Randgold Resources' CEO Discusses Q4 2012 Results - Earnings Call Transcript

Feb. 4.13 | About: Randgold Resources (GOLD)

Randgold Resources Limited (NASDAQ:GOLD)

Q4 2012 Earnings Call

February 4, 2013 11:00 AM ET

Executives

Philippe Liétard – Managing Director

Mark Bristow – CEO

Graham Shuttleworth – CFO and Financial Director

Analysts

Joung Park – Morningstar

Howie Flinker – Flinker & Company

Filipe Martins – GMP Securities

Operator

Welcome, ladies and gentlemen, to the Randgold Q4 Results International Investor Call. My name is Fay and I’ll be your coordinator for today’s conference. For the duration of the call, you’ll be on listen-only. However, at the end of the call, you will have the opportunity to ask questions.

(Operator Instructions)

I will now hand over to your host to begin today’s conference. Thank you.

Philippe Liétard

All right. Good morning and good afternoon, ladies and gentlemen, or good day, as we say here in Cape Town and welcome to this presentation of Randgold Resources’ results for the past quarter and for the whole year of 2012. The past year has reminded us forcefully that mining in Africa is not for the faint-hearted. Mark and his team are used to taking obstacles in their stride, however, and undeterred by operational problems including the fire at Tongon or the political turmoil in the background. They have again posted a most impressive set of results.

As you will have seen from your information pack, production, sales, profit and earnings per share achieved a new record level. Given this robust performance as well as the company’s solid growth prospects, the board had no hesitation in recommending a 25% increase in the dividend to shareholders.

We held our recent board meeting at Kibali last week. This is the third time that we have visited the project and, on each occasion, we have been amazed by the progress being made there. In a very short time, we are seeing Kibali rise from a plant that we mentally imagined on the site to an open pit that is already been mined, to an underground mine that is in development and to a concrete and steel structure that already looks like a processing plant and is clearly going to be capable of delivering its first bar of gold by the end of the year as scheduled.

If you needed proof that Randgold has confidence in the long-term future of Africa, as well as its own ability to manage the continent’s risks and challenges, this is it. You would have read also that at our recent board meeting, we appointed and welcomed our new director, an African national with a vast experience in the private and the public sectors, and with a deep knowledge of the environment within which we operate.

And with that, I’m handing you over to Mark for a complete review of the Randgold’s performance and prospects.

Mark Bristow

Thank you very much, Philippe, and good morning and evening to everyone on the call. We have a big turnout today just as we did there in Cape Town. I think to start with, I’ll just remind you that 17 years ago, we set out to build a world-class African business, capable of developing value for all its stakeholders. And certainly at Kibali, the latest stage in this very dynamic journey is taking shape as Philippe referred to. It’s worth noting that in 2010, we commissioned Tongon. In 2012, we opened up Gounkoto. And certainly everything being equal, we are on track to pour our first gold at Kibali as scheduled this year.

Looking back on 2012, it was another eventful year, which certainly turned out to be even a little more challenging than we had expected. And not withstanding those challenges, as Philippe referred to, we set new production and profit records although we also missed a few targets. And I think that’s what really puts Randgold apart and that is that we really do work to deliver on our plans. And without a doubt, as I hope I’ll demonstrate through the presentation, we are firmly on track on continuing to deliver as we have done over the last 10 years both value for our shareholders, and as importantly creating value for our host countries in many different forms.

Before we start on the projects and operations themselves, as usual we look at our health, safety, environment, and sustainability scorecard, which is your second presentation that’s on the screen for those that are following. And I just point out as we indicated last time, we talked that we had a fatality at the beginning of quarter four at Kibali.

And whilst the group’s overall safety performance was excellent when you look at us being able to bring the injury-free incident rates down across the group, we take every fatality very seriously at Randgold, and certainly after due review of the related contracts, we have again reinforced our safety procedures in line with our people’s and behavioral-based approach to safety.

And I think, notwithstanding this incident, we were still able to make big headway in overall safety statistics. We stand ahead of most of our peer group in the industry. And when you consider that we’re operating and with Kibali, we’ve got now 6,000 employees on site, a lot of them never worked in a heavy industrial environment before. The team has done well to show an improvement across the group.

On the environmental and health and safety accreditation, as you know, we’ve signed up to be compliant with the ISO 14001 environmental procedures and practices as well as the OHSAS 18001 health and safety process. And we’re very far down the road in making sure that all our operations are compliant and accredited under these programs.

On the sustainability side, we continue to work within our communities and we’ve got successes to share with you and they are in the report, but one of the big successes has been our work with the RAP program in Kibali, and I’ll touch on it a little later.

With that, the next the next slide is really a quick snapshot of our KPIs and as you can see, profits, production up year-on-year as well as quarter-on-quarter, and perhaps most critically, something our boys highlighted as important for us is the increase in earnings per share both on a year-on-year basis and on a quarter basis.

The highlights, first four points in the highlights are already covered under the performance achievements and moving down the list, total cash costs exceeded our guidance, mainly because of operational problems at Tongon as, I’ll come back to but apart from that and some already guided changes in our operating philosophy at Loulo that also impacted on cash cost per ounce, the overall group performance at 7% increase year-on-year was certainly, relative to the industry, reasonably well contained.

The Loulo-Gounkoto complex as was as Morila ended the year ahead of plan and Kibali, so out of the five sort of business focuses, we certainly made huge progress with the Loulo-Gounkoto complex, rarely achieving for the first time its guidance.

Morila outperformed, as it has been doing for some time now, and Kibali kept on track, which is a great achievement. The exploration team continued, and we made good progress in building our footprint in DRC, and I think the challenge was really dealing with the Tongon operation. Finally, as Philippe referred to, you’ll see our earnings per share up $0.50 per share, and the board recommending of $0.50 payout for dividend this year in line with our growing dividend policy.

Looking at the numbers for the year in the quarter, they all are records throughout the set of the accounts so that’s pleasing. Some work to do, as I have already pointed out, on costs. And I think the other take away I’d point to you is that while cash is around $50 million lower than last year at the same time, we did invest over $560 million in capital development during the year in line with our growth strategy.

Moving now to our flagship operation, the Loulo-Gounkoto complex, as I pointed out, cracked the 0.5 million ounce production mark and exceeded its target for the year, and has certainly taken its place in the elite club of world’s great gold mines posting record profits from mining in the process. And, as I point out just now, significant delivery on the underground side of the operation.

Before I move on to the details of the complex’s performance, I want to say just a few words about the general situation in Mali, and there are two points I’d like to make. The first is that the invaders of the north is a problem that’s not only in any way a Malian issue, it is an international problem. And whilst it took some time for the international community to take the warnings from the Mali Interim Government, the ECOWAS grouping, as well as the African Union to react with the intervention of the French and subsequent rallying of the international community, it’s pleasing to see just how much progress is made in such a little time.

And, I think that the reason for that is there’s such a real alignment amongst all interested and affected parties across the continent. The French led joint forces have made substantial progress in dealing with the situation in the north, and it’s pleasing again for us to see that the French President has said they will stay in Mali until the job is done.

Equally heartening is the fact that there will be an international peacekeeping force in Mali to support the recently announced intention to go to elections, which I think is very important for that country to deal with. So, a lot of good news on the back of the successes, the short-term and medium-term successes that we’ve seen out of the military intervention.

And the second point is, Mali is a big place and so is Africa and I don’t think everyone keeps talking to us on risk and safety and security. And I don’t think there is anybody across the continent that allow themselves that the Mali initiative that’s not exposed to that risk, and been able to manage that is critically – what’s critical and the important is one’s partnership and integral support from not only one’s own security forces, but also the ability to rely on a national police and armed forces to protect the assets. And I must say despite the capacity issues in Mali, the Malian government has kept a constant dialogue with the industry and certainly supported in every way both in communicating and in material support in ensuring that we able to manage the risk around our assets.

I think there’s a lot more to say about that, but that pretty well summarizes our view of Mali and again managing these sort of crises, an integral part of that is one’s social license because these things are very complex when it comes down to this sort of military top incursion, notwithstanding that, I’m sure you all appreciate as I am sure most people in the world now understand where Mali is, it’s a very large place and we’re a long way from the actual action.

Moving onto the business then, numbers speak for themselves, but it’s worth pointing it out that one of the drivers of our success is being the third mill installation, last year, early last year which ran ahead of our expectations and has had a big impact on production.

But also is significant that for the second quarter in a row, Loulo’s contribution to the complex combined production has exceeded that have Gounkoto. And our aim, as I indicated last time we spoke, is to settle the split around the 60% Loulo and 40% Gounkoto mark as we go forward in line with the reserve ratios of these two businesses.

Costs were higher than forecast following drop in recoveries, particularly with our change to exploit Gounkoto as a whole body and not attempt to high grade it. At the same time, if you move to Loulo’s standalone, good set of results, significant uptrend with the big improvement in all tons mined and once again flying through to a significant increase in profit from mining for the year.

Turning specifically to the underground, this slide sets out one of the key achievements of the group in 2012 without any doubt and it really reinforces the tenacity and commitment of the Randgold team to deliver on its plans, notwithstanding run of mill challenges that one and every mining company has in developing these sort of size and complexity projects. So some takeaways, as we all know, building sustainable underground mines is all about building development and the development rate at Yalea is now – being for near over 1,000 meters a month for just under a year and as well as all production out of the mine is now starting to be reliable at plus 100,000 ounces.

The consistent improvement in underground operations over the past years is without a doubt due to a strong effort by our Malian team, which as we pointed out just on a year ago that we had changed tack and broadened and committed to building our own team, along with, of course, our contract partners, who have worked hard in a range of efficiencies and enhancements as well as optimizing the mine design, and with that the backfill strategy, which is on this slide.

And the past quarter saw an introduction of the Cement Aggregate Fill project, which is an interim measure to allow us to access some of the higher grade ore bodies and ensue they are in tectonic integrity of our mining excavations until such time as we’re able to commission a more permanent paced backfill plant scheduled for January in 2014.

Again looking for the main areas of capital spending, our plan to stabilize the benefits of the mill, a third mill project with the improved throughput, and with it will come because with the increased throughput, we put pressure on the CIL residence time and which is exacerbated by recovery, which was exacerbated by the more complex Yalea South open-cast ore body that we processed with high copper content.

We got to get through that Yalea South material, but at the same time, we’re going to – we need to expand that CIL residence capacity along with some additional upgrades to the crushing and milling and elution circuits, so that we are able to benefit from the extra throughput and without negative impacts on recovery. It’s quite important for us because looking forward, we’re showing another improvement this year and then, 2014 our target is to achieve 650,000 ounces, so this mine is going to continue to grow.

On the Gounkoto side, decrease in production was in line with our plan as we balanced the two operations contributions, notwithstanding its lower throughput. It had better grade this quarter and as we pointed out, we mine it as it comes and we were able to get flow-through to increased profits and of course, better dividends. And it’s worth noting we’ve already paid $135 million of dividend now to shareholders. That’s in addition to having recouped all our capital for this project.

Results really speak for themselves and the grade is done because of the decision to mine the whole ore body that’s impacted on lower stockpile adjustments that’s also led to higher cash costs. And that’s why we’ve always been and me personally not enamored by this cash cost story. We’ll keep reporting on it, but at the day of the day, it’s all about what you can deliver in cash flow and bottom line profits, whichever way you look through these accounts, look pretty good.

Just moving onto the underground project at Gounkoto, as we reported already, we are currently considering the viability of an underground mine below the Gounkoto pit, and where the recent drilling and upgrade of some of the inferred resources through that drilling program have reinforced the opportunity of being able to convert plus million ounces to plus six grams to our reserves. And we expect to start showing you some of that along with the pre-feasibility study, which is scheduled to be completed by the end of this quarter and then certainly in time before we speak to you guys again.

On the drilling, next slide is just a quick summary, an indication of some the drill results that have gone towards being able to upgrade the inferred to indicated. We still got a few more holes to complete before a sign-off on these reserves as part of our external audit process.

Looking ahead, this is the complex’s combined production profile. I would point out it excludes the underground potential from the underground project at this stage. But even so, production growth is largely coming from better grades, more consistent throughput, and improved recoveries, which should also, as we forecast, be on a relative basis bringing down the costs so the overall strategy of developing the Loulo-Gounkoto complex certainly very much intact.

And when you look at the fact that we’ve got three world-class gold deposits all within 25 kilometers of each other and numerous satellite projects and targets, we still believe there’s enormous potential in this very exciting district for additional discovery. And recently Paul’s team has really focused on trying to look through some of the cover which led to the discovery of Gounkoto further south. We’ve got a large portion of pyramid underlined by or overlined by alluvial cover which prevents us from going through to bedrock and our key groundwork has started to give us results whereby we can map the tectonics through the cover and build remote exploration targets.

Likewise the iron ore body still have potential and not least being the Yalea underground potential extensions to iron ore bodies and recent deep haul drilling has certainly confirmed that we are still in the big system and the potential to that extent the current reserves and resources is a very real one.

And likewise we are going further south to Gounkoto, which used to be part of the Loulo permit, no doubt in our minds that it represents a standalone mineralized district that’s why the split from Loulo and already we have about just under 0.5 million ounces of inferred ounces hosted in two deposits outside the known Gounkoto reserve.

Whilst we’re taking explorations, let’s just pop across to Senegal where we’ve got the Massawa project. We continue to hunt for satellite deposits around Massawa and looking to extend our inventory in order to lift the overall ounce potential of the project. And at the same time, as we shared with you last time we’ve been working on really building our knowledge as far as understanding the Massawa deposit itself. We’ve recently embarked on a 5x5 meter grade control orientation study over about 150 meter strike length of the central zone to really understand the variability and gold department associated with these high-grade quartz and too many phases within the ore body.

And the results so far show a much more confined ore body, a narrower, higher grade, and certainly with more continuity than we expected from when we’re looking at our wider spaced boreholes. At the same time, we’re also busy with a very large diameter drilling program aimed at collecting representative samples to be able conduct pilot plant scale test work on the ore body going forward. We’re scheduled for later this year. Just to remind you, our overall plan is to have a new feasibility complete from this ore body end of next year.

Back in Mali, Morila delivered the goods once again, substantially exceeding the production guidance for the year while containing costs and delivering better profits. I would also point out the board has approved the push back the project, and subject to final signoff by some of the AngloGold technical people, we’ll soon be able to start pushing or mining the reserves left at the bottom of the pit, and following that we’ll go back and reprocess the TSF. It’s also encouraging to see that the Malian government has indicated that it is prepared to waive royalties during the pre-stripping of the pit, which again demonstrates the value of our partnership philosophy.

And in the meantime, we’ll continue with our agri business, something that we’re really committed to ensuring that we support the employment and economic sustainability of the communities around our mines and in particular when the mines eventually close. These are the results, a solid set of numbers, certainly demonstrating the efficiency of that operating team at Morila. And something that we’re very proud of is that the Morila’s ore body and team and its really just keeps driving to the challenges quarter-after-quarter.

This is the Morila forecast showing the impact of the pit pushback, giving it an extra year’s last and then how the TSF will kick in and effectively pay for the closure costs and certainly given the gold process assumptions, it can do that.

Moving on to Côte d’Ivoire and Tongon, I have pointed out earlier today that if we needed a reminder that mining is a tough business, it came in the form of Tongon last year, really a mine having being challenged by operational issues throughout the year and missing our guidance in all four quarters and the problems being exacerbated by an erratic power supply from outside with frequent power outages and disruptions to our process.

And then just as the team, after all the intervention over the last few quarters, thought that we’re coming out of the woods, we had a fire on Christmas Eve, which destroyed in the mill’s cyclone clusters and the flotation cells.

And again my experience has always shown that in the times of adversity like that, it’s amazing how teams really picked themselves up, and I can only say that a herculean effort from both management all the way down to the most junior laborer pulled out all stops and we got the operation back on line. Within 10 days, both mills were operating and we are, as we speak, finalizing the second flotation cell commissioning, and then we’ve just got a couple – about six or seven weeks to go before we can get the automation back because we’re just waiting for spares.

But the operation is up and running as per – it’s where it was when we had the fire and from now on in it’s getting back to making sure that we work hard at ironing out the operational wrinkles that we were busy focused on before we had this incident.

The operational results clearly show the impact of these challenges on throughput recovery and costs but as I pointed out, focus has now returned to continuing improvements across the operation. And I can assure you that, one good thing and as was the case in Loulo, despite all the challenges, we’ve got a very motivated team one site. We’ve just had analysts go through and anyone who knows any of the analysts can check and verify the fact that this team is highly motivated. It’s certainly not de-motivated by some of its challenges, and it’s determined to get it right, so as are we at the executive level.

Just to summarize the recent issues and plans to deliver on improvements, this little diagram or table really highlights the three biggest challenges facing in Tongon, which as you would imagine are all interlinked, the first being how to manage the sparks and interruptions of the grid power supply; second, how to get plant availability up to 90%; and most importantly, how to move the recovery’s percentage from the 70s to the upper 80s and finally to the 90s.

And taking the power issue first, Tongon has recently installed five additional generators to boost its backup capacity as well as a new capacitor bank to smooth out the incoming grid supply. And towards the end of last quarter, I can verify that plant availability has really started to improve, delivering a much more consistent throughput. And we now plan increase residence time in the pump cells circuit as well as augment the floatation recovery by installing a gravity recovery circuit in parallel with a flood circuit as well as introducing intense cyanidation leach reactor to ensure that we recover all the gold that we extract in the front end of the circuit.

A further upgrade on the crushing circuit is also planned to step up at overall plant throughput, that being a strategy to ameliorate the low recoveries in the shorter term and still be able mine lower grade and deliver on our guidance. The negative of that is that the costs will be slightly higher because there’ll be many more tonnes for the same number of ounces.

Despite the difficulties as you’ll see in this slide, that we have been faced with Tongon because of the investments and the way we’re approaching it, we believe we’re going to be well, able to keep our guidance. We’re going to be 10, 000 ounces short in 2013 on our original guidance and the guidance we recently gave of 290,000 ounces, so we’re guiding 280,000 ounces for the year.

Moving then on to some of the exploration again, our recent work we’re doing on the drilling the inferred resources underneath the pit that was still within the $1,000 pit shell, we are currently now just going through the independent review process, but they indicate every indication is that we’re about to make a big dent in offsetting the depletion from mining that we’ve seen over the last year and been able to convert a large number of those resources into reserves.

Exploration in Côte d’Ivoire is a key part of our Greenfield strategy within the group, which is core to our fundamental focus on value creation longer term. And I’d just point out there’s been a lot of gossip and information coming out of the Côte d’Ivoire on the review of the mining codes and the imposing of extra taxes by the government.

We certainly have engaged with the government at large and the Mining Ministry in particular to demonstrate that their initial proposals would be out of line and with the fiscal practices in other West African countries and would seriously compromise Côte d’Ivoire’s ability to attract further investments. And as a result of our engagement, we can confirm the ministry is now re-engaged in additional consultation with the mining industry, and various proposals and counterproposals are now being considered.

And I think it’s very key that the directive from government from the highest level, both the head of government and the prime minister, as well the Ministry of Mines, have confirmed the objective of this is to end up with a mining code that is competitive if not the best with respect to the other West African gold mining countries, which compete for the same capital that we actually do.

Over now to Kibali where our development team continues to make rapid progress as you heard from Philippe, and everyone who’s been through there, we’ve recently had our board meeting there, the main Randgold as well as group of investors, and analysts, and I think everyone had agreed that the progress is really quite amazing given where it’s come from. And I think even the most hardened skeptics are starting to give us credit that we might well deliver on our promise of first gold this year.

The first gold is already – I’ll move on. We’ll get back to that, but I think the first ore is already being processed – you’ve gone back there.

Philippe Liétard

No.

Mark Bristow

I think the key point I’d make here is that we are on schedule. On the schedule, it’s the same old schedule as you’ve seen for a while. We have no reason to change it. We might be tightening up on some of the critical parts, but we’re pretty determined to be able to deliver as we promised our first gold in the quarter four of this year.

And then moving on to the mining, we’ve already delivered the first ore to mine pad and the box cut for the decline shaft system has been completed and development started in December and we actually beyond 70 meters done now in both declines. Likewise with the vertical shaft, the platform has been completed and handed over to the contractor and the box cut for the shaft collar is already complete.

Moving onto the plant, we passed some very significant milestones this last quarter. Both mill shells arrived on site ahead of schedule and they’re both installed on their foundations ahead of schedule. Again, structural civils for the primary crushers have been completed. Steel work for the elution circuits is underway and the bases for the eight CIL tanks are ready as you can see from this slide and they are being erected at some rapid rate than anything I can tell you about. The photography if you can see it is, is that it’s out-of-date already, so it was taken a week ago.

And much more happening across the project site, work is also underway on the first of the four hydropower stations as you can see here and the relocation program, probably the most complex and sensitive part of the development of the Kibali project continues steadily with all the villages on the mine footprint now settled in the new model village of Kokiza and we will expect that by midyear all 14 villages will have been resettled at Kokiza bringing to an end one of the largest exercises of its kind ever undertaken by a mining company in Africa.

This is Kibali’s production guide and cost forecast, which is materially unchanged, and shows production of around 600,000 ounces per year over the next 10 to 11 years and supported by good grades and relatively low costs.

And we have also, you won’t see in the report, updated our capital guidance for the project as we promised we would do as we went along noting that we do not try and forecast escalation and contingencies, but rather that we give you a best information available at the time. We’ve divided the capital as you all recall into Phase 1 and Phase 2. Phase 1 being the infrastructure required to bring the mine into production, and then the Phase 2 being the underground mine development running out to early 2016. They both run in parallel. And the latest estimates are $990 million for Phase 1 and $670 million for Phase 2, a combined increase of 6% on the numbers from 20 that we declared and at the start of the project, which were based on 2011 money.

While our development team paves the way, our geologists are also busy at Kibali looking for set lots around the iron ore bodies and evaluating the portfolio we acquired along with the Kibali from Moto. And going along further field hunting new targets and one of the new projects that have recently been defined has been the Rhino project nearby. And we are very excited about what we’ve learned from this project and it demonstrates that there’s still additional resource reserve opportunities in the very near facility of the main KCD deposit.

One of our strategic objectives, as I alluded to in the introduction is to grow our footprint in the DRC, and to benefit from some of the stress in the junior exploration industry and certainly our recent joint venture agreement with Kilo Goldmines is really the first step in a series of opportunities we’re looking at where we’ve acquired 2,000 square kilometers of very prospective greenstone belt, about 200 kilometers northwest of Kibali. It’s our first move outside the joint venture.

And I was there with Paul and the team just last week, and what excites me is that not only the geology, and we’ve already got people on the ground there, but also the accessibility and infrastructure is no more difficult than what it was when we first arrived at Kibali in 2009.

Putting it altogether, how is our five-year forecast for the group. We’re still aiming to hit the 1.2 million ounce target by 2015, and our group guidance for 2013 is 900,000 ounces to 950,000 ounces per year was titled cash cost in the 700 to 750 per ounce range. The higher cost profile is really a shorter term impact from the delay on the heavy fuel project at Loulo, so high energy costs, the higher costs in Tongon because of the fact that we’re going to push on the throughput and drop the grade a bit and at the same time, the cash costs, which will have the benefit of higher grades going forward and ensuring the integrity of the underground excavations.

I mean, the full costs demonstrate two of the qualities that set us apart from the industry. I believe, first we’re continuing to grow production while elsewhere they’re static or declining. And secondly, this growth is based not on hope, but on firm foundations of reserves already in the bank. And by the committed and experienced teams across our business, we believe that we’ll be able to continue to improve on our business and deliver on our plans.

On the cost issue, with cash costs rising faster than the gold price, many gold mining companies are experiencing significant margin erosion largely because, in the past, they’ve followed short-term market trends instead of looking further ahead for ways to ensure the sustainability of their businesses. And certainly as you see in this slide, our focus is on quality and grade and not getting seduced into using high and high gold prices to plan our mine plants have ended up with us arriving at the low end of the quartile, cost quartile for the industry as you see here.

And we believe that if you look at our forecast, we have a real potential to continue to manage the cost pressures because of our continued improvement in grade profiles going forward. And while we are making comparisons as I usually look at the share price performance and as I said at the start of this presentation, we set out to build a world-class African business with all its risks and challenges and focus purely on gold. And really, we’re very proud of our achievements this last year and it’s very motivating for the team when one comes through such a challenging year and with that bodes well on its way and Kibali being our next really big step in to the future, we’re all excited about what that’s going to do for our business and its stakeholders.

And finally, I think our success is due in large measured to our partnership philosophy and it’s a very topical subject at the moment, this whole thing about our resource nationalization et cetera, et cetera. Now, I would just point out that the perceived increase in risk across Sub-Saharan Africa is largely because there are lot more people invested there and not necessarily because the risk is inherently higher. If anything and from my experience and if I look back at the 20 odd years we’ve been there, it’s much easier to manage that risk and we have a much stronger alliance with the governments and even more importantly the people of our host countries.

And we have no doubt that, despite the raising of expectations and the political messages of participating more in the proceeds of the mining industry, that the education continues and there is one thing that’s more important to host government is the sustainability and the ability to deliver tangible benefits to the communities and that’s something we are completely aligned with. And I think our big focus is engaged publicly in the debate and with intention of persuading all stakeholders that short-term gains they may get from tampering with the existing mining codes will not begin to compensate them from the longer term losses they will suffer if they drive investors away.

And I think we’ve got some very exciting examples of that sort of real contributions that can be made to economies like Loulo impact on Mali, the Tongon impact on Côte d’Ivoire, the (inaudible) Freeport investment in the DRC and more recently our investment in Kibali. There’s many more very good examples across the continent that I’m sure will keep everyone focused. And we intend to continue that debate here for the next couple of days whilst we’ve got everyone’s attention and many of the various government delegations visiting Cape Town.

With that, thank you very much for your attention ladies and gentlemen. We will be delighted to take any questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Joung Park from Morningstar. Please go ahead.

Joung Park – Morningstar

Hi, Mark. Thanks for taking my questions, and good afternoon.

Mark Bristow

Hello, Joung.

Joung Park – Morningstar

Hi. It seems like you did a good job of covering the operating mines. I just wanted to ask about some of the projects. So what kind of mine development time were you guys expecting to follow before Massawa, looks like you guys are expecting that to start production by 2016 in the presentation?

Mark Bristow

Yes. We want to finish the feasibility in 2014 and at this stage, we really do believe in the prospectivity of that whole Kibali belt. At the same time, we have ongoing discussions with the Senegalese government to look at the power solutions, which is one of the key drivers in being able to unlock that asset.

At the same time, if it doesn’t meet our criteria, which we’ve not prepared to bend, we’ve also reassured the government that, there will come a time when if it doesn’t meet our criteria, we’re very happy to bring in additionally new investors and bring it to account in a different way as we have done with Kiaka in Burkina Faso.

So, whichever way, we’re determined not to sit on assets, but to work with our host countries to bring things to account. But having said that, we still believe that Massawa, again, it’s the biggest undeveloped gold deposit or one of the biggest in Africa.

Joung Park – Morningstar

Okay. Thanks for that and then could you also give an update if any on Mongbwalu?

Mark Bristow

Well. Mongbwalu is an AngloGold project, you should probably ask them.

Joung Park – Morningstar

Okay, fair enough. Thank you.

Mark Bristow

Thank you.

Operator

Thank you, and our next question is from the line of Howard Flinker from Flinker & Co. Please go ahead.

Howie Flinker – Flinker & Company

Hi, Mark. Excuse me. Hi, Mark.

Mark Bristow

Hi, Howie.

Howie Flinker – Flinker & Company

I got three numerical questions. In your income statement, last year in the December quarter, there was $8.1 million of other expense, what was that?

Mark Bristow

Graham?

Graham Shuttleworth

So, Howie, just give me a second, I’m just flipping to that page.

Howie Flinker – Flinker & Company

Okay. And second, what accounted for the higher tax rate this year on the same pre-tax profit?

Mark Bristow

While Graham is looking it up, I’ll answer the second question.

Howie Flinker – Flinker & Company

Sure.

Mark Bristow

The profits driver is really because we shifted production and profits from Gounkoto to Loulo as Loulo has started to deliver. The Loulo is in tax and Gounkoto and it goes out of tax in June. So that....

Howie Flinker – Flinker & Company

Okay, I forgot.

Mark Bristow

Skewed the tax.

Howie Flinker – Flinker & Company

All right, I forgot. Okay. And there’s something wrong with my arithmetic. Looking at Morila, I’m trying to find that page, I think that – well, until I find the page, I think it costs you about $3.5 a tonne to extract the overburden at Morila according to what you described. And it takes 19 tonnes to get to the ore. Is that correct?

Mark Bristow

I think you’ve done a lot more. And I can tell you is that I think you’re talking about the pushback to come.

Howie Flinker – Flinker & Company

Yes.

Mark Bristow

And the cost of open-pit mining is $342 a tonne mined over the life of the project. And, we’re planning to capitalize $28 million as part of the pushback.

Howie Flinker – Flinker & Company

Now, does it take 19 tonnes of overburden to get 1 tonne mined or do I miss understand that?

Mark Bristow

Absolutely right. That’s it.

Howie Flinker – Flinker & Company

Okay. So, $75 in round terms, 3.5 times 20 say, for tonne mined and does one mined tonne get you 1.5 grams? That’s where I misunderstand it.

Mark Bristow

No. It’s a little bit higher than that because that the open pit ore that we are accessing is higher grade than the 1.5 grams.

Howie Flinker – Flinker & Company

Sure. That explains it because the...

Mark Bristow

The 1.5 is a historical number. You’re mixing the two up.

Howie Flinker – Flinker & Company

Yes. That’s where I was confused. Right.

Mark Bristow

The reserve grade for the pit, for that pit of reserve, we are going to in excess of just over 3 grams.

Howie Flinker – Flinker & Company

Otherwise, your variable cash costs would have been, the way I calculated it incorrectly would have been about $2,000 an ounce. I know you wouldn’t do that?.

Mark Bristow

We wouldn’t do that, Howie. You’re absolutely right. The all-in costs for the pushback is about $1,000 an ounce, all in.

Howie Flinker – Flinker & Company

Okay.

Mark Bristow

Including capital.

Howie Flinker – Flinker & Company

Yes, that’s explains – including capital? Okay. Great. And that’s it, except for my tax question.

Mark Bristow

Searching for the bean counter to come back on other expenses...

Howie Flinker – Flinker & Company

No, not the tax question, the $8,100 of other items of last year.

Graham Shuttleworth

Howie, what that relates to is, operational foreign exchange differences resulting from settling of invoices and currencies other than in dollars.

Howie Flinker – Flinker & Company

Okay. I’d forgotten.

Graham Shuttleworth

It’s not something you can really anticipate because it depends on how the currencies move in that period and what payments we are making. That’s what it relates to.

Howie Flinker – Flinker & Company

Yes. I’m sure you mentioned last year and I had forgotten. Okay. Thanks a lot guys, thanks both.

Mark Bristow

Thanks, Howard.

Howie Flinker – Flinker & Company

You’re welcome.

Operator

Thank you. (Operator Instructions) Okay and we have a question from the line of Filipe Martins from GMP Securities. Please go ahead.

Filipe Martins – GMP Securities

Hi, gents. Just a quick question on the purple patch, just to get a bit of more color on when you start to see that coming through. I think from the side that I understood mid-year of this year and also regarding the tax free space of the potential concurred of underground, would you expect it to seamlessly carry on or will there be a break, you’ll be paying taxes and then the additional tax free given the additional capital expenditure would kick in?

Mark Bristow

Yes. I think, Filipe, that the impact of the purple patch has already started. We’re mining in the upper-ends of the purple patch as we speak, but our intention is not for – as you see from our forecast, it’s a very gradual increase because it makes no sense to go rip the heart out of the purple patch first of all. And secondly from that slide, the backfill slide I showed you, we really got quite a lot of backfills to catch and to be able to ensure the integrity to do, but to go full steam with the purple patch and even then we’ll be leaving what we call secondary stopes for a while as the primary stopes mature as far as the backfill goes.

So it’s a process but you’re right in saying that the benefits will slowly become – I mean, the way, I guess, to give you a feel is if you look at Loulo’s standalone, I’ll give you a feel for the grade profile going forward, if you just give me one second. The Loulo grade profile on its own is we’re looking at sort of 4.955, this next year. And then we all go down to 4.1 again. So it’s not a perfectly straight line. And then that will go steadily up because we manage it with Gounkoto which starts delivering its own high grade part of the ore body going through next year.

So on a combined basis, if you look at the grade profile for – just getting to it, Loulo-Gounkoto combined, the grade profile looks like – sorry, I was just stuck with the – we’re looking at like 4.4, 4.7, 4.7 and 4.7 through next year. So slightly above the grade of this year and it goes up year-on-year until it peaks to. But we’re very mindful of the fact of optimizing these ore bodies and not just ripping it out without a hallelujah year then very difficult future.

Filipe Martins – GMP Securities

Sure.

Mark Bristow

And your second question was?

Filipe Martins – GMP Securities

On the tax-free status of Gounkoto, should you proceed with the Gounkoto underground?

Mark Bristow

That expires in June. One of the big things about us is being able to support the Malian authorities in this very difficult time is that we’ve been paying dividends, which is good for all the stakeholders including the treasury, and the fact we are – our contribution to the Mali, treasury is growing at a time when they need money.

So submitting the tax in June is good for all – for them as well and we’re not against that. When we finish the bankable feasibility study at the end of the year with Gounkoto underground, we’ll sit down and talk to them about how we manage and what sort of levels of capital we’re going to be putting, and then how much we can claim back from our deferred tax holiday.

And we’re comfortable that we’ll get to an agreement that has merit for everyone because certainly development of that underground brings a lot of indirect benefits as well as direct benefits to the Mali government and as you’ve seen from the discussions, we’ve had at Morila, they’re very mature in that approach. I think there are quite a few more endowed countries around the world that could take a feather out of the Malian’s book as far as keeping to the rules.

Filipe Martins – GMP Securities

Thanks a lot.

Operator

Thank you. (Operator Instructions) And we have a question from the line of Bart Jaworski from Davy. Okay. Bart has put himself on hold. (Operator Instructions) Okay, we have no further questions coming through on today’s call.

Mark Bristow

Okay, well thank you very much, ladies and gentlemen, for making the time and again, as you know, we’re always at your disposal for any follow-up questions you might have either by e-mail or directly on our telephones and we’ll be standing by. Thank you and we look forward to catching up with you. I think we got to probably see a lot of you down at the BMO conference in Florida in a couple of weeks. Cheers.

Operator

Thank you for joining today’s call. You may now replace your handsets.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!