Kinross Gold Corporation (KGC) Q4 2016 Earnings Report, Transcript and Summary

Thank you for standing by. This is the Chorus Call Conference Operator, and welcome to the Kinross Gold Corporation Fourth Quarter and Year-End 2016 Financial Results Conference Call. As a reminder, all participants are in 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, Mr. Elliot.

Thank you, and good morning. With us today, we have Paul Rollinson, Chief Executive Officer; Tony Giardini, Chief Financial Officer; and Lauren Roberts, Chief Operating Officer; and Paul Tomory, Chief Technical 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 two of this presentation, our news release dated February 15, 2016, the MD&A for the period ended December 31, 2016, and our most recently filed AIF, all of which are available on our Web site. I'll now turn the call over to Paul.

Thanks, Tom. Today I'm pleased to welcome Lauren and Paul to our quarterly conference calls going forward. They bring a wealth of experience, talent, and proven success to their roles, and we are confident you will see their positive impact at our operations and projects. I want to start off this call by saying how proud I am in what our entire team has accomplished and how excited I am for what the future holds. 2016 was another impressive year for the company across a number of areas. We delivered strong operational performance marking the fifth consecutive year we've met our guidance. We continue to maintain our strong financial position, generating $465 million free cash flow, paying down $250 million of debt, and ending the year with approximately $830 million of cash on the balance sheet. And we met key milestones on our pipeline of organic projects, particularly at Tasiast and Bald Mountain. Tony, Lauren, and Paul will speak to all of this in greater detail shortly. Looking ahead, our four key priorities for 2017 are as follows: Number one, we will keep doing what we have been doing over the past five years. Specifically, we will continue to deliver strong consistent operational results and maintain the strength of our balance sheet. We are forecasting another solid year from operations with production in unit costs that are in line with 2016 and the results that we've achieved over the past five years. Two, we will continue to advance the two-phased expansion, the Tasiast two-phased expansion. The construction of Phase 1 is advancing on-time and on-budget. I visited the site in January, and I am very pleased by how activities are progressing. Once complete next year, Phase 1 is expected to double Tasiast's annual life of mine production to approximately 400,000 ounces and significantly reduce all-in sustaining costs to approximately $760 per ounce. We expect to finish the feasibility study on Phase 2 in the third quarter of this year, which would put us in a position to make a decision whether to proceed at that time. The Phase 2 expansion is forecast to double annual life of mine production again this time to approximately 800,000 ounces and reduce costs by a further $100 per ounce, which would make Tasiast one of the lowest cost mines in our portfolio. Number three, we expect to continue to realize the benefits of our acquisition of Bald Mountain. When we closed the deal last January, we expected that we would double Bald's gold reserves by the end of the first quarter of this year. I am pleased to report that we've achieved this goal ahead of schedule, adding 1 million ounces to Bald's estimated proven and probable gold reserves. This increase is the current mine life estimate, and confirms our vision of Bald as a long-life asset with significant upside potential. With 3 million ounces of gold resource and a significant pipeline of high-quality targets, there are opportunities for additional resource conversions and exploration success. In addition to doubling mineral reserves, we are also on track to double Bald's production this year and to reduce unit costs. And lastly, priority number four this year, we will continue to advance our other organic projects, all of which have the potential to extend mine life or expand production at existing mines for the relatively low-risk execution. These include Round Mountain Phase W in Nevada, the September Northeast, and Moroshka Satellite Deposits in Russia, and exploration drilling at several of our mines, but in particular, Kupol and Fort Knox. This will be an exciting year for the company as we advance our organic pipeline and continue to build positive momentum. Our portfolio of mines is generating solid consistent results. We have a number of development projects, and our balance sheet remains one of the best in the business. Kinross has a clear path forward, and we are very excited about our future. I will now turn the call over to Tony.

Thanks, Paul. Consistently meeting our numbers and maintaining our financial discipline has allowed us to generate significant free cash flow over the past three years and build up one of the sector's strongest balance sheet. We ended 2016 with free cash flow generation of $465 million, approximately $830 million in cash and significant liquidity, including $1.4 billion in un-drawn credit facilities. And lastly, a trailing net debt to EBITDA ratio of 0.8 and no debt maturities until 2020, all of which provides us with the financial flexibility to invest in our strategic priorities and development program. Taking a closer look at our financial results, our operations generated approximately $930 million in adjusted operating cash flow, an increase of 18% over 2015. Our adjusted net earnings were $93 million for the year, or $0.08 per share, a year-over-year increase of $184 million or $0.16 a share. This reflects the benefit of higher realized gold prices, which was up 8% year-over-year, and our continued focus on operational delivery and financial discipline. At the end of 2015, we instituted a number of changes which were aimed at reducing our overhead cost, which have successfully lowered our 2016 overhead spend to $170 million, an 18% [ph] reduction from 2015. And we expect further reductions in 2017 with our forecast for overhead of $165 million. In terms of capital, our sustaining capital forecast for 2017 is in line with our usual run rate of approximately $400 million. In addition, we are leveraging the strong financial position we have carefully built over the past five years to invest approximately $450 million in our development projects and in our future. We continue to take a prudent approach to our budget assumptions for oil price and FX. Over the course of 2016 local currencies and lower oil prices versus our budget resulted in a $12-per-ounce benefit to cost of sales. For 2017, we are budgeting $60 per barrel for oil, an exchange rate of RUB60 to the U.S. dollar, and BRL3.25 to the U.S. dollar. These assumptions and the sensitivities we provided in the guidance section of yesterday's news release take into account FX and oil hedges we have in place for the year. Our hedging strategy is aimed at managing near-term risk related to fluctuations in foreign exchange and input commodity prices. With signs of the ruble maybe strengthening we felt it was appropriate time to hedge a ruble for the first time since 2013. In Q4 we therefore entered into a zero cost option hedge for 19% of our 2017 exposure, at an average input of RUB60 to the U.S. dollar offset by a call strike of RUB72. Similarly for 2017, we are hedged 35% on the Brazilian Real at favorable rates compared to current spot prices, and we have hedge over 50% of our 2017 exposure to oil at our U.S. sites, and 50% of our 2017 requirements for Tasiast at $46 per barrel, which compares favorably to current spot of approximately $53 per barrel today. We will continue to monitor FX in oil exposure and look for opportunities to establish additional input cost hedges if market conditions are favorable. To sum up, we are in a strong financial position. Our focus on discipline, capital management, and the strength of our balance sheet will continue to be priorities for us as we head into 2017. I'll now turn the call over to Lauren.

Thank you, Tony. I'd like to begin by saying how pleased I am to be joining Kinross leadership team. Over the past five years Kinross has delivered solid and dependable operational performance while maintaining an industry-leading safety record, a strong tradition that I intent to continue. Our success in 2016 is a credit to the teams across the company as we achieved record production and continue to manage our costs. Our 2017 production guidance is 2.5 million to 2.7 million gold equivalent ounces with production cost of sales forecast to be $660 to $720 per ounce. There are various puts and takes across the portfolio this year which I will outline. Looking first at the Americas region we expect to produce 1.5 million ounces to 1.6 million ounces, which represents approximately 60% of our total forecast production. We expect another solid year for Fort Knox which performed extremely well during the fourth quarter as mill grades were particularly strong. Kettle-River continues to be a positive story. Originally slated for closure in 2015, it is now expected to produce through Q1 of this year. We're also excited about the encouraging results of our district exploration efforts, details of which were included in last night's news release. Turning to Bald Mountain, 2016 was a transition year for the mine, with heavy stripping of the top ore body and the start of stripping at Redbird both located in the north area. We are seeing significant improvements, including increased mining rates and improved efficiency in the areas including hauling cycle times and shift changes. We're now in the heart of the top ore body, we're well into stripping at Redbird, and we expect to bring Poker into production this year. This has positioned Bald for a very strong 2017. I want to point out that Bald's production will be heavily weighted toward the second half of 2017 and Q4 specifically due to the mining sequence and lag between stocked and recovered ounces from the heaps. Paracatu has performed well despite the drought conditions, producing 483,000 ounces of gold in 2016, including 74,000 low cost ounces from the Santo Antonio tailings reprocessing project. With the implementation of mitigation measures, we believe we are now in a much better position to withstand lower rate wall. We continue to monitor the situation carefully and have again accounted for the risk of drought-related production curtailments in our regional production guidance. As we announced last quarter, we suspended mining operations at Maricunga and have placed the operation on care and maintenance. We are continuing to rent some material on the heaps and expect minimal production in Q1. Turning to Africa, we are forecasting improvements in both production and costs for the region this year. We expect increased production of 420,000 to 470,000 ounces and significantly lower costs of sales of $740 to $820 per ounce. Tasiast has been performing very well. The team has been successful over the past year in enhancing throughput and reducing unit mining and processing costs. As a result of these efforts and the benefit of higher grades in Q4 Tasiast production was up and production cost to sales decreased compared with the previous quarter and results achieved earlier in the year. We are looking for Tasiast to continue this positive trend in 2017. Moving to Chirano, I am pleased to report a successful transition from underground mining at Akwaaba to Paboase. We are hitting our tonnage goals, grades have increased and production is up. Cost of sales, as a result, have trended down over the course of the year to $772 per ounce in Q4, and we now have sufficient power generating capacity on site to mitigate disruptions in the power supply from the national grid. Russia had another banner year producing approximately 734,000 ounces of gold at a production cost of sales of $441 per ounce. In 2017, we are anticipating lower grades as per the mine plan and therefore expect Russia to produce 560,000 to 600,000 at a production cost of sales of $520 to $570 per ounce. We started commissioning the new filter cake plant in December and expect it to be fully operational during the first quarter. This provides additional payments capacity at Kupol and Dvoinoye over and above the original mine plan and with allow for potential mine life extensions. In summary, 2016 was another solid operational year for Kinross with all regions delivering strong results. And we expect to deliver another strong year in 2017. I'll now turn the call over to Paul Tomory.

Thanks very much Lauren. Very pleased to be joining the Kinross senior leadership team at a time when we have such a strong organic pipeline of developmental opportunities to extend life at many of our mines. So once we've got a strong technical team over the past few years and we're focused on advancing explorations completing our major studies and delivering on our approved projects. And I'll now update you on some of our key activities. As Paul mentioned, with the Tasiast Phase I expansion we are making good progress, we are on schedule, on budget, and we are on track to reach full production Q2 in 2018. We substantially completed engineering and the procurement of major capital packages and construction is on track approximately 20% complete this far with significant progress having made on earth works, concrete and the TSF. In fact the picture on the slide is a good view of the field of works right now looking from the primary crushers to the reclaim tunnel over to the segment on the background. Concrete, as I said, is well advanced with foundations of the SAG and the primary crusher now in place, and with work continuing on multiple fronts. Last week, we closed off the tailings, and that's the picture on the bottom right ahead of schedule and we're now proceeding with placement of the container and the liner. Major components of the SAG mill plant and primary crusher have arrived at site, and we expect installation of the SAG mill to begin later this month. With respect to the Tasiast Phase 2 feasibility study, it remains on track for completion in the third quarter of this year. Moving on to Bald Mountain, at year-end, we upgraded 1.2 million ounces of mineral reserves to proven and probable mineral reserves. Net depletion of 230,000 ounces, this resulted in a net increase of 1 million ounces, doubling Bald's gold reserve estimate to 2.1 million ounces. Of those, 670,000 ounces were converted in the North area as a result of drilling, resource, modeling, and mine plan optimization. And in the South area 560,000 ounces were converted as a result of our PFS work the Vantage Complex project. For the Vantage Complex project the scope of works in our pre-feasibility study includes the addition of a heap leach facility and the associated processing ad mining infrastructure. Just a note on a couple of numbers here, the Vantage project will require 28 million tons of capacity for the 560,000 ounces in the reserve, but we're designing a facility for 62 million tons to allow for an incremental 34 million tons from future deposits in the South area. On the exploration front in 2017, we plan to spend approximately 9 million with the goal of expanding and upgrading mineral resources in the North area, and at Yankee in the South. Turning to our Russia projects, in January we commenced stripping at September North East, the high-grade satellite deposit located 15 kilometers northwest of Dvoinoye. And on Moroshka the deposit located east of Kupol is on schedule to enter production in the first half of 2018. Construction of the portal is about 30% complete, and we started driving the twin declines. Moving over to Round Mountain Phase W, a drill program where the feasibility study continued during the fourth quarter. This resulted in an upgrade of 1.3 million ounces from inferred mineral resource to the indicated category, and an addition of 1.7 million ounces to inferred resources. A number of activities related to Phase W feasibility study are now fully underway, including mine planning, geologic modeling, mat test work, engineering, and permitting. The FS is on track for completion in Q3 of 2017. Moving now on to exploration, we put out a detailed update last night with the news release. And as mentioned, our priority for 2017 will be to intensify focus on extension of non-zones and mineralization at our mine sites. We believe that the best strategy continue finding economic ounces that add to mine life in the near-term. To give you an example of this and you can see it on the current slide with the long section at Kupol, mineralization remains open in certain zones. We are currently mining in the northern and southern zones, and also at depth. As we access some of those deeper zones it has become more efficient to drill from underground than from surface. Based on drilling that took place in the second half of the year we've identified potential targets for continued drilling and resource estimation work in 2017. On this long section again, on the left there's the 650 zone in the south, roughly in the middle the Big Bend deep zone, and over on the right the North Extension zone. Not shown on the long section is a separate mineralized zone located approximately 400 meters to the east of the main Kupol ore guardian. Some of our other priority targets for the year include Fort Knox, East and South Wall, and Kettle-River where we've identified some potentially promising opportunities in the Curlew District; still early days on a lot of these, but we're encouraged, and we'll keep you informed of our progress through the year. In short, to summarize, we've got a very strong pipeline of organic projects and promising exploration opportunities with the potential success in mine life and to add significant value to our existing portfolio. With that, I'll turn the call back over to Paul.

Thanks, Paul. In closing, 2016 was a good year. We're in a strong financial position, our operations are firing on all cylinders, and we are making progress advancing our pipeline of organic projects. We are headed into 2017 with good momentum, and we are excited about the year ahead. With that, Operator, I'd like to now open up the line for questions. Thank you.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question today is from Greg Barnes with TD Securities. Please go ahead.

I was wondering if we could get a little more detail around the pre-feasibility study for the Vantage Complex in terms of mining rates, ounces production, costs, what kind of numbers are you contemplating in the pre-feasibility study.

Yes, thanks Greg. I'll turn that one over to Mr. Tomory, but I would say just for context as you'll appreciate given the nature of the Bald Property, we have numerous pits in both the North and the South. And over time, I think for efficiency reasons on our part under the heading of work smart we're going to try to move to more of an aggregate lens on what the North will do and what the South will do. We don't want to get into a situation where we're, if you were to use the analogy of an underground mine, we're kind of giving it stope-by-stope, but that being said -- and so I just want you to know that's directionally where we're headed given the nature of this property and the number of pits in both the North and the South. But let me hand over to Paul Tomory on that specific question.

Yes, thanks Paul, thanks Greg. Slide 27 on the webcast deck actually had the primary details of the results of the PFS. And I'll touch on some of those here and maybe add a little bit of color around them. So the Vantage Complex project, 570,000 ounces of reserve, 28 million tons grading around 0.63 grams per ton. And as I mentioned earlier, the design of the facilities which is the basis of the $90 million to $120 million capital estimate. Size of the leach path were just over 60 million tons, so we're making allowance for future deposits in the South which have not yet been converted to reserve, and which are the focus of exploration activities for 2017. So, in terms of mine sequencing in the South area major project works will begin in 2018, and we expect substantial production from there to begin on a full-year 2019 basis running for about three-and-a-half years out of the Vantage Complex. With those 28 million tons of ore we've also got about 100 million tons of waste, and what we like about the South area is it's going to be an attractive ASIC [ph] because we got relatively short cycle times. And as I said, the strip ratio was not too bad. So we're targeting an ASIC [ph] of low 800's through the Vantage Complex.

Okay, that's great. So Paul, you're targeting, you're going to give us, going forward, details around what you're doing in the North side of the Bald Mountain project, and then the South side will be separate, so you'll have two separate operational…

Yes, that's what we're thinking, Greg. And again, from our point of view it's just how do we work smart here and be efficient. And instead of kind of drilling into every little situation we'd rather try aggregate up, and so give you more of a directional feel for North and South as opposed to, say, numerous pits in both zones. So that's where we're headed.

Okay.

One of the positive outcomes from this PFS and the reserve conversion we've just done was achieving our objective of getting to parallel production in the North and the South. And so with our reserve mine planned here we will have that starting in 2019.

That's great, thank you very much.

The next question is from Andrew Kaip with BMO. Please go ahead.

Hi, good morning gentlemen, and congratulations on a decent fourth quarter regarding production. I've got some questions about Kupol and Dvoinoye. Historically you guys have been quite successful over the last couple of years at identifying very high grade near-surface deposits. September North East and Moroshka, in the information that you've provided in the project update as well as in the presentation you hinted towards some higher grade by narrow structures off to the east of the main Kupol main system. And I'm just wondering if you can provide us details on -- a little more detail on the success, and whether you're vectoring in towards other near-surface high-grade deposits with expiration results?

Sure, Andrew, it's Paul Rollinson, I guess I have to differentiate now going forward. Yes, we have had pretty good success. And we've had, I call it, very good technical success because some of those proximal high-grade parallel structures were blind and didn't come to surface, and the team has done a great job. And that work still continues. I'm going to let Paul elaborate, but I think that the bigger point we were trying to make in the press release this year is as you can appreciate in the last few years, Kupol has been pretty successful at replacing ounces though the course of the year to offset depletion from underground drilling. And what we're finding is as we get deeper into the ore body, and our understanding of that is evolving. And this is drilling that is best done from underground, not done, particularly given the climate there, which short field seasons best not done from surface. So we are still doing both, but our emphasis has adjusted a little bit more to mineral and ore body-centric model where we're letting the -- our models tell us where the mineralization looks to be going, and we're trying to follow that. But why don't I let Paul go to the specific question.

Yes, I guess there's two perspectives on this, one of the point of practicality that Paul mentioned, where at Kupol the drilling season is short. And drilling from surface for some of these targets in the main Kupol ore body would've been challenging from surface, so it's easier to do it from underground now that we're mining in those areas, so one is the question of practicality. The other, as you pointed out, is over the last couple of years there's been a slightly greater focus on the delineation of near zones like September Moroshka. But we're now, we're targeting for 2017 priority focus on the 650 zone in the South. Let me just talk a little bit more about those. The 650 zone is a splay at the south end off the main Kupol ore body, and there we're starting to get encouraging results on both grade and width, and that's where our highest priority at Kupol is just ensuring that we can get to a minable width down there. In the North zone we are getting grades, and we've put out some of the drill intercepts in the exploration detailed press release. There, the question is mining width, whereas in the South we're a little bit more confident on mining width. In the North the drill program will essentially look to confirm whether we can mine those economically. You asked about the South zone Hanging Wall -- the zone hosts a narrow high-grade coarse pirate vein, and is about 400 meters east of the main Kupol ore body. And we've got a series of high grade intercepts there, but I'd say with those it's still early days. And a question again around how narrow those veins are, but overall we're encouraged with Kupol. It's our highest priority focus in terms of exploration spending in 2017, and there's a lot of work to do on drilling, geologic modeling, and resource estimation.

Okay, thanks. So it sounds like the 650 southeast extension is the best target you've got right now. And can you just remind us what kind of width you're seeing in grades at that target. And just based on the longitudinal section you've got on the presentation it looks like you're heading into an ore shoot, and I'm wondering if you can give us some indication of geologically what you're seeing that tells you that that's going to grow in size?

Yes, so the first part of the question was 650 zone, I'd say that that's the highest priority simply because it's the most advanced. Now, we're also optimistic about the North, but it's much earlier days in the North. So the 650 zone, a couple of the data points that we put out, one, 11.5 meters at 28 grams, and 15 meters at 49 grams in the press release. And we're targeting mining width of around 10 meters in that 650 zone. I'm sorry, what was the second part of your question?

Just, it looks like you're heading into an ore shoot, and I'm just wondering geologically are you seeing the textures that suggest to you you've got an ore shoot here that's going to develop inside.

Yes, so these are extension of the main Kupol mineralization so there's not another boiling zone. And in effect it's an extension and it gets narrower but we're encouraged by some of the grades that are being maintained as I said, in the 10, 12, 13, 15 range. So it does get narrower, there are bifurcations, and we just need to test out whether or not the widths are there especially in the north.

All right, thank very much.

The next question is from Stephen Walker with RBC Capital Markets. Please go ahead.

Thank you. A question for Paul Rollinson and I guess Tony. Talking a little bit about capital allocation, is the thought here that Bald North would self-finance Vantage, and as is Phase One self-finance the second phase two and then round the existing cash flow finance Phase W, or as we get into 2018 with some of the major spending ramping up, taking on more debt. Can you talk a little bit about your expectations on how you're going to finance and allocate capital at a lower gold price?

Sure. Well, again I think I would say a couple of things. Stephen. Number one, I mean, I think we've demonstrated over the past few years we're pretty disciplined with our capital. And we've always sort of put the balance sheet ahead of the project, so to speak. So if we make a decision to sanction a go-ahead we've got to fund it or we've got to plan to have it funded. That would be the sort of the contacts point. In the case of Bald, it's really been a little bit of an evolving good news story. And by that I mean we've had a Hollywood problem of finding gold in a lot of places. And the Hollywood problem there is that, by having more gold that you anticipate it does create that dynamic of well that's -- where do we go first. The original thought was we'd get the North zone up and running and optimized and then layer in more production from the south. And I think that's still the case. But to the extent we keep finding stuff in the North that might impact how we choose to spend the capital. Tony, do you want to just talk more specifically to the every side of it?

Sure, I can address that. Stephen, thanks for your question. I think the first thing that I would point out is if you look at our results for 2016 we generated $1.1 billion of operating cash flow. So if you look at our expenditures for '17 of roughly $900 million, and assume that that's going to be our capital spend, it really highlights that. Assuming like-for-like on gold price which is roughly 12.50, we're able to fund out of operating cash flow our expenditures in the current year. That pretty much takes into consideration the entire development of Tasiast Phase One and some of the developments -- well, obviously the Vantage initial capital developments, and the feasibility study cost for around -- but it doesn't factor in the additional capital. The good thing is though we ended the year with a cash position of roughly $830 million. And if you actually compare that to where we were last year, recognizing we did do an equity issue during '16, but we're basically about $170 million down from our cash balance last year, not bad, $830 million in cash, no debt repayments until 2020-2021, $1.5 billion un-drawn credit facility, our net debt to EBITDA 0.76, the lowest that we've seen in four years. I think we're in a very, very strong position to not just fund obviously our capital spend for 2017, but look at these projects. And the key, the key that I keep stressing is we need to be disciplined in how we allocate that capital. And so we're going to have some good competition for capital across a number of projects in the portfolio. And we're going to be disciplined about doing that. And as we said with Maricunga that was the reason why we suspended operations there because we weren't prepared to allocate capital in terms of returns we are going to expect. So it's good to be in the game plan, but we're in a very strong position. There's no need to out and raise any additional debt at this time. When we look at Tasiast Phase 2 we'll judge it based on the merits of the feasibility study that comes in. But we feel very confident in our ability to fund the projects we have in our portfolio.

Thanks, Tony. Just maybe if I have another question, if I may, I'm not sure whether it's Lauren or Paul can answer this. The Fort Knox the mineralization that's starting to show up in the east and south wall of the existing pit, does that lie within the existing permitting footprint or are you in a position at Fort Knox where you need to be permitting for additional laybacks or additional expansion at the mine site.

Hi, Stephen, this is Lauren. I'll take that question. The mineralization that we're seeing in the east and the south wall is entirely within our permitted footprint, which is all state land. So it's a very favorable environment for us.

Great, thank you very much for that. And thanks Paul, and thanks Tony.

The next question is from David Haughton with CIBC. Please go ahead.

Good morning, Paul and team, thank you for the update. Just looking at your non-sustaining CapEx guidance you've got $455 million in there, you've identified a big chunk of that going to Tasiast, but $125 million is sort of against other. I wonder if you can give a split as to where we could put some of that money in our models?

Sure, I'll start. I mean, in the press release what we've tried to do is give you a bit of color just be region in terms of sustaining capital. The primary largest non-sustaining capital relates to Tasiast, and of $250 million of West branch stripping obviously, and then as you point out, the development projects and other. The other projects, and I'm going to ask Paul to give a bit more detail, but they're really around process solution management initiative, Moroshka, the Phase W feasibility study, La Coipa and Cody now. I don't have the specific dollar amount, we can chase those down for you, but that's really where we're planning to do the additional spend.

Okay, and just by calculating, it looks like maybe about $45 million goes to Chirano as well?

Yes, I'd have to check that to confirm, but we could come back to you on that.

All right, and La Coipa, you're moving that forward on the permitting side of things, but I'm just wondering strategically given that you've closed Maricunga, you've got permitting issues with regards to water there. Would you want to move La Coipa beyond the permitting? What would you need to make a commitment to proceed with that development?

Well, I'll start, and I'll give Lauren a chance to opine as well. Look, I think by and large La Coipa has been a success story for us, as you know. We put the mine into care maintenance in '13, we went out, we drilled the Satellite deposits. Our thesis on higher grade was proven out. We have a positive PFS. And I've said a couple of times; the only negative is we currently have only about a five-year mine life. And so that's good news but we like something a little longer. And to be completely frank we have a five-year mine life. We're not rushing to try to get La Coipa back into our production profile. So we are continuing to advance permits, move the project along, and we're at a point where we're looking around the property to find places where we could add additional resources to get a longer mine life for us and our production and our sort of total production profile, other capital priorities. This is something we're working on, but it's not the top of our list right now. Maybe Lauren you want to add to that?

Sure. Thank you, Paul, and thank you for the question, David. Just a couple things there, I'd like to recognize the great work by the team in securing the RCA, which is the federal authorization for the project, and we are continuing with the sectorial permitting expect to have sectorial permits in hand this year. You had asked about water, we have a secure source of water for the project, so that's not a concern for us. And we remain optimistic about the land package. It's a big land package. There's good exploration potential, and we're going to be focusing on looking for additional rock side resources with our exploration efforts, and in the hope of growing the project and making it more competitive within our pipeline.

Thanks Lauren, thank you Paul, and Tony, and perhaps Tom might be able to give us a little bit more of an idea of where that CapEx gets split, that would be extremely handy. Thank you very much guys.

The next question is from Chris Terry with Deutsche Bank. Please go ahead.

Hi guys, a couple from me. I'm just wondering if we can get a little bit more color on the Phase W. I remember when we were on site last year just going through that. Is it more around the strip ratio optimization? You've listed few things I think on Slide 29, but just looking for a bit more color on what's going on in 2017?

Sure, Chris. I'll get Mr. Tomory to jump on that one.

Yes. We are doing our work. So the bulk of the results will come out with our feasibility study in Q3, but there is couple of things I can talk about. Back when we did the visit we also had the results of our scoping city, which we talk about 2.4 million ounces of inferred and with the year end you're seeing we've added 1.3 and 1.7 respectively to M&I and inferred. So we've been able to grow the resource a little bit with success in our drilling program and it's been a major focus. And one thing that's encouraging is the M&I that is showing up at Round Mountain is over a gram a ton versus 0.7 grams in the current reserves. In other words, as we get deeper at Phase W it was seem that the grades are becoming better. However, that's offset by the bigger strip ratio. So what we're working on right now is continued drilling continued resource modeling estimation and optimizing the mine plan to drive returns and I said we'll have the results of that in the feasibility study in Q3.

Thanks. Thanks, Paul. Maybe flush out a little bit more on the CapEx side, I think in the last couple of years you have said the guidance and then during the ear you've probably pulled it back a little bit or it's been somewhat flexible, how do we think about that 900 million and what might actually get spent, and is a gold cost dependent or is that lack of the amount that comes through it?

Yes. Again just I would point out and hand over to Tony. I mean, the 900 is the total capital, where we have been extremely consistent is on the sustaining capital in the 400 plus or minus kind of range year after year. And so the adjustments are relating to what happens through the course of the year on the growth capital, but Tony maybe just pick that up.

Yes, I think it's a good question and you know we have been under-spent in the past. I think when you look at '16 as a proxy we pretty much spent the sustaining capital process. So, our expectation is the sustaining capital will likely be spent on the growth side, the big factors are really going to be the Tasiast spend then some of that actually falls into 2018 or not and you know that's why when we looked at our guidance we've indicated 900 million plus or minus 5%. It's really a function of whether it falls into 18 or not -- we've been pretty good in terms of being under-spent on capital and it is possible that that will be case again this year, but at this point for a budget purposes I think 900 is what I would use for modeling. And just coming back to David's question on the breakdown of the additional items, just to give you a better color Round Mountain is roughly the PSM is roughly $20 million. We have some mobile equipment additional mobile equipment at Tasiast at roughly $35 million that's included in that 125, development is $10 million, and then the rest is project study. So that sort of breaks out the 125. So I've saved Tom a phone call there.

Okay. Thanks very much.

Thanks, Chris.

The next question is from Steven Butler with GMP Securities. Please go ahead.

Good morning, guys. It's just a quick question to follow up on the Phase W project. Paul, you mentioned the trade-off between strip ratio and graded debts. So, is the inferred resources of Phase W substantially a debt, or potentially within the pit itself or peripheral or strike?

In our exploration addendum, there is a good cross section that identifies a zone of mineralization, so rather than me trying to describe it with words, just have a look at that cross, but it's basically all ex the current pit. So Phase W is a large push back that also contemplates some infrastructure development at surface. We'd have to move some of the facilities but it's the entire resource is ex the current reserve pit.

Understand. Okay. Paul. Thanks and then you mentioned you guys mentioned the exploration budget I think it's the largest on record for Kupol. Do you have a magnitude of what you're spending this year in terms of last year?

Yes, we are targeting $15 million-$16 million in Russia. So that's combined Kupol and Dvoinoye. And so, that's the largest in the portfolio. I'm not sure it's the largest on record in Russia, but it's the largest this year in the portfolio.

It is the priority in the portfolio this year.

Right, okay. Okay. Thanks, guys.

[Operator Instructions] Next question is from Tanya Jakusconek with Scotiabank. Please go ahead.

Yes, good morning gentlemen. I have a question on Fort Knox and Paracatu, and it has to deal with your filed technical studies, if you go back, they're a bit stale, but they did show 2018 dipping in production at both of those assets, and I am just trying to get a little bit of clarity given the 2017 and 2016 was actually -- they performed quite well. Maybe you can give us an idea whether that dip that is in technical study is going to occur, or maybe some guidance on what exactly do you think 2018 could look like for those assets?

Yes. Obviously you know, we don't kind of give beyond the one year guidance, and it has tended to be a bit of a dynamic world, and I don't disagree that those -- some of those technical reports maybe at a point where -- there maybe some narrative in trying to get an update, but maybe specifically to your question…

Yes. On Paracatu, Tanya, I think what you are referring to is a big different production in the TR indicated…

Yes, that's right.

This year, next year; that is driven by the fact that the technical report assumed only plant two continuing. So, we envisioned the shutdown of P1. And as we talked about in the last couple of years, we are now blending ores. So, we are realizing higher combined throughput, and we are also reprocessing the tailings as well. So you are right that some things have changed from the technical report, and I think you know, that's part of an ongoing optimization for the mine just looking at what the optimal mine plant is, given various changes to some inputs.

Paul, could you give us a bit of guidance whether we don't dip down to that under 400,000 ounce level, like do we -- are we in the 450-ish level, just an idea of where we could see ourselves.

Yes. So we are redoing the mine plant right now, an optimization. It's too early to put exact figures on it, but we are not likely to dip as low as what was in the technical report. We are going to stay a little bit higher.

And what about Fort Knox?

Hi Tanya, this is Lauren. I will just comment briefly on Fort Knox. The team there has been doing really excellent work in terms of delineating potential extensions to the ore body, and has become quite creative in finding ways to talk a little bit more tailings into the tailings facility. So I think it's safe to say that we would sustain maybe a bit more production than you are seeing in the TR. And the TR for Fort Knox doesn't include anything in the East and the South Wall, where work is ongoing for expiration.

But may be not as high as here?

That's a good year.

Okay. All right, thank you.

Thanks.

The next question is from Steve Parsons with National Bank Financial. Please go ahead.

Yes. Thanks. Just to follow-up on Fort Knox quickly, sort of looking at the longer term, I understood that the tailings stamp was going to be full at Fort Knox in 2018, and everything after that will begin stacked out to the heaps breach, is that still correct?

Hi, Steve, this is Lauren again. As I mentioned, the team has been doing some very good work on that tailings facility, and you will appreciate that as you plan your tailings deposition approaching closure you start looking at things in a lot more detail. And we are finding the ability at that facility to tuck-in a bit more tails here and there inside the existing facility. And so, we are optimistic that we are going to be able to see some incremental improvement there.

Okay. I heard the mill shutting down in '18, so you are suggesting it can go longer?

Well, we are optimistic.

Okay.

We need to finish the work.

Got it, okay. Over to Tasiast, obviously you guys have been spending a long time engineering the Phase 2 in optimizing the CapEx, as you are nearing completion on the feasibility study and sort of considering the backdrop for steel and diesel prices, are you seeing any pressure on CapEx prices for Phase 2?

It's Paul Tomory here. Part of the Phase 2 FS versus what we did in the PFS is an update on all key inputs and does includes the capital inputs. What we have seen on Phase 1 has been generally quite encouraging. The market remains favorable for major project development, particularly on major equipment packages, and also on contract labor rates. For example, in Mauritania we are seeing performance from our national contractors, our national local contractors -- higher productivities than were assumed in the PFS. So these are some of the ongoing inputs. Steel, although it's a large input in terms of total tonnage, the real cost comes in the value-add from the fabrication and the manufacturing of the components, and that market remains favorable from a CapEx point of view.

Okay. In terms of the decision, I understood it was served later, this year decision on whether or not to go ahead with Phase 2, is any of that decision -- I would assume also political base to understand there is an election in Mauritania next year?

No, we've had -- I mean, the answer is no. It's going to be all about completing the feasibility study and understanding the environment we might find ourselves in as we get into the third quarter. All things being equal, I've said before, Steve, our desire would be to press on and go out of Phase 1 directly into Phase 2. From a political point of view, we are in our seventh year of operating in Mauritania, and we have found the government to be extremely supportive, constructive, we get our permits, you know, and I think they have been the cases historically, and I think there is a lot of positive buzz in country now that we are actually proceeding and executing with Phase 1. So that hasn't been something that keeps up awake at night at all.

Good. Okay, that's very helpful. Thanks.

Thanks.

The next question is from Frank Duplak with Prudential. Please go ahead.

Good morning, guys. I just had a question on the income statement, the other operating expense line, looks like it was a pretty material year-over-year, with 76 last year, 209 this year; just curious if there are any big sort of one time items we could think about or any color you might have on that line would be helpful.

Yes. Sure, Frank, I can take that. You are absolutely right, there are a number of one time items, and the biggest item that hit during the fourth quarter was basically a write-off of state VAT in Brazil, and what we did was we entered into what's called an MSE Program with state government and wrote-off that VAT and got some concessions on a go-forward basis. So what we have is effectively clean slate with respect to previous liabilities that could have come up on the state level, and puts us in a position to recover the VAT on a go-forward basis. So as part of that, we took that through other expense and we also were able to get a tax deduction for that on the Federal level in Brazil. So, actually reduce our tax expense in 2017. The other items were really ticked up during the previous three quarters with the exception that we had, an incremental amount of $27 million which was reclamation expense that wasn't booked when we recorded the impairment at Q3. So, those are the two major items that came through in the fourth quarter. The VAT write-off was $58 million put into context, $27 million on the reclamation. So I'm happy to answer any other questions on that.

And that 58 would have been a non-cash expense, it was just simply a write-off of the receivable?

It's a write-off of the receivable, and hopefully put that behind us and puts us in a position to recover VAT on a go-forward basis.

Thank you. I appreciate the help on that.

No problem.

The next question is a follow-up from Andrew Kaip with BMO Capital. Please go ahead. Andrew, your line is open.

Yes, thank you very much. Just one follow-up question on Maricunga, the 27 million in reclamation cost that you book in the other operating costs, are we going to expect any future reclamation cost to run through the other category? And if so, what would be the timing for those future reclamation costs?

Sure. I can certainly address that. As far as reclamation cost go, as you appreciate we have an ARO liability, which is accrued, and normally what would happen is to the extent that you are recording reclamation costs that are set against that liability. So we have a cumulative liability that did not broken out separately for Maricunga, but it's included in our ARO liability on the balance sheet. So if it's specifically reclamation-related, it will go through that ARO liability. Going forward, though we do expect to continue to have some care, maintenance-related expenditures with respect to Maricunga which will flow through the other expense line. In the third quarter, we had indicated that was going to be about $10 million and when we looked at that, the big change that's really happened there is that because of the fact that we have been getting more ounces from the heaps quicker than we had otherwise anticipated. So we are getting the revenue much faster than we thought, and we are likely going to see production at that site probably in the first quarter of this year. It puts us in a position where we expect to get cash with ounces going forward. So we're not going to get that cash to the same extend. So this year we are looking at about between $20 million and $25 million of care, maintenance, and we will have to look at it on a go-forward basis from there depending on what happens with the site.

Okay…

And that's part of the $60 million that we budgeted for other expenditures.

Okay. So, Tony, really the 27 million was just truing up with respect…

Was absolutely a truing up, that's right.

Okay, great.

This concludes the time allocated for questions on today's call. I will now turn the conference back over to Paul Rollinson for closing remarks.

Thank you, Operator, and thanks to everyone for joining us today, and we look forward to catching up with all of you in the coming weeks. Thank you.

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