Kinross Gold Corporation (KGC) Q2 2017 Earnings Report, Transcript and Summary

Thank you for standing by. This is the Chorus Call conference operator. Welcome to the Kinross Gold Corporation Q2 2017 financial results conference call. As a reminder, all participants are 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, Senior Vice President, Investor Relations and Corporate Development. Please go ahead, Mr. Elliott.

Thank you and good morning. With us today, we have Paul Rollinson, Chief Executive Officer; Tony Giardini, Chief Financial Officer; Lauren Roberts, Chief Operating Officer; 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 information, please refer to page two of this presentation, our news release dated August 2, 2017, the MD&A for the periods ended June 30, 2017 and December 31, 2016, and our most recently filed AIF, all of which are available on our website. I’ll now turn the call over to Tom.

Thanks, Tom. At the beginning of the year, I laid out four key priorities for 2017. First, continue to deliver strong operating performance and maintain balance sheet strength. Secondly, continue to advance the two-phased expansion at Tasiast. Three, continue to realize the potential of Bald Mountain. Lastly, continue to advance our pipeline of additional organic projects. Today, I'm pleased to report that we've made excellent progress in all four of these areas and we have laid the groundwork for continued momentum in the second half of the year. While I’ll give you a high-level update on these priorities before turning it over to Tony, Lauren and Paul for additional details. First and foremost, we had another strong operating quarter, hitting our targets for production and costs in all of our regions. I would highlight a few standout operations in the quarter, including Round Mountain, which had an excellent second quarter, delivering increased production and its lowest cost of sales per ounce in five years; Paracatu, which achieved a new record for quarterly production; and Buckhorn, which saw notably higher grades during its final full quarter of mining operations. As you can see from the results, in the first half of the year, we remain on track to meet our corporate guidance for the sixth consecutive year. In terms of our balance sheet, we further strengthened our financial position during the first six months of the year, increase in cash and cash equivalents to approximately $1.1 billion, and optimizing our debt portfolio, which Tony will speak to in more detail. With a strong liquidity position and no debt maturities prior to 2021, we have the financial strength to invest in our strategic priorities and development projects. Our second priority is the two-phase Tasiast expansion, you'll hear more details from Paul Tomory in a moment, but I’d just say that we're making great progress on the development of phase one, which is now approximately 55% complete, and remains on track to reach commercial production in Q2 of next year. The phase two study is also progressing very well and we look forward to sharing the results with you in approximately six weeks. I would also add that the efficiency gains we are seeing at the mine will contribute positively to both the phase one and phase two projects. Our third priority is to continue to realize Bald Mountain's potential. As we noted earlier in the year, we expect to double production in 2017 with reduced costs. And with our second quarter results, the trendline is definitely going in the right direction. We've significantly increased our mining and stacking rates and costs have continued to decline. We're also advancing engineering work on the Vantage complex located in the south area of the property where we expect construction to commence in the first half of 2018. Finally, we're also making good progress on our fourth priority, which is to advance our pipeline of additional organic projects. The feasibility study for the potential Phase W at Round Mountain is also going very well. And like Tasiast phase two, we expect to share the results in mid-September. We began processing ore from the September Northeast deposit through the Kupol mill in June. I was at the site a few weeks ago and was also very impressed with the progress the team is making in developing the twin declines at Moroshka where surface infrastructure is now complete. We've also continued to advance other exploration priorities. Paul Tomory will be sharing some mid-year highlights for you and touching on the properties where we've had done some good success. So, to summarize, it's a very busy time for us, with lots of exciting development opportunities on the horizon. As we advance our future opportunities, we continue to deliver in the two areas that have defined our overall strategy, namely operational excellence and financial discipline. I'd like to reiterate, we are on track to meet our guidance targets for 2017, the sixth year in a row and our balance sheet is in excellent shape. I'll now turn the call over to Tony for a review of our financial results.

Thanks, Paul. Financially, Q2 was a strong quarter. While the gold price was essentially flat compared to the same quarter last year, production was up slightly and production cost of sales declined by 10% quarter-over-quarter to $660 an ounce. This was our lowest quarterly cost of sales since Q4 2011. We generated approximately $230 million in adjusted operating cash flow, which represents a 23% increase year-over-year. One item to note is that taxes paid increased year-over-year as payments in Q2 2017 included amounts related to tax reassessments in past years, which were previously accrued and tax installments paid in Q2 for our US operations of approximately $20 million. Operating earnings were also higher due to lower cost of sales, resulting in an increase to reported net earnings of $0.03 per share compared with a net loss of $0.02 per share during the same quarter last year. Adjusted net earnings for the quarter were $55 million compared to a loss of $10 million in Q2 last year. Capital expenditures for the quarter were $200 million. We remain on track to meet our expected capital spend of approximately $900 million as spending is expected to increase in the second half of the year. We have made two slight adjustments to our guidance, which – taken together – are expected to be a net positive to earnings for the year. First, we have increased our forecast for other operating expenses to $80 million to $90 million, up from our original estimate of $60 million. The revision is due to costs associated with the Paracatu curtailment, which Lauren will discuss further in a moment, and that and other tax-related items at Tasiast. Second, we now expect DD&A to be approximately $200 to $325 per ounce, down from our original estimate of $350 per ounce. As Paul mentioned, we continue to strengthen the balance sheet during the first half of the year with the sale of several non-core assets, namely Cerro Casale, Quebrada Seca, and White Gold. As a result, we ended the quarter with approximately $1.1 billion in cash and cash equivalents, an increase of $240 million compared to Q1. We also continued to optimize our debt portfolio to further strengthen our financial flexibility. We took advantage of favorable conditions in the debt market. And in July, we completed an issue of $500 million of unsecured senior notes due in 2027 at a rate of 4.5%. We used the proceeds of this public debt issue to repay our term loan, which was due in 2020. We now have no debt maturities prior to 2021. We also extended the maturity date of a $1.5 billion revolving credit facility by one year to 2022. With $2.5 billion in liquidity, strong cash flow from operations and net debt to EBITDA ratio of 0.6, and a manageable debt profile, we are in a strong position to invest in our future development opportunities. I’ll now turn the call over to Lauren for a review of operating highlights.

Thank you, Tony. Each of our three operating regions performed very well in the quarter delivering strong results within our guidance targets. Our mines in the Americas region produced approximately 442,000 ounces for the quarter at a cost of sales of $658 per ounce. Fort Knox had a solid quarter as higher mill grades largely offset heat bleach performance which was impacted by a colder-than-normal spring. Turning to our Nevada assets, Round Mountain, as Paul mentioned earlier, achieved excellent results in the second quarter. We're mining a deeper section of the pit where grades are higher which has helped boost production 24% year-over-year, while reducing the cost of sales to a five-year low of $641 per ounce. At Bald Mountain, we are on track to double production this year compared with 2016. Production continues to increase and costs continue to decline. Tonnes of ore mined and processed have both increased by more than 137% year-over-year. With a significant amount of material now stocked on the heaps, we're in good position for higher production in the second half. Buckhorn has continued to impress right to the end of its mine life, processing higher grade material in the second quarter that increased production by 24% year-over-year and helped lower cost to a near record low of $402 per ounce. The last batch of ore was hauled to Kettle River from Buckhorn in early July. We now expect the mill to process stockpiles with minimal production in the third quarter. Paracatu had a strong quarter, with improved grades and better recoveries contributing to a 28% increase in production and a 23% improvement to cost of sales compared to the first quarter. The improved recoveries were driven by two factors. First, we ran a zone of the ore body with higher sulfides, which is resulting in higher recoveries. This material was more typical of what we would expect for the life of mine or feed to plant two. And second, we have made some operating changes to the gravity and flotation circuits. Q2 was the first quarter of operating the plant with these changes in place and the initial results indicate a benefit to recovery. While Paracatu had a strong quarter, insufficient rainfall in the region continues to be a challenge, with this region of Brazil receiving only 70% of historical average rainfall year-to-date. We had anticipated earlier in the year – as we had anticipated earlier in the year, we curtailed mining and operations at plant two in early July due to low rainfall. We've seen a reduction in annual rainfall since 2015 at Paracatu. And as we did in the previous two years, we have factored this into our regional production guidance for the year. We, therefore, remain on track to meet our 2017 guidance for production and cost of sales. We've increased the reprocessing of tailings through plant one to 50,000 tonnes per day, which is partially offsetting the production impact of the curtailment. While there is significant variability in the grades of the tailings, we estimate that this will produce approximately 25,000 to 35,000 ounces during the third quarter. We continue to implement mitigation measures aimed at both reducing our water consumption and securing additional sources of water. We've enhanced the water pumping system, secured additional water rights and installed new wells around the site. Studies of the region's geophysics are ongoing and we expect to grow more wells and target additional water sources later in 2017. In the interim, we have brought forward planned maintenance at plant two. We expect to restart mining and plant two operations in the fourth quarter once the rainy season begins and assuming the water balance recovers sufficiently to resume normal operations. At Maricunga, we continue to rent [ph] the material placed on the heaps before mining operations were suspended in 2016. We now expect production until the end of 2017, although at reduced rate compared to the first half of the year. Turning to our West Africa region, our two mines produced approximately 106,000 ounces for the quarter at a cost of sales of $842 per ounce. Tasiast delivered another strong quarter with 56,000 ounces at a cost of sales of $799 per ounce. Production was lower than Q1 largely due to slightly lower grades as we mined through a lower grade sequence in the mine plan. Moving to Chirano, we have completed surface mining operations and mining is now focused on the higher grade underground deposits at Paboase and Akoti. Production was 28% higher year-over-year, but down slightly compared to the previous quarter due to the completion of surface mining operations. Cost of sales followed the same pattern, down significantly compared to last year, but up slightly compared to Q1 largely due to the higher underground maintenance costs. The Russia region produced approximately 146,000 ounces of gold for the quarter at a cost of sales of $540 per ounce. As expected, and consistent with the mine plan, lower mill grades resulted in lower production. However, the region remains a strong performer, consistently achieving costs among the lowest in our portfolio. We began processing ore from the September Northeast satellite deposit through the Kupol mill in June as planned. Work on the Moroshka deposit is well advanced with surface infrastructure complete and development of de-clines proceeding on schedule. In summary, we have demonstrated strong operational momentum in the first half of 2017 and we are very well positioned to meet our guidance targets for the year. I’ll now turn the call over to Paul Tomory for an update on our development projects.

Thanks, Lauren. We've got a lot on the go right now with our projects and exploration sites. We've got one of the most busiest and most productive quarters in recent memory. We've got the constructions of the Tasiast phase one expansion progressing well. We're in the final mile of the feasibility studies for Tasiast phase two and Round Mountain phase W. We're doing further work on expanding and upgrading resources at Bald. We're in the final stages of engineer for the Bald Mountain Vantage Complex project. And we're seeing encouraging results in Russia and at Tasiast on our priority brownfields targets. I’ll take you through some of the progress on each of these projects. Starting with the Tasiast expansion, it's progressing well and it's on schedule and on budget. We're now approximately, as Paul mentioned, 55% complete on construction and we have 85% of all required materials at site. Installation of the sag mill is progressing very well. The outer shell and the heads are on. Bolting is taking place, as we speak, and we started work on the trunnions and the upper portions of the gearless motor drives. Over at the crusher, and the picture is up on the slide here, the crush and the stockpile area, concrete work is in its final stages and the mechanical contractors for the crusher, apron feeders and conveyors have been mobilized. Over in the existing mill, construction results are progressing well on new leach thanks, cyclone towers, screens, intensive leach and other new elements. In addition, we've started some early commissioning. The oxygen plant has been commissioned and handed over to ops. And in the new tailing storage facility, we plan commissioning and handover to ops sometime in August/September – yeah, in the next several weeks. Phase two feasibility study is nearing completion and we expect to share those results with you in September, along with the results of the Round Mountain phase W feasibility study. We expect to make a decision on both of those projects at that time. Turning to Bald Mountain, we have two main areas of focus. First is development of the Vantage Complex in the South; and second, focusing on our exploration efforts to expand and upgrade the resources. Engineering work at Vantage is progressing well and the project team is now in place. We're in the midst of finalizing our execution plan and we expect to begin the initial works, procurement, and major capital spending in the first half of 2018. In terms of what are the main focus at Bald, expansion and upgrading resources, we continue to drill the Vantage deposit, including the South extension, Saddle and Luxe, and in the North area drilling is focused at the Top and Saga deposits and results continue to be encouraging. I’d like to conclude with a quick update on two of other priorities exploration targets. First, at Kupol, we have completed approximately 44,000 meters of core drilling in the first half of the year, but half of that was infill, but the north and the south strike extensions were the main vein. The results are encouraging, confirming our optimism from start of the year, and we expect to undertake geologic modeling and resource evaluation later this year to determine what potential mineral resource additions and reserve convergence we might have at year-end. Second, at Tasiast, drilling was focused on two deposits in the Tasiast Sud area, C613 and C615, which are located immediately south of the main West Branch deposit and just west of the Tamaya deposit, and as you can see there on the map on the slide. With approximately 13,000 meters drilled in the first six months of the year, C613 has been defined over approximately 2 kilometers a strike and is open south and north. While over at C615, it's been defined over 3 kilometers a strike. The majority of the mineralization at both these targets is within a banded iron formation, which is quite similar to what we encountered in the early years up at the Piment pits. Following these encouraging results, we have decided to accelerate the infill drill program with the goal of potential mineral resource additions at the year-end. Parallel to this, we've also initiated a PFS that contemplates a dump leach operation in the Tasiast Sud area, combining material from Tamaya, 613 and 615. In summary, we're making excellent progress on all our projects and exploration and we look forward to updating you on a number of these important milestones later in the year. With that, I'll turn it back to Paul.

Thank you, Paul. So, to sum up, I’ll just reiterate. We had a strong second quarter and first half. Our portfolio of mines continues to deliver. We have an excellent balance sheet. And all of our organic development projects are advancing well. So, with that, operator, I'd like to open it up to questions.

Thank you. [Operator Instructions] The first question is from David Haughton of CIBC. Please go ahead.

Good morning, Paul and Tim. Thank you very much for the update. I've got some questions on Paracatu, if I could. Quite a few moving parts there. You're changing the mill 1, mill 2. You've got some down time, mill 2, as a consequence of the water. Can you just talk us through what Q3 would look like as far as the split of production goes? And then, what we should expect going forward once you have the water that you need?

Absolutely, David. Thank you for the question. So, as we discussed in the speaking section, we have curtailed all mining activities and the operation of plant two in Q3. We're focusing our efforts on reprocessing of tails in plant 1. There's a few reasons for this. We are at a point in mining the tailings that we're actually able to utilize two mining methods at the same time. And so, one is to mine with truck and shovel and feed the plant directly with equipment and the other is that in the second quarter we commissioned our tailings pumping system. And it's also feeding plant 1 directly. So, with those two mining methods operating concurrently, we're able to deliver 50,000 tonnes a day of tailings to plant 1, which utilizes the full capacity of the plant. The other benefit for us of mining tailings is that, as we mine tailings, we liberate water that's entrained in the tails and that helps us to sustain our operating time in Q3. The net result of that is that we would expect to produce something on the order of 25,000 to 35,000 ounces during the quarter. We will look for opportunities to restart plant 2 on a batch basis should the water balance recover to a level that allows us to do that. But right now, that's what we're believing we'll produce.

But what would you expect, say, for any production coming out of the plant 2 during Q3? Would they just be minimal production here or zero? What's the sort of number should we be thinking about?

So, the 25,000 to 35,000 ounces does not include any production from plan two. Plant two would be upside, dependent on receiving some rain.

Okay. So, if we're thinking about the split going forward, plant 1 had been about 18 million tonnes per annum. Let's call it 55,000 tonnes a day. So, the balance is about 75,000 tonnes a day going through plant two. If you do get the water going forward, is that the kind of split that we should be thinking about? Is this going to be a permanent kind of reprocessing through plant 1 of the tails or is it only for the interim to extract the additional water out of the system?

Right. So, right now, the reason that we're doing this is because of the water balance. Under normal operations, we would favor feeding as much fresh ore to plant two as possible. And that should be on the order of more like 120,000 tonnes a day, and not 75, depending on the work index of the material that's going to the plant. We also send some fresh ore to plant one during normal operations. And then, the tailings reprocessing is basically an economic decision. And then when we have capacity and it makes money for us, then we utilize it. But the main show is the fresh ore milling in plant two.

Okay, alright. Just over to Fort Knox, if I may. So, you had a colder weather in Q2, does that mean that we should have some additional leaching or leached ore coming out in Q3? Are you expecting a bit of a catch up in Q3 as a consequence?

Yes. Typically, when we have a delayed spring either because it's colder, it just takes longer for it to come, then the flush of ounces that we typically see in the spring is also delayed. So, we would anticipate the ounces that didn't come from the heap in the first half to come from the heap in the second half.

Okay. And last question. Sorry, I know I'm taking a bit of time here. On page 23 of the presentation, you’ve got the long section for Kupol. You did speak about strike length extensions. Now, as I'm looking at this, I'm seeing that it appears, at the extremities of that North and South end, that the grades kind of coming off. Is that really just a consequence of lack of drilling or are you seeing lower grades as you're going more distal part on that vein?

Well, no, the grades aren't coming off. In fact, we are continuing to get higher grade material. But, Paul, do you want to just expand a bit.

As I said earlier, our biggest focus of exploration in terms of meters drilled in the first half was easily at Kupol, 44,000 meters. And as I said, we're very optimistic about the results overseeing that we're seeing. We're seeing the hypothesis play out both in the south and in the north. As we mentioned on the last quarter, in the north it tends to be narrower widths, but the grades are maintained. And what we're doing right now is we are approaching the drill cut-off and we're going to start geologic and resource modeling. And as I said, we expect to provide an update on resource additions. But we are optimistic on the extension of mine life at Kupol from both north and south.

Yeah. Our trend at Kupol is really – we've had really good success at replacing ounces during the year while we're depleting. And I've often said for context, the original mine life at Kupol was 2017, this year, and` we've added 2018, 2019, 2020, 2021. And we feel very good about the potential for that to continue.

Excellent. Okay, thank you, Paul and Paul.

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

Good morning, guys. My questions is mainly around the balance, just use of cash going forward. In terms of the tax, the accounts in that quarter, is there anything else we should look for, I guess, over the next four quarters or so on the tech side? And the overall working capital position, can we just get an update on that as well?

Sure. Chris, it's Tony. With the tax, I think what we wanted to was, obviously, highlight some of the changes that have come out in tax. The tax paid in the current year, there were really a couple of the big impacts. One, we had a tax amount that we had actually accrued last year in Q2 and it was a reassessment of tax in one of our operations, and that actual tax payment was made during the second quarter. And as a result, it hit our cash tax and came through on the working capital – as part of our cash paid in our cash flow statement. The second major change was really just related to the business in general. As you recall, last year, the gold price started out roughly around $1,100 and we really didn't have an expectation of significant tax payments in the US. Current year, we've seen a much stronger gold price. So, as a result, we've had about $20 million in tax installments that we've paid and that's gone through our cash tax payment in the first half of the year. So, going forward, I don't think we'd see any major changes, subject, of course, to what happens with respect to the gold price and how things play themselves out there. I would also add that there's two other components that effectively netted themselves during the quarter that you wouldn’t see in the numbers. One was, we did have a withholding tax payment that we made on the Cerro Casale sale, which we expect to recover, but we did make that payment. So, when we talked about 260, we effectively received 240 because roughly $22 million was paid in withholding tax. And then, we also – netted off against that, we had some refunds come out of Chile that effectively netted those balance. In terms of working capital, it's just ebbs and flows and timing related more often than not and inventory and receivable specific, but we don't see any major changes. I would say – the one thing that I will point you to we have highlighted in the past that we're holding on to inventory associated with Maricunga. And so, our expectation is subject to the plant continuing the way we expect it to that we would sell that gold in early 2018. So, we would, obviously, see a reduction in inventories and increasing cash as a result of those sales. Absent that, it's all pretty much steady as we go. As Paul highlighted and I highlighted, balance sheet is in great shape, couldn’t be happier with the position that we're in as we start to look at some of the large capital projects that are in the portfolio.

Right. Thanks, Tony. And just a question on the overall balance sheet for yourself or for Paul, obviously, you’ve got the Tasiast phase two. You're considering a phase W and other growth options. So, you’ve got some cash outflows potentially there. What else are you seeing on the horizon. Has the M&A opportunity space changed at all in the last three to six months or are we still pretty much in the same position as late last year?

Look, on the M&A point, I think we're in a great position. Because of the balance sheet strength, we don't really have to sell anything. And given the organic projects in front of us, we don’t really need to buy anything. And that puts us in a really strong position, I think. We do look. And we keep an eye on what's out there, but we don't have to transaction. And I think if you look in the rearview mirror, in the last five years, we've really only bought once and sold three times. So, I don't expect that discipline on the M&A to change just because we do have a strong balance sheet, is how I would answer that.

Okay. Thanks, Paul.

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

Good morning, guys. Just a couple of questions – well, first on Kupol. The grade that you present there, 9.78 on the gold grade, is that blend of Dvoinoye and Kupol ore feed?

Yes. Yes, that is. It's a blended grade through the mill.

All right. And then, when do you think Moroshka is going to come online?

So, we'll be into development ore in Moroshka this year and potentially some stoping depending on decisions we make with respect to mine sequencing.

Okay. And then, just in terms of Tasiast, can you give us some clarity on how much of the capital has been spent to date as sustaining capital and how much was growth capital?

You're talking about phase one? We're probably -- construction is at $55 million. In terms of total spending, we're probably approaching the $120 million, $130 million mark on the project. So, that's growth.

Okay.

And year-to-date sustaining, I don't know, Tony, you might have that number there.

$60 million approximately.

So, Tasiast, year-to-date, sustaining capital…

Sustaining, $60 million, yes.

And, sorry, Anita, the number I gave you on the project, some of that is 2016 spend. So, project to date, like I said, we're around $120 million, $130 million.

So, I’m just – just, Tony, I think in the disclosure – sorry, $60 million – okay, never mind. That's okay. That's fine. I was just looking at the wrong column. And then in terms of Round Mountain, have you seen any unit cost reductions at the site at this point?

Yes. Yes, we have. So, the team has put a tremendous amount of effort into improving our efficiency. And they're very strongly motivated to do so because they are desiring for the phase W project to work. So, there's been a tremendous amount of effort that has been put into it. We're seeing productivities go up and unit costs come down.

That's it for my question. Thank you.

The next question is from Greg Barnes of TD Securities. Please go ahead.

Yes. I was wondering if you could give us a little more color around the Tasiast Sud and the dump leach potential. What kind of grades are you looking at? Timing? I guess, there's going to have to be some kind of technical study on it as well?

Yeah, exactly. So, just a point of perspective here, the total package at Tasiast, we have 75, 80 km of strike length over the full land package. And up until now, most of the focus has, obviously, been in Piment and West Branch, which is the central 10 km. Tasiast Sud is south of the main Tasiast area by 10 to 15 km. And what we're looking at right now is the PFS that we're kicking off contemplates a dump leach operation. If you look on the map on that one slide, you can kind of see a central location there between 613 and 615 and Tamaya. What we're contemplating is the potential for a dump leach there. And you asked about grades, roughly speaking, our dump leach cut-off at Tasiast is around 0.4. We're probably modeling at 0.5 cut-off down there at Tasiast Sud. We're not expecting grades up in the range of big Tasiast grades, but we're still looking at 1 to 1.5 grams in that south area. There will be a portion – there will likely be a portion that is above CIL cut-off. So, one of the things we are assessing is the potential for trucking to high-grade fraction up to big Tasiast and dump leaching the majority at Tasiast Sud. It's early days. Most of the drilling we've done right now is wide space 100-meter drilling. And so, one of the things we want to do over the back half of the year is, as I said, accelerate the drill program, tighten it up to 50 meters, see if we can inferred and indicated., and parallel to that, develop a prefeasibility study to assess the potential of a dump leach operation there. So, it's too early to talk about inventories, but we're quite encouraged about what we're seeing there. And I think the acceleration of the program is an indication of how we are thinking about it.

So, we could get a better idea of this probably this time next year?

Well, certainly by year-end. If there is a resource to be declared, it will be included in our year-end reserves and resource – it wouldn’t be a reserve. It would be probably a resource. And we expect to finish the PFS sometime next year, but the first step would be a resource declaration if there is one at the end of the year.

Paul, just another question of bigger picture. I know the balance sheet is in great shape. You've got a lot of spending coming up, but you're well-funded to do that. Is there any consideration to resuming the dividend?

It's a good question. I mean, not at this time. I think that's a question that we would entertain more post, say, 2020, presuming we've had our period of heavy reinvestment in our business in the next two to three years. We understand, and agree, we're all shareholders and the return of capital is important. But, right now, the priority and the better return that we see is investing back in our business.

Right. Thanks, Paul.

The next question is from Steven Butler of JMP Securities. Please go ahead.

Well, good morning, guys. A question for you on the Paracatu, the sustainability of the higher recovery rate of 77% versus we've been running that around 73% in recent quarters. How does that sit for you guys?

Yeah. Very good question, Steve. So, as I mentioned, we're mining a higher – in Q2, we were mining a higher sulfide content portion of the ore body. And typically, in the higher sulfide portion of the ore body, we see a little better grade and better recoveries. And the encouraging thing about that is that type of ore is more representative of the long-term feedstock for plant 2. Now, in Q2, we made some tweaks to how we operate plant 2 and we did that in the gravity circuit and in the flotation circuit. And we saw pretty promising results, but we only had one quarter of run time with those changes in place and we'd like to get some more runtime under our belt before we're confident, but it looks encouraging at this time.

Okay. So, I guess, we'll look to see how Q4 performs and judge accordingly.

Well, I think in Q4, because of the mining sequence, we may not spend the entire quarter in that portion of ore body. But we can we provide you an update on that later.

Okay, sounds fine. Paul T, do you have any resource inventory at all at this Tamaya – you called that the Tamaya deposit. Is there any resources at Tamaya?

Yeah, there is. I don't know the exact number. It's around 200,000 in resource currently.

Okay. And the five-letter word, Tony, taxes, just come back to it or you can call me off-line if it gets too confusing, but you booked $58 million of taxes on the income statement. I assume income taxes have been approved and you reduced income tax payable by $20 million in the quarter, it appears, from Q1 to deferred recovery of $4 million. But then, you backed out the full $90 million. So, it appears as though, you maybe have backed out more taxes than you paid from an operating – adjusted operating cash flow. But maybe – am I missing there?

Yeah. I think if you look at adjusted operating cash flow, what we do is we back out working capital changes. Because we started out with $179 million number coming from the cash flow statement, you'll note that that's already net of the tax payments that we had in the quarter, which are roughly $90 million. So, the reason you can't tie it directly back to the cash flow statement is because we've got some of the amounts that are accrued or in the accounts payable and other taxes amount. And then the other balance is in taxes paid. So, it doesn't tie directly. But we're happy to just walk you through how that reconciliation works. But suffice to say, it's really just taking that working capital changes as we highlight in the definition of adjusted operating cash flow and nothing more.

Okay, thanks very much.

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

Thank you. Good morning, everybody. A question for Paul Tomory and then a follow-up for both Paul Tomory and Lauren. Paul, what percentage of the detailed technical drawings have been completed for Tasiast phase two? And if you and – or do you expect to be completed by September? And if you and Lauren can talk a little bit about how you're going to dovetail phase two construction at the backend of the plant at Tasiast with the ramp up of the front-end, the crushing in phase one that’s going to be completed here in – late this year or early next year and then ramp up early next year? I guess, my question is, how you are going to avoid the bottlenecks or the disruption of the operating team as you're implementing a fairly chunky expansion of the backend of the plant as part of phase two?

Right, okay. So, with regard to the drawings, we have our internal standards on where we need to advance projects before we get board approval on projects. The FS standard that we use is 10% to 15% engineering. And so, all of the drawings, as we stand right now, are already at FS level. Over the next two months, as we head to the board, request to proceed, we are going to continue to advance drawing. So, by September, we'll probably be a little bit advanced beyond where you would typically be at FS level. So, it's in line with how we have managed all of our studies over the last two, three years. With regard to your other question on time and commissioning, I think a reminder about the scope of works might be in order. Phase one is an upfront crusher, stockpile and sag mill, with some upgrades to the existing mill. Once that is up and running – so, that’s the 12K phase one project. Construction for phase two will take place beside the sag mill. And the phase two project is the installation of a ball mill and a brand-new 30K tank train. So, in other words, we can get construction essentially complete before we even have to begin tie-ins. And I'm going to oversimplify it a little bit, but it's really just a reconnection of the sag discharge slurry from the 12K project over to the new 30K project. I am oversimplifying it, but we design the project for minimal disruption in that cutover period. And we are now finalizing the details of that in the feasibility study. And when we release the results of the feasibility study, the tie-ins will be incorporated into the production schedule that we'll be releasing.

At this time, do you have a sense of the timing of the cutover period and the tie-ins? When would you expect that to occur? And, Lauren, do you expect there to be some sort of production disruption for that period?

Steve, it's Paul. Paul Rollinson. I mean, we're going to be back to you in six weeks with all the detail and we're going to be excited to give you a full update at that time. We don't want to speculate on this call. The feasibility study is in great shape. It's out for peer review. Let us get to the end of the work and we'll give you a very fulsome picture, as I say, in about six weeks.

Understood. Thanks, Paul.

Yup.

The next question is from Tanya Jakusconek of Scotia Bank. Please go ahead

Yes. Good morning, everybody. Congrats on the good operating quarter. Just wanted to come to phase W and I know you're coming out with feasibility study in six weeks' time also. But I just want to be reminded, is the feasibility study going to still be the 1.3-million-ounce deposit, the 51 million tonnes at 0.08 that we were told when we were on the mine site toward last year? Is that still the scope of the study?

Yeah. So, just again, it's maybe helpful to rewind a little bit here. So, at the kind of analyst tour, we added about 2 million ounces of resource to Round Mountain which subsequently became a higher number at year-end. We were able to add more inferred and add – and converting the inferred to indicated. So, the total pool of ounces that we're working with are more in the 2 million to 3-million-ounce range. However, now going back to your question on that, that's smaller pit design, what we're working on here on the feasibility study is something larger than that small pit that we discussed at the analyst visit. So, it would be something closer to the large pit that we described at that last June.

Okay. Remind me of what the larger pit was because my recollection from the mine tour was that we had the lay back – I think it was 100 million tonnes to access that 1.3-ounce deposit at the bottom of that pit. That’s my recollection, but clearly it's bigger than that. So, maybe if you can remind me of what…

Yeah. What we're targeting is between 1.5 and 2 million ounces.

Okay. So, that's what we should be expecting. And not take away from six weeks from now, but it would just be obviously – the lay back, are we expecting it to just go deeper. I think we were going to go down by 250 meters if I remember correctly.

Yeah. So, high level, it's only a few weeks before we put out the results, as Paul said, for Tasiast. We're just in the midst of finalizing our results and peer reviewing it. But in scope, Round Mountain is a large pushback at increasing strip and grade, the highest grade portion of ore body is down at depth. So, it's really an optimization exercise between strip and grade. But we'll be providing a lot more detail on that just in a few weeks.

Okay, okay. And I will look forward to hearing that. And then, maybe coming back to Paul, I know we talked about M&A and you have a lot of organic growth within your portfolio and you did say that you are looking at things that come along. Would it be safe to assume that because you have a lot of organic potential within your portfolio that you'd be more interested in producing assets?

Well, I think, again, as I said, we have a team. We have a good, strong, technical internal team and corp dev department. We look at stuff. And we're trying to find places where we can see volume. It could be production where we could maybe bring our operating strength to bear. It could also be development where we bring our balance sheet to bear. So, I think we're keeping an open mind. But the key point here is we don't feel under pressure to have to go out and do anything.

Yeah. No, I appreciate that. Okay, thank you.

Thanks.

Next is a follow-up question from Anita Soni of Credit Suisse. Please go ahead.

Okay, thank you. So, just another question with respect to Paracatu. Could you remind me what the recoveries in the tailings were?

So, the tailings recovery – this is Lauren, by the way, Anita. How are you?

Good. How are you?

Good. It was rude of me to start answering without saying hello. And the recovery of the tailings reprocessing closely follows the grade recovery curve for the ore. There's not a lot of difference between it. For me to predict for you a point in time, recovery is difficult because of the variability in the grade of the tails and the difficulty in predicting that. But you could always look back at the previous information that was released on PSAT [ph] and that would give you a good sense of things.

I was trying to save myself think that down.

I'll call it 55% to 65% recovery, depending on grade.

Okay, sure. And then, just to Paul, a question on the dump leach at Tasiast Sud, would that require additional or new infrastructure down there? Or would you be able to build new dumps? In terms of water requirements, is that something that also would have to be, I guess, thought about, compensated for?

Yeah. So, the PFS of Tasiast Sud contemplates a construction of new dump leach down in the south area. Like I said, sort of near the centroid of the three deposits – Tamaya, 613 and 615. What we're doing on the Tasiast phase two feasibility study on big Tasiast, we are sizing the pipeline and the water infrastructure to accommodate continued dump leaching at the site, whether at big Tasiast or at Tasiast Sud.

Okay. That's it for my questions. Thank you.

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

Good morning, everyone. I don't know whether you're going to answer this or not. I recognize that you have a lot of decisions to make here relatively soon, but is there any way to help us sort of frame what CapEx might be in 2018 or what it might be in 2018 over 2020 as you look at the bulk of these projects –spending on those projects?

It's Paul here. And Tony might want to add. I can appreciate it's a little frustrating, but we should really have this discussion as we get through September and the results of these feasibility studies in. it will start to frame up. You can go back and look at capital on a sustaining basis, we've often said, a placeholder, it moves up, it moves down a bit. We're generally in the range of about $400 million per annum to keep our minds well-maintained. And then, it's really a question of what the growth is going to be on top of that. Tony, you want to add?

Yeah. I think Paul sort of started the discussion. Sustaining, you can definitely look at $400 million-$420 million a year over that 2018 to 2020-time period. We do have a prefeasibility study out with respect to Tasiast phase two and the capital in that pre-feasible is $620 million plus incremental strip of about $120 million. So, that number is a starting point. We'll see where it comes out when feasibilities comes out later in September. There hasn't been a capital investment put out with respect to phase W, but that should be out shortly. And there will be good visibility into where that fits. And then it's really about are there other opportunities within the portfolio that would require growth capital as well. And we believe there are. And those will have to be factored in as well. So, then it's going to be about sequencing in terms of when we would if we've got, make positive decisions on all of those projects, to see them come out. So, I think, Frank, in answer to your question, we have no problem in answering it, but we'd like to wait until feasibility study comes out for Tasiast in September in phase W. And that will really give you the clarity that you need in terms of being able to look at capital. And I would remind you that expected capital, this year, is ballpark $900 million. So, that's a starting point to think about that in the context of 2018 through 2020.

Thanks, guys. I appreciate the color.

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

Good morning, Paul, everybody. I was wondering, what sort of oil price are you assuming in your costs for the second half? I’m just thinking that, given where oil is at the moment and perhaps taking into account hedges that you’ve got, then you might be getting a sort of following wind on your cost structure in the second half with lower oil prices?

Thanks, John. It's Tony. I'll start in terms of giving you a bit of color on that. So, oil, we budgeted $55 a share. And just as a sensitivity, just to give you an impact, about $10 a barrel impact is about $2 an ounce to us in terms of potential savings. So, if oil is effectively $45, we pick up a couple of bucks. We do have a significant portion of our – well, roughly, 50% hedged in the current year. And we have hedges out for 2018 and 2019, particularly with respect to Tasiast. So, I think one of the questions that we're looking at longer-term is if, in fact, we make a positive decision on Tasiast phase 2 – and in fact, I would also say with phase W because there is a significant fuel component associated with the stripping operation there. Are we going to extend out hedges further, given the current oil pricing? And I would suggest that that's quite likely. So, $55 is what we had used from a budget point of view, $10 impact worth a couple of bucks. Likely that we continue to look for opportunities to layer on hedges below that 55 level, particularly at Tasiast, the phase W.

Okay. That's great. Thanks. And then perhaps, another way of looking at all your capital questions that have been thrown at you, what sort of minimum cash funding ratios would you be comfortable going to? Maybe that’s a better way for us to approach financial modelling until we get the detail next quarter?

Yeah. I will let Tony answer that specifically. But, again, I think what's important here on these capital type questions is really about balance sheet philosophy. And our philosophy, I think we've articulated it many times is it's a priority for us to maintain balance sheet strength. So, we wouldn't proceed, and we've demonstrated that historically, with a project unless we're absolutely comfortable that we can fund through to the finish line. But on the minimum cash balance, Tony, maybe you want to just highlight where you're coming from?

Yeah. I think if I understood your question, John, it was really an appreciation of how much liquidity we need. And I think the key for us is actually liquidity. And so, that's a little different than cash because, as we've indicated, we've got $2.5 billion of liquidity, a billion dollars in cash and $1.5 billion of undrawn credit. So, the cash that we have, when we look at running the business, we sort of look at somewhere around $300 million of liquidity that we need to be able to really fund and run the business. And it's really just about being able to access that cash quickly if, in fact, we need it. So, what Paul indicated as we're looking at these development projects, we're looking at our liquidity on a five-year basis and really assessing potential impacts of changes to gold price and other inputs on our liquidity and our ability to fund through the development pipeline that we have. And we're going to continue to be conservative. We're going to continue to be fiscally responsive and be very cautious about making sure that we have significant liquidity available to us. And part of a decision to term out the term loan out to 2027 was very much driven by the fact that the interest rate environment that we see, but also the fact that it gets us through the bill period, so we've got lots of flexibility. And having just renewed the credit facility, we've pushed it out for another year, out to 2022, further strengthens our hand in terms of being able to take on these projects and see them through to completion. So, the answer to your questions is ballpark 300, but it's about liquidity and we feel very good in the current price environment and in lower price environments in the event that gold should go back down.

Okay, very helpful. Thanks a lot. And congratulations on the results.

Thank you.

The next question is from Andrew Kaip of BMO Capital Markets. Please go ahead.

Hi. Good morning, Paul and team. Look, I don't know whether you answered this. I had to drop off the call basically. But at Fort Knox, you indicated that production off the leach pads was adversely impacted during Q2 based on cooler weather. I'm just wondering, should we be thinking about better production off the leach pads in Q3 and in Q4? Can you give us an insight on how we should think about that?

Sure, Andrew. This is Lauren. Normally, when we see a delayed or colder spring and the flush comes later than we expect, we typically will see those ounces come back to us over the balance of the year.

Okay, all right. And then the second question I have is, I don't know whether you provided a bit of an exploration update at Fort Knox. You’ve indicated that you're doing some drilling in the pit walls and finding better mineralization. And we notice you’ve recently picked up some adjacent ground. And I'm just wondering if you can provide us a better a bit of insight on how exploration activities at the project are going?

Well, just a quick note on exploration. We are doing exploration at Fort Knox. And it's focused on areas peripheral to the pit. Too early to give an update on numbers and I would suggest waiting to the end of the year on any potential resource additions we may have at Fort Knox.

All right. Thanks very much.

This concludes the question-and-answer session. I would like to turn the conference back over to Paul Rollinson for any closing remarks.

Thank you, operator. And thanks, everyone, for joining us today. We feel we've had a very strong quarter. We feel we're firing on all cylinders. We're very excited about our project and very much looking forward to updating you guys in about six weeks. And I just want to thank all of our employees for all their hard work and having made all of this possible. So, thank you and we'll, hopefully, speak again in six weeks. Thanks.

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