Kinross Gold Corporation (KGC) Q4 2018 Earnings Report, Transcript and Summary

Good morning, my name is Lisa and I'll be your conference operator today. At this time, I would like to welcome everyone to the Kinross Gold Corporation Q4 and Year End 2018 Financial Results Conference Call and Webcast. All participants are in a listen-only mode to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] At this time, I would like to turn the call over to Mr. Tom Elliott, Senior Vice President, Investor Relations and Corporate Development. Mr. Elliott, you may begin your conference.

Thank you, good morning. With us today we have Paul Rollinson, Chief Executive Officer; Tony Giardini, Chief Financial Officer; 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 2 of this presentation, our news release dated February 13, 2019, the MD&A for the period ended December 31, 2018 and our most recently filed AIF; all of which are available on our website. I'll now turn the call over to Paul.

Thanks, Tom. Good morning, and thank you all for joining us today. I'll begin with some of the highlights from yesterday's news release and some observations about the year ahead before turning the call over to Tony, Lauren and Paul for additional details. I'm pleased to say that in 2018 Kinross has once again delivered on our core principals of operational excellence and financial discipline as we met our guidance for production, costs and capital expenditures for the seventh consecutive year. 2018 was a strong year for the company across a number of areas including record annual production at two operations, continued financial strength as we ended the year with $1.9 billion of liquidity, achieved key milestones at our pipeline of growth projects and continued progress in our exploration programs. I'd like to highlight a few standout achievements. Paracatu had a record year producing 522,000 ounces while also reducing costs by 6% compared to last year. Bald Mountain after doubling it's output in 2017 achieved a new record for production this year of 285,000 ounces. And Tasiast ended the year very strongly and achieved a record quarterly production in Q4. Notwithstanding strong performance by the overall portfolio we experienced a few operational challenges, particularly at Fort Knox following a pit wall slide and an unseasonable amount of rainfall earlier in the year. One of the most significant achievements in 2018 was successfully completing the Tasiast Phase 1 expansion. I want to commend the projects and operations teams for completing the project and for executing both, a seamless transfer and an impressive ramp-up of the new mill. Tasiast just performing better than ever with throughput averaging over 14,000 tons per day in the fourth quarter, almost 20% above nameplate capacity of the Phase 1 design. That strong performance has continued into 2019 with throughput and recovery continuing to exceed expectations. While we are very pleased with these results, continuous improvement is ingrained into our culture. Therefore, we're also undertaking a number of additional initiatives that are expected to result in meaningful cost and operational improvements at the mine. Lauren will have more details in a few minutes. As we think about the next steps for Tasiast, we are continuing to evaluate alternatives to optimize additional increases to throughput. Our objective is to continue to evaluate options that lower capital expenditures while preserving Taisast's overall value proposition. We are now incorporating Phase 1's better than expected performance into our analysis. While we advance this work, Phase 2 continues to be a viable option; and considerations for moving forward include our evaluation of the throughput alternatives, acceptable project financing terms, other capital priorities across the portfolio, and our ongoing discussions with the government of Mauritania. In regards to those discussions, it's important to highlight that throughout the process, Tasiast has continued to operate uninterrupted, in fact, as I just highlighted the mine is running better than ever. I'd like to provide some context on the types of matters we are discussing with the government without going into any confidential details and discussions of included tax issues, work permits for expats, and increasing opportunities for local suppliers. In addition, we're discussing customs and import duties and licensed conversions. Many of the matters under discussion are not uncommon in our industry and we are working to resolve them. I'd also point out that matters that we are not discussing with the government are equally important. For example, we are not discussing reopening the mining convention and to date, the government has not expressed a desire to do so. As well, you'll recall that we have a MIGA policy in place and that the IFC has signed a mandate letter in connection with the project financing which is progressing well. I met with the IFC earlier this month and they are highly focused on advancing the project financing to conclusion which is expected to be around mid-year. Both, MIGA and the IFC are members of the World Bank Group and we see merit in their involvement with Tasiast to help drive an alignment of interest for all parties. In the interim, our focus will continue to be on operating and optimizing the mine, finalizing project financing and completing our throughput optimization studies. I'd like to turn now to the year ahead. As has become a trademark for Kinross over the past 7 years, in 2019 we plan to keep focusing on our core strategic principles, namely delivering strong, consistent operational results and maintaining our financial discipline. We are forecasting another solid year from our operations with production and cost of sales in line with 2018. We're expecting a slight increase in our all-in sustaining costs in 2019 as a result of higher sustaining capital but total CapEx is in line with 2018 spending. Tony and Lauren will provide details in a few moments. We're also focused on advancing our pipeline of organic projects which are expected to extend mine life or expand production at existing mines in the Americas with relatively low execution risk. We made excellent progress on this front in 2018 and we have a number of key milestones planned for the year ahead. In the first quarter, we expect to begin commissioning the Vantage project and complete the Lobo Marte scoping study. In the second quarter, we expect to commission the Phase W processing circuit. And in the third quarter, we plan to ramp up stripping at Gilmore and complete the La Coipa feasibility study. To wrap up, I'm very pleased with how the company is performing across both, our existing operations and our development projects. Over the past seven years, we have proven ourselves to be strong, dependable operators who deliver on our targets, fiscally disciplined with the financial strength and liquidity to invest in our future and effective project managers who deliver our projects on time and on budget. We will continue to be a steady, reliable mining company, and I hope all of our stakeholders will benefit from these strengths. Before I hand the call over to Tony, as a company with a large mine in Brazil, I want to reflect for a moment on the tragic events of the Burma Dino dam collapse. I'd like to express on behalf of Kinross our sympathy and support for the people in the community who have been affected by this. Lauren will provide additional details on the engineering and technical side, but I want to reassure our stakeholders, our tailings facilities at Paracatu, like all of our tailings facilities worldwide, are designed, constructed, and maintained to the highest engineering standards, they meet or exceed regulatory and international requirements and standards of best practice, and we have rigorous monitoring systems in place. Technical excellence is ingrained into our culture, not only in how we build and operate our mines, but also how we construct, manage and reclaim our tailings facilities. I'll now turn the call over to Tony.

Thanks, Paul. I'd like to begin with a few financial highlights for 2018. Our operations generated approximately $874 million in adjusted operating cash flow compared to $1.2 billion in 2017. Our adjusted net earnings were $128 million for the year or $0.10 per share compared with $179 million or $0.14 per share in 2017. Reported net loss was $24 million or $0.02 per share compared with net earnings of $445 million or $0.36 per share in 2017. The change was primarily a result of decreased operating earnings needs, a reversal of impairment charges related to the sale Serac Sally in 2017 and an increase in 2018 income tax expense. Capital expenditures for 2018 were approximately $1 billion at the low end of our guidance. This included approximately $665 million of growth capital, mainly related to our organic projects at Tasiast Round Mountain, Bald Mountain and Fort Knox. During the quarter we continued to advance the $300 million a project financed that we are targeting for Tasiast. You will recall that mandate letters were signed with the IFC, a member of a World Bank Group and Export Development Canada earlier in the year. During the fourth quarter, we conducted a due diligence site visit, which included meetings with relevant Mauritanian government, ministers and officials. In addition, two commercial banks have also expressed interest in the financing and are engaged in the due diligence process along with the IFC and EDC. We are targeting completion of a project financing from mid-year. Turning to 2019, we're looking forward to another strong year. We once again expect production of 2.5 million gold equivalent ounces with costs of sales expected to be $730 per ounce plus or minus 5%. Our capital expenditures are expected to be in line with 2018 at approximately $1 billion plus or minus 5%. This includes approximately $65 million of capitalized interest. Our sustaining capital guidance has increased compared to 2018. This is essentially due to splitting at Bald Mountain as we complete the Vantage product project and we begin production in the South Area refine. As a result, we expect all-in sustaining cost to be $995 per ounce plus or minus 5%. Our guidance for both overhead and exploration expenditures are in line with 2018 and can be found in yesterday's news release along with our guidance for other operating costs contacts. For 2019 we're budgeting $65 per barrel for oil and exchange rate of 60 Russian rubles to the U.S. dollar and 3.5 Brazilian real to the U.S. dollar. These assumptions and the sensitivities we provided in the guidance section of yesterday's news release taking into account FX and oil hedges we have in place. Our strategy in this regard is aimed at managing near-term risk related to fluctuation in these inputs. For example, over 50% of our 2019 exposure for oil at Tasiast and our U.S. sites has been hedged at approximately $50 per barrel compared with our budget assumption, a $65 per barrel. In terms of a balance sheet, our cash position at the end of the year reflects the strategic investments we have made. This includes investments and our development projects of approximately $665 million during the year as well as other transactions to add value to our portfolio, such as a $254 million power plant acquisition in Brazil. We funded this deal with cash and continue to consider debt financing alternatives. In 2018 we also bought out JV Partners at two of our properties consolidating our ownership and projects per land packages, but we see significant potential. These include the Phase 7 deposit at La Coipa where we now own 100% and the Bald Mountain central zone, which was previously a 50-50 JV with Baird. We continue to maintain a strong financial position as we enter 2019 with total available liquidity of $1.9 billion. With every $100 per hour change in the gold price above our budget assumptions, $1,200 we expect to generate approximately $200 million of additional cash flow for the year. Positioning us well, at current spot, gold prices. To sum up with $1.9 billion of liquidity and no debt maturities until 2021, we continue to be in a strong financial position. Our focus on discipline, capital management and the strength of our liquidity position will continue to be priorities for 2019. I'll now turn the call over to Lauren.

Thank you, Tony. Overall, our portfolio delivered strong operating results in the fourth quarter and we achieved our full year [ph] guidance targets for 2018. Our success this year is a credit to the teams across the company. For me, this is highlighted by our strong safety record with 2018 being one of the safest years in company history. Our mines in the Americas performed well producing 1.5 million ounces in 2018 at a cost of sales of $740 per ounce. Paracatu was a standout performer, achieving a record production at 522,000 ounces while reducing costs per ounce by 6% year-over-year. The mines' performance reflects records tons mined and moved, strong throughput as a result of increased efficiencies in the mill, the highest recovery achieved since 2005, the benefits of our water mitigation measures and significantly improved rainfall compared to the previous year and lower power costs and favorable foreign exchange movements. We're looking forward to another strong year from Paracatu in 2009. While the racing season started strong at the end of 2018, rainfall was lower through January. However, with the successful implementation of our mitigation measures, we feel the risk of a potential impact due to loan [ph] rainfall is significantly lower than in previous years. Before I move on to the results from the rest of our portfolio, as Paul mentioned, I'd like to provide some details on our tailings facilities. Paracatu's tailings facilities are engineered, compacted and zoned, or build dams that were constructed using a centerline design. We routinely monitor and assess these facilities both with our internal teams and independent experts and we have not identified any areas of concern at Paracatu. I'd now like to move to our operations in Nevada. Bald Mountain delivered another record year production of 285,000 ounces. Cost of sales performance was also very strong at $547 per ounce representing a 15% reduction year-over-year. This made Bald our lowest cost mine in 2018. As we anticipated, production in the fourth quarter was lower and costs were higher than the previous quarter due to timing of ounces recovered from the heap leach pads. We're expecting another strong year at Bald Mountain as the Vantage project comes online and we initiate mining in the south area of the property. Round Mountain continued to deliver consistent results. Production was lower year-over-year, which was in line with our expectations. This was the result of fewer ounces recovered from the heap leach pads. We mentioned on our last call that there was a wall failure in the Southwest corner of the pit. Portions of the failure remain moderately active and mitigation plans are underway. At this time, we don't expect a significant impact of 2019 production but we are continuing to monitor the situation and have reflected some risk in our 2019 guidance. Turning to Fort Knox the site continued to experience headwinds in the fourth quarter as we work through the challenges associated with the wall slide that occurred early in 2018 and restricted access to the higher-grade material. As well, the site experienced significantly higher than average rainfall during the spring and fall, which further affected geotechnical stability. As a result, in 2018 production was down in costs were up compared to prior periods. Mill great oil release is expected to be low in the first quarter of 2019. In order to preserve tailings capacity for the best grade material, we plan to operate the mill at a reduced rate in Q1. As a result, we expect production to decrease in Q1 compared to Q4 and then increase as the year progresses. In 2019 we expect our America's region to produce approximately 1.44 million ounces at a production cost of sales of $750 per ounce, which represents almost 60% of our gold production for the year. Turning now to our operations in West Africa, Tasiast had an excellent fourth quarter achieving record production of approximately 92,000 ounces. As Paul mentioned, the Phase 1 expansion has performed better than expected with throughput averaging above 14,000 tons per day and recovery averaging 94% during the quarter. For the full year, Tasiast produced 251,000 ounces. While production was strong, cost of sales increased year-over-year by 30% resulting from higher fuel and maintenance costs and an increase in operating waste mined. We have accelerated our continuous improvement initiatives as a site transitions from a large capital project to a steady state operation. Areas we are targeting include operational improvements in the areas of mining, milling and maintenance, our overall approach to maintenance of the site and a review of all existing contracts. It's too early to quantify the impact, but we are targeting meaningful operational and cost improvements. Overall, at Tasiast, the strong performance we saw in Q1 has continued and we're expecting a strong year in 2019. Production at Toronto was slightly lower year-over-year, mainly due to anticipated lower grades. However, cost of sales decreased by 4% a result of lower overhead maintenance and power costs. Over the past two years, we have made great strides at Toronto, improving mine performance and rightsizing the cost structure. As a result of this strong performance, we are planning to reinitiate open-pit mining at Mamnao [ph] in 2019 this year we expect our West Africa region to increase production to 560,000 ounces at a production cost of sales of $800 per ounce. And finally, our Russia region continues to deliver strong and consistent performance producing approximately 490,000 ounces at a cost of sales of $582 per ounce. Production was lower year-over-year as a result of plan decrease in grade as well as lesion of mining of September Northeast at the end of 2017. As we noted last quarter, we can miss production at the Murasko satellite deposit October. While the veins are narrower than at the Kupol ore body, mining has gone well and is meeting our expectations. Development of Zone 1 satellite deposit located near Dvoinoye is continuing on schedule and we expect to begin production mid-year. Looking ahead, we expect 2019 to be another consistent year at our Russian operations with the region expected to produce approximately 500,000 ounces at a cost of sales of approximately $600 per ounce. Looking at the portfolio as a whole, our priorities continue to be safety, delivering strong, consistent operating results and managing our costs. I'll now turn the call over to Paul.

Thanks very much, Lauren. As Paul mentioned earlier, 2018 was a significant year for our projects and aspiration teams. As we completed Phase 1 at Tasiast advanced execution of the Phase W and Vantage projects, completed the Gilmore FS and added a project to our development pipeline, initiated studies in Chile at La Coipa and Lobo Marte, and continue to advance our exploration programs at our priority targets. Let me start by giving an update on Phase W which is progressing well and remains on time and on budget. Pre-stripping is advancing well. We've encountered initial low-grade Phase W while ahead of schedule and are placing material on the existing heap leach pads. Construction of the mine infrastructure such as a truck shop, warehouse, wash bay and fuel island are all proceeding as planned and approximately 35% complete. Construction of the new leach pad is now approximately 80% complete and construction of the process circuit for the vertical carbon-in-column plant is approximately 50% complete. We expect to start commissioning of the process circuit in the second quarter. At the Vantage complex project, Bald Mountain construction is proceeding well with new heap leach pad about approximately 85% complete and UVC IC plan similar in design to the one around mountain is approximately 30% complete. Supporting infrastructure including the truck shop, warehouse and wash bay is now about 25% complete. Talking of economic but previously leach door on the new heap leach pad is underway with approximately 50% of the material move on to a segregated portion of the pad. Mining activities at Vantage have commenced and initial or is now being stockpiled in preparation for completion of the new heap leach pad. Project has experienced a few challenges, particularly with a very tight labor market in Nevada and severe winter weather. However, we remain on-track to be in commissioning by the end of the first quarter. At Gilmore project at Fort Knox, we have completed final engineering at the Barnes Creek heap leach pad, grading for the new pad was complete in the fourth quarter and we expect construction activities to ramp up in the spring and continue through 2020. Expansion of the dewatering system will continue throughout the year in anticipation of stripping which is expected to commence in the third quarter of 2019. Overall project is off to a good start and is on budget and on schedule to begin stacking oil and leap portion of 2020. As for our future development opportunities in Chile, the feasibility study for the La Coipa project and the scoping study for Lobo Marte are both proceeding well. We expect to be able to share high-level results of the Lobo Marte scoping study with our first quarter results in May and to complete the La Coipa by FS in the third quarter. All necessary permits for La Coipa are on hand and we started planning our permitting strategy for Lobo Marte. I'd like now to share a few aspiration of highlights from the update we provide in the last year's news release, particularly focusing on Russia Toronto and Bald Mountain. We had a very strong year on the exploration in Russia where we added Ansys [ph] to partially offset the pollution and including additions of 325,000 gold equivalent analysis to proven and probable reserves, 50,000 gold equivalent ounces measured and indicated and approximately 420,000 gold equivalent ounces to infer. Over the past few years, we've been working on a hypothesis that there was potential along the north and south of the main Kupol trend. This has yielded a number of targets in addition to additions to reserves and resources. This coming year, the primary objective of drilling will be to test the death in north extensions and the main Kupol vein. And thus far, we've been pleased with the results. Drill intercepts continued to high-grade narrow vein mineralization extending northward and at depth below the Kupol mine workings. Our mines in Russia have a good track record of adding ounces and extending production. Through a combination of exploration success at Kupol Dvoinoye as well as engineering or optimization, we've extended mill production at Kupol until the end of 2023 which is yet another one-year edition at this high-grade high margin world-class asset. As you can see from the chart, when we first acquired Kupol mine life was expected in 2017 based on 5 million contain ounces of gold equivalent. Since then Kupol Dvoinoye have produced over 7 million ounces and have a combined 2.1 million gold La Coip analysis of reserves remaining. And we continued to be encouraged with what we were seeing our exploration results for future potential resource additions. We've increased our budget for exploration in 2019 for Russia to approximately $20 million to continue to exploring and delineating high-potential targets at these two assets At Toronto, exploration death extensions of the equality for Washington internal deposits, increased minerals reserves by 50,000 ounces and added approximately 20,000 assets measured and indicated and 170,000 ounces to inferred. This has extended Toronto's mine life also by one year as the mine is now expected to produce through 2021. Following a successful the 2018 program, we are increasing the budget of Toronto to drill deep-depth extensions of both the [indiscernible]. In addition, we've started an exploration drill from the Pubwasi [ph] underground to Tanoe [ph] another underground deposit where economic gold mineralization and was encountered at depth. And finally, at Bald Mountain, our drill program was focused on near-mine opportunities that were expected to increase the resource base as well as provide a direct impact and operational planning and sequencing. Drilling in the north area had a 260,000 ounces of inferred mineral resource estimates. In 2019 we will be focusing our efforts on infill programs with the goal of upgrading mineral resources at top [indiscernible]. Exploration will also focus on other target areas for a resource growth including targets in the central zone, which we now own 100% and where we are focused on higher grade intrusion-related mineralization. To wrap up, we've got a strong pipeline of organic projects and promising exploration opportunities with a potential to extend mine life and to add value to our portfolio. And with that, I'll turn the call back over to Paul.

Thanks, Paul. In closing, I want to thank our employees worldwide for their dedication and hard work and our shareholders for their continued support. Overall, I'm pleased with where we are as a company. Our portfolio in operating mines delivered solid results in 2018. We're looking forward to another strong year in 2019. We remain in a financial position and we continue to advance our numerous development projects. With that, operator, I'd now like to open up the call to questions.

[Operator Instructions] Our first question comes from the line of Fahad Tariq from Crédit Suisse. Your line is open.

In your release you mentioned that the discussions with the Mauritanian government around Tasiast have centered on taxes, work permits, increasing opportunities for local suppliers. My question is from what you know today, how wide is the delta between what the government is looking for and what Kinross wants, and what would be the timeline for deciding whether to go with the original Phase 2 expansion or to pursue alternative measures?

Sure, thanks. I'll take that. Look, I think again here, context is important. As you know, we received a letter last May. It was somewhat vague and as a result, we suspended activity on the Phase 2 while we got a better resolution and an understanding of where the government was coming from. Since then, a lot of good things have happened. I believe we're in a better place today. We were with that uncertainty back last May. We've had lots of meetings and as we indicated, it is those sorts of topics which I believe are not uncommon and we see those sorts of questions and in other countries. So, we're working through it. I would say again, I just repeat what's also very important as what we're not discussing, which is reopening our mining convention. So, I think as well the silver lining is as we've continued to complete the Phase 1 on time on budget and had it really an excellent transfer and ramp up, we've learned a bunch of things both in what we were doing on the Phase 1 and how the mill is performing. And that's given us the benefit of time to modify our thinking and analysis on the Phase 2 and how we might improve from our base case Phase 2. As to timing, -- look again, as I indicated, those studies we expect to complete towards mid-year. Our project financing is going very well and I expect that will be completed around mid-year. So I think the tone I would leave with you is lots of good things happening, good discussions and it's all leading us towards a mid-year kind of decision timeline.

That's really helpful. And just as a follow-up to switch gears a little bit on the M&A Front, which is the hot topic in mining now, can you describe what Kinross' investment criteria would be as it looks to some of these assets that are being divested by some of your peers? Maybe just some color on how you're thinking about and what would make a good investment or a good asset to add to the portfolio.

Well, that's a pretty wide question. We do look, we have a team. It's the same DNA as our operations and technical folks. So we come at any opportunity with a lot of technical rigor. At the end of the day, it's about creating value for shareholders where we think we have strengths that we can bring to bear. When we look at opportunities is obviously technically, can we improve the operation, can we perhaps do a better job, then obviously, financially, there are certain instances whereby it'd be on the smaller end of the companies have run out of capital or are capital constrained. I think, again, the point I want to leave with you is discipline. We have a team, we do look, but really the only acquisition of significance that we've done in the past several years was the Bald and Round Mountain. And that's been a great deal for us. We've improved both those assets considerably and they've been good performers in our portfolio. So that's the kind of thing we try to look for when opportunities present themselves.

Our next question comes from the line of Steven Butler from GMP Securities. Your line is open.

Well, thanks, operator. Good morning guys. Lauren, a question for you, if you don't mind. Paracatu had a whopping recovery of I think 81% in Q4. How comfortable are you with the sustainability of near 80% recovery going forward?

So, yes we had an excellent recovery, best in many years through the plant and it's the combination of a lot of work by the operating team there to better understand the performance of the plant and how it reacts to different ores. So we've got a lot more control over what we're feeding to the plant, how we feed it to the plant, and how it responds in the plant and how we react to it. So I would say, it's safe to say that we're going to see recoveries at a higher level than we saw in the past several years. One of the things that contributed in Q4 to the high recovery is, mining in the southwest corner of the pit, an area we call Tank-C, it's the main part of the ore body; so it's thicker mineralization, it's more consistent, less edge of facts [ph] and generally higher sulfide. So we tend to see better recoveries from that. So I wouldn't bank on that level of Q4 recovery always but I would say we are going to see higher recoveries going forward.

Okay, thanks, Lauren. I almost fell off my chair.

Well, I'm happy to hear that.

Paul Tomory on Chile; of course, looked like it was a bit of a problem child back when you guys decided to sort of mouth-ball [ph] it several years ago. What confidence do you have in Phase 7 restart or is that just a stepping stone to the bigger prize, maybe in Lobo Marte? And do you expect -- I mean, I can't remember how much ounces we are talking about in phase 7 in La Coipa if you can clarify that? And any -- just high level thoughts you have towards La Coipa/Lobo?

Yes, Steven. So when we shutdown La Coipa we were still in the process of drilling the Phase 7 deposits; so at the time it wasn't available for mining, so it was the right decision from a capital discipline point of view to shut La Coipa down. Since then, and this is going back four, five years; we drilled out Phase 7 and added close to 1 million ounces there of equivalent reserves between gold and silver. And the feasibility study is focused on mining out Phase 7 but we're also assessing the opportunities for potentially mining a couple other remainant ore bodies there though the focus of the FS will be Phase 7. But as you quite correctly pointed out, our strategy in Chile is to use La Coipa as the start of a longer term return to production in Chile where we would hope to roll from La Coipa into Lobo Marte, we're treating them as sequential projects. But the FS is focused on refurbishment of the mill there, mining out Phase 7 and in parallel assessing other potential opportunities at La Coipa. So we're pretty happy with how things are going and as Paul mentioned, we will be finishing that in the third quarter.

Paul Senior, Rollinson; Paul do you have a view -- so, just to clarify your talks with Mauritanian government, there is no -- and you're not interested in re-opening the money convention, and are they also not interesting specifically reopening the money convention; it's just around the edges of these as a request?

That's correct, that is what they have told us is that they have no intention of reopening that convention.

Okay

And these are -- again, I -- we've tried to give a flavor for the kinds of things we're discussing. They are important to us and we want to resolve them and we think we'll get there, it takes time but again, it's -- as I say, it's as important as to what we're not discussing with them which is -- there has been no suggestion of wholesale change with respect to watch what's protected under that convention.

Our next question comes from a line of Greg Barnes from TD Securities.

Yes, thank you. Just on the success you've had with Phase 1, how far can you push throughput? I know you've got off your very large SAG mill but I assume flotation capacity kind of backs you up there?

Yes, we're really, really pleased with the rapid ramp up and subsequent throughput that we're achieving in the plant. And I would say that the kind of performance we saw in the fourth quarter is certainly something that we think we can sustain going forward. In terms of the ultimate capacity of the plant, we're still working through that. We've got a number of debottlenecking projects, small scale things that will make incremental gains and we'll keep banging away on those things over the course of the year. I don't want to guess where we'll end up but it's -- I would like it to rebuilding an engine, we're just getting the ring seeded and we're going to step on the throttle here see what we can do.

So in terms of Phase 2, Phase 1.5, is the focus now more just adding a little bit more grinding capacity on some flotation rather than going to the whole scale hundred -- whole scale bigger expansion?

Greg, we're looking at two things. So the objective of the studies right now; first is, to look at what steps we can take on incremental debottlenecking, so exactly what you said, where can we add capacity to incrementally increase throughput? The second objective of the study is to make a reduction of capital in the 30K design, and we're progressing on both of those. So, we have both incremental development, as well as capital reductions in the ultimate 30K design that we're working on. And the -- one of the benefits over the last year in the operations over the last quarter in a bit has given us more confidence in what the plant can do and it's allowing us to target capital reductions like I said in the ultimate 30K design.

So the 30K design is ultimately where you want to get to?

It is our reserve, it is where we ultimately are planning from a project perspective.

And Paul Rollinson, just a follow-up again on this Mauritanian issue. With the presidential election coming up I believe in June in Mauritania; is that going to slow this process down or it will be well into the second half of the year before you think you can get something done?

Look, I -- yes, that's a good point Greg. There is going to be an election process. Our experience from last summer, this is a presidential election as you pointed, last summer there was more of a regional election process. There is no question it can be distracting. Our ability to get meetings and have discussions will most likely be more challenged, candidly, as they're more focused on the electoral process. But -- again, I believe we'll be able to keep moving things forward and I don't think we're looking for game changing outcomes here. We'll continue to work with the government but absolutely there will be some distraction on their part.

Our next question comes from the line of Carey MacRury from Canaccord.

Hi, good morning just another question on Tasiast, I noticed in the growth CapEx you've got about $60 million of growth capital not including the stripping. I'm just wondering is that related more to Phase 1 -- work-related Phase 1 or is that kind of moving the ball forward on an ultimate extension for Phase 2 or Phase 1.5?

It's really related to the ongoing stripping activities that we have at Tasiast, so as we've highlighted we have about $180 million of stripping that's going to be happening this year; so it relates to equipment associated with that stripping and rebuilding associated with, and then incrementally there is approximately $10 million related to alternative studies that we're looking at that our focus primarily on throughput, such really what makes up the bulk of it.

Okay. And then maybe on cash costs at Tasiast, you mentioned they were high in the quarter, ultimately I think with Phase 1 you're expecting to get that down into the $500 range. Is there anything that you've wanted to know on the cost side or cost inputs have gone up that you know you think that is just -- you think you'll still be able get that sort of level?

Yes, I think one of the things that maybe I'll start and if Lauren and Paul want to chime-in, they can. I think one of the things that we highlighted in our release was just what was happening with respect to the purchase of fuel in Mauritania. So we're entitled to a tax exemption on fuel as part of our mining convention, unfortunately, the government hasn't been processing the paperwork that relates to our fuel purchases and we've had to purchase what we would call non-exonerated fuel to maintain operations. In other words, we're paying duties on fuel that we would have otherwise expected not to pay. And you know, this really relates to the government expressing concerns about whether all the fuel is being used in our mining activities and we've done our own studies and accounted for the bulk for the use of fuel in our activities. Now, these issues have arisen in the past and they've eventually been resolved and our hope is that obviously we started discussing it with the government in '18, and we'll hopefully get to a reasonable resolution. But I would say that that is a big contributing factor on the operating cost side in terms of the additional costs that we incurred in the fourth quarter.

What would be the sort of level of duties that you'd be paying?

So, for 2018, the cumulative cost of duties were about $30 million and it's probably split equally between amount. So it would have been capitalized as capital stripping $15 million and the balance would have gone through the P&L as operating costs.

And then maybe one other question on Bald Mountain. We've got Vantage ramping up this year. Can you talk a little bit about how we expect that production to evolve over the year between the North and the South?

Sure. Happy to do that. And that is Lauren here. So, we will be transitioning mining from the North Area operations to the South Area operations in the first quarter of the year. So we're kind of in a bit of a wind-down mode in the North and a windup mode in the South. So the way I would look at this is we will see lower Q1 production as we make that transition. Q1, will probably about 15% of the full year and then it will ramp up from there. And we should be roughly evenly weighted between North and South -- I'm sorry, between first half and second half, assuming the ramp up goes as expected, it might be a little bit heavier toward the second half.

Our next question comes from the line of Mike Parkin from National Bank. Your line is open.

With the fairly significant capital spin at Tasiast stripping, is that something that could continue into 2020 or is that largely kind of getting cleaned up this year and sets you up well for the near term?

As per the FS, we capitalize the stripping until mid-2020.

So currently, can we expect kind of a similar for roughly in like $90-ish million for first half of 2020?

Yes. Divide that number by two. Yes, that's about right.

All right, and you've already indicated to expect a slightly softer Q1, is there any major outages planned at your core assets throughout the year that we should kind of take into account?

Well, Mike, this is Lauren again. There's always certain outages that have to happen in the course of the year to maintain the primary equipment. And so where you would see that manifest itself most obviously is when we take a SAG mill down for a reline or a re-torque or whatever it might be. But those are built into our production schedule. So, what you would see in guidance from us accounts for those kinds of outages. So all the planned stuff is built in.

Okay. And then just one last question. So, you kind of mentioned that you're about to step on the gas at Tasiast. Can you give us an idea of what the 2019 guidance is based on in terms of the throughput for Phase 1?

Sure. So we took a look at Q4, which I think right now would be a pretty good proxy for a sustainable run rate. And then we accounted for some other things that we think are important and those other things are reflected in our guidance. And what are those other things? They're things like, as I just mentioned, we know we will need to take the mill down for reline for couple times this year, but what we don't have is a long operating history with that SAG mill. You know, there are other big SAG operations. We have long operating histories, we understand how the ore interacts with the lining packages and on that sort of thing, we don't have that history at Tasiast yet. We also have a big power system in place to support that large SAG mill. And again, we don't have a long operating history with that power system in its current configuration. So we've taken a somewhat conservative approach with respect to those maintenance activities. And that's reflected in our guidance. A couple other things to keep in mind. We're operating at an elevated cutoff grade right now relative to the resource model. And so the consequence of that is that there's some delusion coming into the system and that affects grade to the mill. And I think the last point I'd just draw your attention to is that we do have a collective labor agreement coming up for negotiation this year and as is the case in any CLA, there's some potential for work stoppages. So we've taken all of that into consideration in our guidance and that's how we're looking at the year.

Thanks. Can you remind me off the top of your head how the last labor contract went? In terms, was there any kind of lost days of production?

Yes. I think it was -- I wasn't running the operation at that point in time, but my recollection, it was about a month.

Okay. And when was that, do you know?

More than three years ago.

Yes. Fifteen, maybe.

Our next question comes from the line of Tanya Jakusconek from Scotiabank. Your line is open.

I just wanted to ask a question on the Mauritania and the presidential race and maybe someone can give us some insight in terms of what you're hearing and in terms of the candidates and views on mining, et cetera.

Okay. I think we don't want to get too far ahead of ourselves in terms of speculating certainly about an election. All we know at this point is the constitution indicates you can stand for president for two cycles and the current president has indicated he'll be retiring. As you will recall, perhaps that political party, the UPR Party has won democratically the last two elections and at some point, we suspect maybe later in March there'll be a new representative from the UPR Party that'll be put in place and that will start the process again for the election. But again, I think we would say we expect an orderly transition but beyond that, I guess our philosophy on these things is to just really try to stay out of the political side of things.

Now, it wasn't more just some insights in country in terms of some of the candidates and what they stand for et cetera.

I think they'll continue to be mining friendly to pick up on that point. Tanya, I mean, it is -- SNIM is a big component of the economy and they understand mining. And I think there'll be supportive of mining and foreign investment. I think as we've said on previous calls, there's been a strong push by the government to attract foreign investment, particularly in the offshore gas and they've signed a few licenses. So I think in general, Mauritania will continue to seek foreign investment in natural resources.

Our next question comes from the line of Lawson Winder from Bank of America, Merrill Lynch.

So, two for me, and I apologize to come back to this once again, but just on Mauritania with the discussions that you're having, I'm just curious, at what level are the meetings happening, both from the perspective of your side in the Mauritanian side? And then I apologize, I got on the call very late, but did you say that the project financing was dependent on the outcome of these discussions or not? And I'm sorry if that was already asked. Thanks very much.

Sure. Let's start with the project financing. It's proceeding well. I think there's an alignment of interest. The IFC would like to proceed, we'd like to proceed and I think from the point of view of the government, I think they would like to see a successful project financing. Because I think from a government point of view, it's really an endorsement by the World Bank that you're project-financeable, which is a good thing to advertise in terms of bringing more foreign investment into the country. In terms of the discussions, we have a senior team, we have an in-country team, we have a senior team. And for the level of meetings and discussions, it's been primarily with the Minister of Mines. And that I think is the appropriate level Minister of Mines and his Deputy General, we call the DG, and I think we've got the right level of engagement from both our side as well as the government.

We have no further questions in queue. I'll turn the call back to Paul Rollinson for closing remarks.

Well, thank you, operator. And thanks, everyone for joining us today. We look forward to catching up with you all in person in the coming weeks and months. Thank you.

This concludes today's conference call. You may now disconnect.