years. Fort Knox with strong production and lower power cost delivered the mines lowest cost of sales in two years. And Paracatu were higher grades and increased recovery contributed to increase production and the lowest cost of sales the mine have achieved since Q4 of 2011. The cost decrease was also driven by lower power and input cost and a favorable foreign exchange. However, South Central Brazil continues to experience its harshest drought in 80 years. Unfortunately due to the ongoing lack of rainfall in the region, on November 5, we temporarily suspended operation of Plant 1 and we are currently running Plant 2 at reduced tonnage rate after shutting down one of its four bar mills. Whilst the extent and duration of the curtailment will depend on the amount of rainfall over the coming weeks, we expect this to have a production impact in the range of 20 to 80,000 ounces for the remainder of the year. The good news is that we do not expect to have an impact on our guidance and we expect to be within our regional and corporate guidance ranges for production, cost of sales and all-in sustaining costs. While the Santo Antonio tailings reprocessing project remains on budget and is now in its commissioning stages, we have also temporarily suspended this project until water levels recover. We will continue to monitor the situation closely and we are taking advantage of the shutdown to bring forward schedule, maintenance in the thirds so that we can obtain to normal operation once adequate water levels are restored. Our Russia region continued to deliver excellent performance producing 190,000 gold equivalent ounces at a cost of sale over $469,000 an ounce which is the lowest level since Dvoinoye first started production in 2013. Cost of sales per ounce decreased compared with second quarter mainly as a result of higher gold equivalent ounces sold due to the timing of shipments. Costs also benefited from an increase in the proportion of the higher grade Dvoinoye material being processed in a favorable foreign exchange rate. Our West Africa operations produced 111,000 ounces at a cost of sales of $880 an ounce. At Tasiast, production decreased this quarter due mainly to the plant wind-down of dump leach. However the cost of sales per ounce decreased slightly compared to the previous quarter, largely a result of increased gold ounces sold. At Chirano, production decreased quarter-on-quarter as a result of expected lower grades. This is mainly due to declining contribution from the higher grade Akwaaba underground deposits as per our mine plan. Cost of sales per ounce increased as a result of lower production and increased power costs compared with the second quarter. Work related to the extension of Chirano's mine life continues as planned. Development of the decline at the Akoti deposit is progressing well with some 250 meters completed at the end of the quarter. As such Akoti is expected to start producing ore in the second half of 2016. We completed the pre-feasibility study of Akoti during the third quarter as planned. The study was based on using existing infrastructure to blend and process higher grade material from the Phase 7 deposit of oxide and transition material from the existing Puren deposit. The results of this study were positive. Highlights of the study results include an estimated initial capital cost of $95 million with the further $105 million for the open-pit stripping for a total of $200 million. Annual production of 207,000 ounces per year and an average cost of sales of $675 per ounce and an early interest of $767 per ounce. The study estimates the non life of 5.5 years following the receipt of the necessary permits and a startup of stripping with ore processing expected to commence 1.5 years after stripping has been initiated. The gold price of $1200 per ounce assumption, the project is expected to generate an IRR of 20%. While we’re proceeding with the payment in process, we intend to complete further blending and throughput optimization studies and continue to advance our exploration efforts. La Coipa is located on a highly prospective land package and has been a focus of our exploration program. There are several district targets that we’re exploring including Catalina, which is located just a kilometer southeast of the Phase 7 deposit. Further exploration work is planned in 2016 to asses opportunities to extend the estimated mine life beyond debt which is the pond in the pre-feasibility study. Turning to Tasiast. We’re continuing detailed engineering on a two phase expansion concept and I would like to share some of the highlights of the work contemplated or completed today. With an initial capital estimate of $290 million Phase One would enhance processing of the harder higher grade West Branch ore improving Tasiast's current production and operating costs. During the two years of operation Phase One is expected to increase average annual production to approximately 365,000 ounces per year with an estimated cash cost of $575 per ounce and an estimated all-in cost of $725 per ounce. Phase 2 of the project could further increase total throughput to as much as 38,000 tons per day to the installation of additional milling, leaching, thickening and refining capacity. To the large mineral resource that is open at dip at most infrastructure already in place, Tasiast is an attractive potential expansion project with relatively lower execution rate and we look forward to sharing more detail with you next year. To wrap-up, it was a great quarter overall and an excellent nine months of operating performance. We are focused on continuing to deliver strong results for the remainder of this year.

Thanks, Warwick. And again just to wrap, as you've heard, this has been another very solid quarter for Kinross. We continue to deliver on our operational targets, and we continue to maintain balance sheets, strength, and liquidity. Going forward, we have set ourselves a clear path for continuing to execute on these principles. We've reset our purpose structure to be leaner, more cost effective, and efficient. We're focused on extracting additional value from our existing operations through innovation, and continuous improvement initiatives. And presenting on a number of promising growth initiatives that have the potential to enhance our production and cost profile. With that, Operator, I'd now like to open up the call to some questions. Thank you

[Operator Instructions] The first question today is from Chris Terry of Deutsche Bank. Please go ahead.

Hi, guys. I've got two main questions, one on the production side and the second one around the CapEx going forward. Just in terms of your production guidance, looks quite conservative given you've already done around 2 million ounces of gold equivalent with the 2.5, 2.6, is that mainly around the uncertainty at Paracatu? That's the first question. And then secondly on the CapEx, given you've trimmed it from I think about $725 million the start of the year to below the $650 million level, is that genuine savings or can we expect some of that to I guess be a deferral into next year and how do we think about incorporating these growth projects and what the 2016 and 2017 CapEx may look like?

Thanks, Chris, it's Paul here. I'll lead off and then maybe I'll hand over to Warwick and Tony to elaborate. But certainly on the production, we did revise our guidance to the positive earlier recently in all areas. And all we're doing today is indicating that we are comfortable and trying to maintain that guidance. Yes, we certainly have had some unexpected weather conditions, but we are quite comfortable with the guidance that we improved and intend to stick with that.

I think Paul just in support of what you're saying, Chris, the potential loss of ounces that Paracatu could be as much as 83,000 ounces. I as I've explained, we cut out operations at plant one and partially at plant two. If we don't get any rain within the next week or two, we might have to shut those operations down and worst case scenario and that's what I am describing as 83,000 ounces would be no further production up till the end of 2015. And so if you consider a range of 83,000 ounces and we only have a range of 100,000 ounces within our guidance, I think we are being prudent.

And maybe I'll start on the capital question. I guess the first part of your question Chris, was really regarding the $650 million capital, and just whether it represents a deferral or actual savings? It's a bit of a mix. It's roughly about 50% of it. And reduction is actually reduction that we will realize and some of it will be deferred not just in the next year but into other periods. And it spreads between obviously our sustaining and non-sustaining site. But right now as we indicated in our comments, we're running below the $650 million target level. We'll have to see where we come in and one of the things that we've tried to do at Paracatu is advance some of the maintenance and other spending. So we'll see how that sort of figures into the capital number but we feel like we're in a very good position, and maybe I'll just turn it over to Warwick to give a bit of color on capital going forward and where cash is split in longer term on spend.

Yes, thanks very much Tony. Chris, it could be – turning a view if I didn't suggest that there were also benefits in our capital environment that are derived through foreign exchange. And so that has contributed to the benefits that we see there. We did at the beginning of the year make provisions for work to continue, studies and this thought of execution -- obviously with the curtailment that the decision that was taken at the beginning of the year allowed that to be set aside and a saving in terms of their intent. So, I would add those to what Tony has already mentioned.

And again, just to maybe clarify this. We take our guidance very seriously. But it is the mining business, it's unpredictable. There's puts and takes and through the course of the year we've had heavy rains and flooding, we've had droughts, lots of things that are hard to predict at the beginning of the year. But as you know, our guidance represents our best estimate and we try to take into account some of the unexpected and I'm quite happy that we're maintaining the improved guidance that we set earlier.

Okay. Thanks very much. So just to clarify about potentially 490 million ounce of the two growth projects in the future. What would you say is your sustaining level of CapEx given the environment we're now in?

Yes, I think we'd been pretty clear in the past that we sort of see $400 million of run rate in terms of sustaining capital. And I think with respect to the growth capital you've laid out, that's not going to be spent in one year, that's going to be spent over a period of time. And we haven't made a decision on La Coipa at this point, we're continuing to obviously look at finding more ounces to possibly extend the mine life. So, there's a lot of puts and takes that we need to factor into the mix. And lastly, we're in a good position. We've got lots of liquidity, excess of liquidity and we feel we're in a position to incorporate these projects at the appropriate time into our portfolio.

Thanks very much.

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

Thanks, Paul. Congratulations on Q3, a nice quarter. Just taking a bit deeper into Tasiast, what's the project going to look like without the expansion? I thought I heard you say you're going to struggle to generate free cash flow without the expansion. Is this something that really has to happen for the thing to be getting concerned?

Look, I think this as, for context as you know John, the issue with Tasiast is a little bit what it was historically and what it is going forward. And historically we were mining and in our information out of small pits and in that little late 8,000 ton per day mill we actually got it up to 10,000 tons per day. As we've transitioned out of the information into the newer - what we've called [indiscernible] mineralization higher grade, but harder. And as we put that harder material into the 8K, it's sort of de-rated the mill if you will, down from into the seven which is where we struggle on the economics to make money. This concept that the guys, the team has come up with I think is a really good second best price to buy new mill. We're very excited about it and obviously the first phase is about beating up that rock with the SAG mill before it goes into the 8 in order to get 8 up to the 12. So we think it's very compelling. If we are not going to proceed with the 12, then we haven't made a decision, this is not a decision announcement, this is a update on where we are at. I did quite clearly say we'll complete the FS in the first quarter. If we wanted to proceed, we're going to have do some tough thinking about what the future is at Tasiast because we've made those tough decisions in the past, we're not prepared to lose money. We need a way to make money. And in fact that's really the good news story on the La Coipa. That was a situation as you recall back in 2013, we were losing money, it was highest cost asset, we suspended it. We went out and drilled those satellite resources under the expectation we'd have grades. We've now come back with a PFS which is pretty attractive on how we could make money there. So that’s the Zamora and that’s the bubble, I am most excited about a fact that the guys have come up with a really intriguing two phase concept.

Interesting. So power phrasing is sounds like Tasiast is your first choice, but if that doesn’t work then you're going to for Paracatu, I am sorry for La Coipa?

I think that are independently – the projects that we're going to view end of Henley, I think the good news for me here I would said on previous calls my analogy of few well was going to 38 was like building a bridge across a river. The bridge cost $1.6 billion. And my point was, one of the reasons we suspended was, if you're going to start building a bridge you better get to the other side. And in this instance we've got a very much more manageable capital spend at $290 million to get us into the black and cash flowing. That’s what I like about this concept.

The pre step, is that pre-step required for 1200, 12,000 run rate or is that for the full scale?

That could extend John, the pre steps certainly is required for both situations. Obviously it’s the extinct in which is required does change and not significantly, but strip definitely is acquired.

Okay. I'll get off the way. Thank you very much and best of luck guys.

Thanks, John. Again, just again, we see this as very positive opportunity here for Tasiast.

Best of luck.

The next question is from Tony Lesiak of Canaccord Genuity. Please go ahead.

Hey, good evening. I wanted to ask you if you'd characterize the restart returns at La Coipa and Tasiast as superior to what you are seeing from some of the other external opportunities.

Yes, that’s tough one. Tony, to go there. I mean, we don’t clearly sort of speculate on the external opportunities. I do think in the case of La Coipa where we put the math in the press release, again, going from what was accounted in maintenance, money losing operation into a 20% IRR with that kind of production, those grades, those costs I think is a good outcome. As others have indicated, I think Tony said, the key focus for us though is with the expiration opportunity can we extend this to more than 5.5 years. Tasiast, we didn’t put any IRR in the press release because we have given a life of mine view. We haven’t finished the full FS. We want to complete that Phase II work in the first quarter. What we have done is give a directional cost margin production with what the 12K could get you and obviously the Phase II we acknowledge, it's never going to be as good as the brand new everything mill at 38. But the whole exercise is gold seeking, and trying to get us close to that 38 as possible with your - I'll call it the plan B alternative in the context of the gold price environment we're in. So yes, we look these things and it’s an optimization effort internally and it’s hard to really sort of speculate on what that means relative to other opportunities.

Okay. Probably it sounds like you're pretty excited about both of them. I mean, with respect to the feasibility studies. I mean, if they confirm the economics that you're showing in the PFS, I mean, is La Coipa big enough and is the mine life long enough that you'd want to proceed with it?

Yes, I guess the answer is maybe, I mean, I think we're – as I said I'll stick by what I just said, its – when we put La Coipa on care maintenance we did it because we had a view on exploration potential. We got to work. We drilled and have come out with a PFS. 5.5 years is obviously something we'd like to see get bigger. So that’s a big part of our thinking, as can we make this things bigger, but longer life rather. Tasiast, I'd say we're really excited. This to me is a great win in a - what's unfortunately being a steadily declining gold price environment over the last 3 years. When we finish the PFS, gold was 1350, and every time we tried get out of the gate we're dealing with a lower gold price. And I think we've broken into two parts, where I am very excited about what it could be on a Phase I and we haven’t kind of bet the firm with $1.6 billion of capital, all in, go decision, we've got a stop look and listen opportunity after Phase I.

Okay. Just finally maybe turning to Paracatu, I mean obviously on a real basis your cost structures I mean seen a major change to the better, and it sounds like you've been locking that real at close to current spot levels. I mean, is there an opportunity here to maybe write back some of those reserves that we saw written off a couple of years back with that cost structure improvement?

Tony, its Tom Elliott. I'll try to answer that. We're obviously in the process of looking at the assumptions that we're going to be using for reserving resource count and the exchange rate will be a key consideration to probably look at and it could have an impact, but we'll just have to do that as we work through the year end numbers. So we've seen the real as you pointed out to see fairly significant depreciation during the course of the year and as we're looking at setting our budgeting, we're benchmarking ourselves against other and also just looking at forward-looking environment in Brazil. On the – just from an operational perspective, currencies have had a big benefit and we've seen overall about $25 we had mentioned. And we look at the real, it’s about 18 bucks and are benefit now. We did had some hedges that have been entered into couple of years back and as a result we didn’t get the full benefit, but as you pointed out what we're locking in and we've only locked in about 30% for next year, it’s pretty much at the market. So we're very well positioned heading into 2016. And lastly I know you didn’t ask the question, but I will answer anyway, on the ruble all of the hedges that we have fell off in the fourth quarter. So heading into 2016 we'll be fully un-hedged on the ruble and obviously hopefully benefit from the current levels that rubles traded out.

I would say just to add to that as well, I mean, with the benefits we get on the cost side of equation, it’s not about just adding ounces, it’s really we're seeking higher quality ounces. Our mantra of quality over quantity and it’s all about trying to find an increased margin as well.

Great. Thanks so much.

The next question comes from David Haughton of CIBC. Please go ahead.

Hi, Paul, Tony and Warwick. Thank you for the update. I quite like this evening kind of update. I got a couple of questions for you. Just looking at Tasiast, I just want a SAG mill, is that the one that you had previously acquired a few years ago, my recollection is that it was about 60,000 tons a day?

Yes, I could answer that question, David, the answer is yes, it is the same. We are not saying, that is certainly our preference. We are in the process of looking at that making sure that we can de-write the deal with a 12,000 ton a day process and then obviously re-write it something closer to the 38. So that is our process. Obviously we are not going jeopardize our metallurgical process and this is still very much an issue that we dealing with – thanks to feasibility study level on which we're at, it really confirms doing feasibility.

And do you have – obviously to match the kind of throughput that after here, firstly the pre-scripts requirements and also to fade the mill at 12,000 tons a day?

The answer there David is yes. We do we have acquired trucks during these build up to previous levels of production and so we do have that equipment.

And I presume if everything got the green light then we could see this up and running early 2018?

Yes. Well, I don’t want to be pre-judge any part of the process that we yet to follow, but from a pure execution point of view, I believe that is possible.

Yes, I think our style David, our style is we have to work down. We've got to finish PFS, then make decision and once we make that decision it should hold as accountable to that, but we're not there yet.

Understood. The improvement in Round Mountain really very encouraging and I presenting with the south prices that going underway from [indiscernible] that is now looking much more attractive for you is that a reasonable assumption?

Once again we, as you know we are the operator. And we don’t speculate on M&A but obviously as an operator we know that asset better than anyone else so one can never speculate about M&A can never know what can happen but clearly as operator we like the asset.

All right understood. Thank you for the update. Appreciate it.

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

Good evening guys. Good quarter. All are more impressive from the two mines in the U.S. considering these loss change rate. I know it's early on the Tasiast get into too much detail but you did - when you said $773 million of capital spend a large portion would attributable or would be able to carry forward in the Phase 2. Can you give us a rough sense of what proportion that would be? What kind of - how much of that would actually reduce that $1.6 billion total cost that you talked about earlier?

Don, Paul here, and Warwick may want – and Tony may be jump. I can understand that eagerness to want to get to that next level but let us just get that first on - finish the Phase 2 thinking and we can have a much more full some discussion on the look forward in the next quarter - by the end of the next quarter.

Okay. And may be one other element related to that. You showed two years can last longer than two years in Phase One only?

Yes, just again we just - we’re not giving life of mine, what we want to do is finish the work on the Phase 2 and then we’ll give you the picture but we felt today we did want to get a sense of what I use that, I made the comment a while ago, it's like selling on island, the first stop on the journey that’s the kind of production and cost structure we would anticipate that just stop, look and listen for $290 million before we have to commit necessarily or decide to proceed with the second phase. So I think it’s a very low risk opportunity to get there in two stages. We didn’t obviously put a life for mine around just the 12 but will come back in the New Year with the look through from there.

I’m just trying to get a sense of with 368 is equivalent of one line highway bridge going across and then after a few years it turns into a rope bridge whether its stays at one line bridge.

I think again what we are trying to do - we are very excited here, the brand new car drive would off the lot is 38,000 that's brand new shiny out of the box brand new mill. In this environment we determine in February of last year that’s just too much capital in an uncertain gold environment what would come up with is, is I think a really interesting plan B and the plan B is ultimately design to get you as close as possible to the economics that we put out on the 38, recognizing it whenever be as perfectly as good because we are utilizing the existing plan. Phase One gets you a step closer we get the production up, we get the cost down, Phase 2 again with that parallel line off the back of the signal we’re trying to get as close as we can to what we would had with the 38 on a production and cost perspective.

Okay. May I don’t want to beat this one to death, but the important point here is does the Phase One give you a lots of flexibility in terms of your timing for Phase 2?

Absolutely.

It can go on for an extended period of time and you can keep at that and still you have capital saving et cetera for Phase 2, you have that choice remains an option for some considerable time?

No that's exactly the point. That is the beauty of this approach is we can sit with what we think is the cost structure we have just advertised and production, as long as we need to if that were the case. That's obviously not where we would like to end up, we wouldn’t be as optimizing of the opportunity but certainly it’s not just two years, we can live with the 12 as long as we need to.

Okay. And then just lastly on the La Coipa because the decision on lot of these mines closures also includes some consideration of closure cost. So the La Coipa cost is not necessarily just zero if you keep it close, what would the closure cost be?

Again I think - I’m not sure - we don’t really have one right now. We’re monitoring as best we can. As you know every mine has closure cost, we monitor it as best as we can but it’s a bit of a moving target when you time value and part of the exercise here is putting time value into that equation. And as we often try to do in mining by extending mine life in many cases that can become deminimis on an NPV basis. Warwick anything you want to add there?

Yes, I think each one of these mines has its own characteristics in the case of – this one also suggest that it is time and duration based and so we could take these discussion offline Don and maybe explain a little bit of the specifics that we have at La Coipa.

Sure, we would be happy to do that. Thanks guys and well done on a good quarter.

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

Good evening, guys. Just a couple of questions, the first one is related to the strip and the - so the pre-stripping that you guys have done to date what was expected in the prior version of total stripping and pre-stripping?

Anita I assume you referring to Tasiast?

Yes, sorry.

Okay. And the number that we would be including in the strip in pursuance of the possible execution of the increase of Phase One would be in the order of just about $200 million for the first two years during which we will do the construction and the next two years post structure construction would be just about $200 million as well. So pretty consistent in the first four years giving you some guidance on level of strip we need to be doing to sustain that 12 position.

Sure. And then the second question I guess would be with regards to the 1.6 original preproduction estimates for Tasiast in the 38 K ton per day scenario. Did that include any pre-stripping, I’m just reading from the technical report and I don’t see line item that includes pre-stripping there?

Anita I can just confirm that it didn’t include the pre-stripping.

Okay. And then last could you just add some color, sorry did you say it didn’t include the pre-stripping?

Did not include the pre-stripping.

Great, thank you. And then could you just add some color on what's driving the reduction capital from the original 1.6 billion through this Phase approach but where are you seeing the reductions?

We are in a big part of it Anita since the fact that we are utilizing the existing plant and we’re not brand new everything. We’re adding a building around - we are renovating the house rather than buying a new house, think about it that way.

Okay, all right. And then some of the - I mean the mine - you said some of the fleet had been acquired previously, so that should produce some of that total number right 1.64?

Yes, we had the capital acquired some trucks initially and those trucks haven’t been utilized to-date. So that is one component which we would not have to spend any further money. The 1.6 that we were talking about and the new numbers we are talking about now in both cases took account of the fact that we had additional trucks available to us.

Okay. All right and then I think that is it. Congratulations on the solid quarter.

[Operator Instructions] The next question is from Tanya Jakusconek of Scotiabank. Please go ahead.

Great, good evening everyone and congrats it was a good operating quarter. My question comes from La Coipa again, just wondering what exactly would – what you have to do permitting wise at that site in terms of what you’re looking to do for this. I guess this pre-feas that you put out and secondly in your numbers when did you forecast startup of the operations?

Why don’t I lead off - I guess the key point is because this was a operating mine that we suspended, we didn’t put it in the closure or reclamation. The idea is we submit a DIA which is not an EIA which is what you would have in from a standing start and the whole point of the DIA is it's meant to be a shorter process than you would otherwise have from a standing start. I mean that's the bottom line, we are under the DIA. But as you know we are dealing with government's and government asked questions and we don’t have any certainty of timeframe other than we expect the DIA to be a shorter process than the EIA would be if you are going from a standing start. So that answers your question?

Yes, just in terms of - I didn’t note there were any permits that was still outstanding that could be used and what we have really acted from a permitting standpoint because I know you didn’t put it on closure with long term maintenance.

Yes. We just meet with the DIA, I mean I think if you think about put into context again we have an existing mine, we have the plant, we’re talking about restarting the plant with material, some of it is from old ground that we were mining on and some of its from new ground that we been drilling out. So in the greater world of permitting that’s pretty straightforward.

Okay. And in your numbers your internal rate of return of 20% to 1200 when did you assume start-up or NPV as $120 million.

Let me give - there is an assume start-up date I think what we’ve done is just done the NPV on a standalone sort of as it is cash flow basis. So, we don’t have the sort of the time of between now - that is an NPV as of really I think today but -

Okay. So it's not an NPV discounted back from certain – it's an NPV of today okay.

Yes.

Okay, that helped. Thank you.

There are no further questions at this time.

Okay, we'll just maybe - I’ll thank everyone and just maybe a closing point as a general matter in addition of the performance in the quarter, you can see we’re doing everything we can to try to generate growth opportunities. And we gone to this place by being prudent students of capital and the balance sheet but while maintaining the flexibility of prudent risk you can expect us to continue to maintain that approach and that’s really my key message going forward. We’re going to continue with the discipline we've shown to date. So thanks everyone. We'll look forward to catching up in person in the coming weeks. Thank you.

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