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Claude Resources Inc. (NYSEMKT:CGR)

Q4 2012 Earnings Call

March 28, 2013 10:00 am ET

Executives

Neil McMillan – President, Chief Executive Officer

Rick Johnson – Chief Financial Officer

Peter Longo – Vice President, Mining

Brian Skanderbeg – Senior Vice President, Chief Operating Officer

Marc Lepage – Investor Relations

Analysts

Paolo Lostritto – National Bank Financial

Kevin Chiew – CIBC

Sam Crittenden – RBC

Operator

Good morning. My name is Steve and I will be your conference operator today. At this time I would like to welcome everyone to the Claude Resources Inc. 2012 Operation and Financial Results conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star then the number one on your telephone keypad. If you’d like to withdraw your question, press the pound key. Thank you.

I would now like to turn the conference over to Marc Lepage, Manager, Investor Relations. Please go ahead.

Marc Lepage

Thank you, Steve. Good morning and thank you for joining us on our 2012 earnings call. We would like to welcome all analysts, current and prospective shareholders and the media. On the conference call today, we have Neil McMillan, President and CEO; Rick Johnson, our Chief Financial Officer; Brian Skanderbeg, our Senior Vice President and Chief Operating Officer; and Peter Longo, our Vice President of Mining.

I’d like to announce that during today’s call, the company may use forward-looking statements. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. For further information regarding forward-looking statements, you are welcome to read our cautionary note located on Page 2 in today’s presentation, which is also located on the home page of our website within the corporate presentation icon on the left-hand side. Please note that you can view the 2012 annual MD&A and financials on our website on the Investors page under Financial Reporting.

I’d like to now turn the call over to Neil McMillan, President and CEO for comments, and then we’ll go to questions.

Neil McMillan

All right, thank you Marc and thanks again everybody for joining us, taking the time to join us. For those of you that have accessed the PowerPoint presentation that we’re going to be using, I will be referring to page numbers as I go through this, and I’m going to start on Page 3 with the 2012 highlights.

Our net earnings for the year as reported were 5.6 million or $0.03 per share. That was after a non-cash deferred tax liability of 3 million, so net earnings on the cash basis were about 8.6 million or $0.05 a share. Cash flow from operations was about what we had expected – 25.8 million, or $0.15 a share. Our cash costs per ounce came in slightly under $1,000 an ounce, one of the areas we’re focusing on addressing on a go-forward basis with some success. I think if you look at our fourth quarter, our cash operating costs were down under $850 an ounce. They were frankly above that level in the third quarter as well, so we have some idea about under normalized circumstances where we can expect to go on the cash cost side of the equation.

Gold sales were up. Our production for 2012 was up about 10% over 2011, and of course gold prices at $1,660 Canadian resulted in a 16% increase in revenue. I will say again at this time, and we’ll deal with it a little later in a slide, the trend in increasing production and reducing costs, so we expect to continue.

We had a significant change in our mineral reserves and mineral resources at the Seabee mine during the year. Our total reserves decreased by about 13% after producing nearly 50,000 ounces, and the grade went up fairly significantly from about 5.37 grams per ton to 6.14. That’s not the big issue, in my view. What did happen was we converted significant inferred resources at Santoy into the indicated category, and in fact we converted 281,000 ounces of resources out there to indicated at 8.8 grams per ton cut grade. Once those ounces are in the indicated category, the next logical step for us is to put a mine plan around those ounces, which we’re currently doing, and once that’s completed they can be converted into the reserve category. We expect that process to be done by the end of the second quarter, and frankly it should raise our total reserves at Seabee from 311,000 ounces, where they were at the end of 2012, into the 500,000-plus ounce range, and we expect the grade to continue to go up as a result of that. So that’s the fuel that’s driving our production increases over the long haul and will have a big impact on lowering our costs.

There’s been lots of concern among our shareholders and analysts about our balance sheet, and I’ll talk in some more detail about it. We have expanded our debt facilities. We had no interest in funding future growth with equity, so we expanded our debt facilities with our bank, Canadian Western Bank, up to $25 million. The average rate on that will be 4.5 to 5%, so a good debt facility. And then we entered into an agreement with Crown Capital Partners early in the new year for an additional debt facility of $25 million. We’ve said on the slide it’s expected to close early in the second quarter. Virtually everything is completed there, and we are led to believe as of yesterday that the transfer of funds is likely going to take place before the end of next week, so we think that’s going to close imminently.

That would give us a total debt facility of $50 million. We are not currently utilizing the 25 million from Canadian Western Bank, even though we’re in the middle of a major expenditure on our winter resupply, and of the 25 million from Crown Capital that we expect to close, 9.5 million of that is earmarked to repay the debenture that matures in May. Out of the total $50 million in banking facilities, we’ll be utilizing about a total of $35 million of that at this point in time and we don’t expect that to change very materially going forward, except for the possibility of a dramatic change in the gold price.

As well, many of you know we did surpass the one million ounce production number at Seabee during 2012. This is a major accomplishment for us. It took us a long time to get there. We’ve averaged under 50,000 ounces a year for 21 years at Seabee, and there’s not very many companies that have been able to stay in business producing at under 50,000 ounces. It’s a terrific credit to the staff that we have at Seabee and our management team and employees up there with their tenacity and how hard they work. They’ve enabled us to meet that milestone. I’m relatively confident it will take us substantially less time to produce the next million ounces out of Seabee, and those million ounces are there. We have a total of 1.3 million ounces already identified at Seabee close to mining infrastructure, so assuming we can continue to convert our resources to reserves and mine it, we expect Seabee to operator for a long time and frankly going forward at higher rates of annual production.

The other big issue for us was the shaft extension at Seabee. We’re developing and mining at 1,100 or 1,200 meters below surface at Seabee, and our shaft that we used to skip ore to surface, the loading pockets were at 550 meters so we were vertically trucking ore 550 or 600 meters – very, very expensive. It created all kinds of ventilation challenges and logistics issues, so we initiated a shaft extension project to about 1,000 meters. We had scheduled that to be completed in the fourth quarter and we had scheduled 42 days of downtime to tie that in, but because our operating staff adjusted how they were going to do that, we deferred that tie-in until January; but we were only down for 20 days instead of 42 as a result of that change, so we have completed that and we expect to see a material reduction in operating costs on the ore that we mine from Seabee deep and our L62 deposit that’s parallel to it.

On Page 4, you can see the trends, and that’s what I’m really looking at in production and cash costs. Q4 was higher than the trend for the previous 12 months. We expect that trend to continue. Every quarter will not be higher than the previous quarter. This is a narrow vein underground mining business, but again we are confident that an increasing production trend will continue. You can see a material trend down in our cash operating costs, and again, we expect that trend to continue. We do have a chart in the presentation later that will give you a better idea over the next five years where we would expect both production and cash costs to move.

On Page 5, again, the trend in revenue, a combination of increasing ounces and higher gold prices, at least stable gold prices over the last 12 months; so again, we expect our revenue to continue to increase.

On Page 6, cash flow is moving fairly dramatically over the past four quarters; and again, net earnings follow that. We again expect that trend to be a very healthy one going forward as production increases. The big issue for us is what we can do on the cost side, and I’ll talk a little bit about what we’re doing on that front and how much potential we have to continue making improvements there.

Our current financial position, again one that people have been concerned about, short-term debt of 16.5 million is a bit misleading in some respects because it includes about $5 million of demand loans for equipment at Seabee that we incurred over the last three years. Because there is a demand provision in those term loans, they go into current liabilities so they are included there; and then the debenture, which was a five-year debenture, matures in May so it’s a current liability as well. What it’s done to us at the end of the year is put us in a deficient working capital position. The expectation here is that with the closing of the Crown Capital facility next week and the termination or the—then 25 million immediately goes onto our long-term asset side of the sheet and our working capital will change substantially, I think into the plus-20 or $25 million range. So there’s some timing issues here, and we’re confident that the Crown Capital will come to a healthy conclusion here next week. It’s been a lot of work to do it, been a very rewarding experience for us but an immense amount of work. Everything has gone very, very well, and as I say, we expect that to close next week.

Again just to make reference to the debt facilities we’ve put in place, we did not want to issue additional equity. We did provide a sweetener with our Crown Capital facility of 5.75 million warrants, five-year warrants, so there is some dilution there, but we expect late last year and with the termination of the debenture in May that nearly 3 million existing warrants will fall off the table, so the net increase in dilution of about 2.5 million shares on top of our 173 million. So we’re very conscious of the need to keep dilution to a minimum, and I think we’re doing a good job of that.

On Page 8, we’ll just talk a little bit about again the financial capacity in the company. We’re going to have $50 million in headroom – again, assuming we have a successful closing to the Crown issue. We’ll have about $50 million in headroom and we’re not using it all, nor do we see ourselves going forward using it all. So we’ve got adequate liquidity to operate and most importantly to expand the Seabee project as fast as we prudently can. So the debentures will be retired in May and we believe we will be adequately funded for the foreseeable future. We have significant capacity to service debt in the company after the closing of the Crown transaction. Our debt equity ratio will be still under 0.25 to 1. We have significant cash flow coverage on our debt service requirements and we consider it a substantially better way to fund our growth going forward than by issuing equity.

Our total cost of capital on that $50 million in facilities, including the cost of issuing the warrants and all fees associated, put our costs in the 8 to 8.5% range annually, and for a smaller company, a growing company like ours, we consider that to be a reasonable way to approach this. Cost of capital to us, if we outright issue equity, is probably 25% a year, so not an option we wanted to pursue.

On the operating side, Slide 10, we had forecast 48 to 50,000 ounces of production in 2012. Obviously we were successful at meeting that objective. Our unit cash costs were up in 2012. Again, you’ve seen some of the potential reduction that can take place when we have good quarters. We are forecasting lower cash operating costs in 2013 because of the increase in production. We are forecasting 50 to 54,000 ounces.

The other thing that we’ve noted, and we’re quite sensitive to consumable costs, et cetera, because of our winter resupply. We don’t have a permanent road into the Seabee mine, so we lay in all of our heavy consumables over an ice road in the first quarter of each year. It’s a 10 to $15 million expenditure, but we put the pin in on the cost of most of those things at this point in time. We’ve seen two very encouraging things. Number one, the labor market has stabilized quite substantially and our expectation about the increase in labor cost in 2013 is very modest 1 to 3% increase. I think the Saskatchewan Mining Association believes the increases will average between 3 and 4%. We think we’ll be a bit below that. And just as encouraging – the cost of our consumables has either stopped going up or in fact in many cases has gone down, so I think that cost inflation that we’ve all been hit with over the past four or five years has at the very worst stabilized, and at the best is actually being reduced. We’ve seen reductions in the cost of diesel fuel, propane and gasoline, reduction in the tires, et cetera. So I think that part of it, certainly in our case, looks to be behind us for 2013.

We will conduct and did conduct a good exploration program in 2012. Again, the real key there was the infill drilling that we did at Santoy from surface that upgraded that 281,000 ounces into the indicated category. That was a material increase in value that was delivered by our exploration department. We also continue to do great work underground. That underground exploration is conducted by our operating staff. They are the ones that were responsible for the discovery of L62, which is parallel to the Seabee operation. So we were firing on all cylinders on the exploration front last year.

Slide 11 gives you some pictorial of what was done out at Santoy, and if you look at it, the yellow area in the middle of the Santoy Gap resource is the area that was upgraded. That whole Santoy project currently hosts just under a million ounces in resources. Measured and indicated, as we said, it’s 281,000, the inferred 357. This is a wonderful new area for us to mine in where the Seabee mine has produced about a million ounces on its own. This particular project, which is about eight miles away from Seabee, this project itself is approaching the one million ounce area already. As you can see in the indicated at 8.8 grams, it has the potential to have a material impact, a positive impact on our fee grade going forward. We’re just putting the mine plan around that Santoy Gap resource now. As I said, that will be done I think before the end of May, and we’ve already started an exploration ramp to the project. On that slide, you can see that that exploration ramp is already parallel to the first part of the Santoy Gap. It’s about 75 meters on the other side of the structure. The first drill chamber is done. What we typically do there when we get parallel to the structure is drill it off on higher densities to assist us in the mine plan.

We currently in our life of mine plan haven’t forecasted any production coming out of Santoy Gap until the last quarter of 2014. I think it’s fair to say once we’re done the mine plan here, we may demonstrate that we have ability to accelerate this particular part of our ore body into our production scenario, so we’ll know that fairly quickly.

Page 12 is in my view really a great summary slide for people about what’s going on in the company and particularly at Seabee. Our life of mine plan currently runs out to 2022 and still doesn’t utilize the full 1.3 million ounces. But a 10-year life of mine plan is—you’re getting into really conceptual views when you get out that far. This one is really a five-year plan in 2013, highly detailed in what we’re doing; and again, we’ve got a good plan going forward for the balance through 2017. But you can see what we expect is reasonable production increases over the next five years, and you can see as well where we think our cash costs could come down to. The reason that we’re satisfied with that, obviously the new L62 deposit at Seabee and particularly Santoy Gap are the big drivers of the increase in the production and the resulting reduction in costs.

We also have a international mining consulting firm in working with us to improve our systems, our planning and our operations to make us even more productive than we are now. We think that will have an impact on our operating costs going forward. The shaft extension at Seabee, we think will have a big impact on our operating costs. We’re frankly encouraged by what we’ve seen already. We’ve been making personnel additions. We have a wonderful group of long-term employees. Four of our senior managers at site together are over 50 years of experience, and we continue to add new technical experience to the team to help fund this increase in production.

I will tell you as well now, we have undertaken an initiative we call the cash flow optimization plan that is intended to deal aggressively with our cost structure. A lot of good work was started in this late last year after Peter Longo became our Vice President of Mining, and we’re seeing the benefits of that already and that process is going on aggressively. We think we can have a material additional impact on our costs over the balance of 2013 based on what we’re doing. It’s never fun and it isn’t pretty, but it is necessary to do, particularly given the volatility in the gold price, and it gives us lots of confidence that we have immense capacity to deal with short-term disruptions in our production scenario or depressed gold prices.

Again on Page 13, it’s just a summary of the update on our mineral reserves and resources that was done at the end of 2012. This is a great story. We carry typically 300,000 ounces of reserves at Seabee, 250 to 300,000 in the reserve category, and produce typically 50,000 ounces. We nearly doubled that, or will by the end of June in our view, and as a result of that I think we should be able to nearly double our production, and that’s what that previous slide showed you. It can’t be done in three months or six months or nine months; it takes lots of investment in development. We have to upgrade our mill a bit, et cetera, but it’s a great news story with both the grade going up and our ability to process tons and increase ounces.

Page 14 – just a quick word about our Amisk project. As you know, we have three projects – Seabee and production, the Amisk and Madsen projects, as I would call them, relatively advanced exploration projects. Amisk has a resource on it of nearly 1,6 million ounces. It’s an open pittable project and the grade is under 1 gram per ton, so it’s not a robust automatic to put in production. We are doing a preliminary economic assessment on the project now to give us some view of how to proceed with this going forward. That will be done as well, I think in the first half of this year. It hasn’t been our highest priority to move this along, but we do have a very large land position there. We have been staking additional ground, and if you’re looking on your slide on Page 14, you can see the green shaded area which we’ve staked in the last 12 months.

We really like this prospectivity here. This is close to Flin Flon, Manitoba, the home of Hud Bay, and there is immense potential economic mineralization on our property. We’re just getting started and we have the 1.6 million ounces already in the resource category.

The Madsen gold project is also a great project for us. We have there now 1.23 million ounces in the resource categories at about 9 grams. That’s a terrific asset. I mean, if you look at Seabee as a whole, it’s 1.3 million ounces at just over 6 grams, and it’s got immense net present value. The Madsen project is the same number of ounces, significantly higher grade and nearly full infrastructure in place. We spent a lot of money drilling deep here to demonstrate firstly that the ore bodies at the Madsen mining complex do continue at depth. We’ve certainly confirmed that. We had very good economic intersections substantially below the former workings. It became time for us to stop and do an economic assessment on Madsen about its viability, so we’ve initiated an internal scoping study to see how much of that 1.23 million ounces is likely mineable economically. That internal process will be completed by the end of the second quarter of this year as well. Logical steps out of that – if the initial view of it is robust, it would like lead us through into a pre-feasibility study, and if everything went well a feasibility study. But the real issue here is at the end of this internal scoping study, we’ll review the strategy that we will be applying to Madsen to unlock the value in this asset for our shareholders. So that one is not far away either. We’re not currently drilling at Madsen while we do the scoping study.

Lastly on Page 16, an outlook for 2013. We are reiterating our gold production outlook of 50 to 54,000 ounces and we do expect our cash costs in 2013 to come down somewhat. We don’t forecast cash operating costs, but we do think they will come down. We can tell you again – and it’s frustrating for me – our first quarter production will be lower than we’ve budgeted. It seems to happen every year. 2011, the first quarter was below budget. 2012, we were below budget. 2013, we’re going to be below budget – not in my view by a material amount, and not by enough to cause us to want to at this point reforecast our 50 to 54,000 ounces. There’s a variety of reasons for it. We did—we don’t have to do an awful lot over the balance of the year to catch up on what we’re behind, and we have lots of different ways to do it; so we’ll see how the second quarter goes but we are a bit behind on the first quarter.

Our winter resupply this year went superbly. We had—last year because we were doing a significant build year at the Seabee mine, we ran nearly 500 semi loads in over our winter resupply. This year, we will be somewhere between 350 and 400 semis, notwithstanding that we intend to do more tons and more ounces. So that’s good news for us, and the weather up here in Saskatoon and northern Saskatchewan gets fairly brisk in the wintertime and we haven’t had any difficulties with the winter resupply. It’s virtually complete now, I think, and we’ll just continue to top up fuel tanks over the balance of the winter road. It typically goes out at this time of year, but our weather is still really cold here and the winter road is still in good shape.

We have a modest budget this year for exploration compared to last year, and that budget is being directed at both Seabee and Santoy in the Seabee camp and close to the existing infrastructure. We do intend to do some deep drilling and I could have showed you that on the slide of Santoy Gap. We’re targeting some holes well below the 750 meter depth level, below Santoy Gap and Santoy 8. We think there’s great prospectivity down plunge of those two ore bodies. They’re actually part of the same system, so we’re quite keen about what we can demonstrate there.

You can see as well our budgeted capital expenditures are well down this year. Last year we spent a lot of money at Seabee. Again, most of the heavy lifting cost-wise on the shaft extension was done last year. We had very little expense in the first quarter to finish that project. We expanded our cap to handle additional people, upgraded equipment, spent money on the mill, so we’re going to spend quite a bit less this year than we did last year.

Of the 31.9 million that we’re budgeting this year, about 6.5 million of that is growth capital or expansion capital related to almost all of it to the Santoy project – the ramp, exploration, drifts, fresh air vent, et cetera. So included in that 31.9 million is about 6 to 6.5 million of growth or expansion capital, and again, lastly we expect our facility with Crown Capital to close hopefully next week, and that’s information that we received from them.

So I’ll stop there and we’ll open it up to questions that any of you might have. Thanks a lot for following along with us.

Question and Answer Session

Operator

[Operator instructions]

Your first question comes from the line of Paolo Lostritto from National Bank Financial. Your line is now open.

Paolo Lostritto – National Bank Financial

Morning guys. Thanks for taking my questions. First question, I guess I’ll pose to Brian and Peter. Neil, you brought up the Q1 looks to be tracking below budget, and very curious as to why; and the only reason why I’m really honing in on it is because of the balance sheet and the balance sheet concerns. It’s just important to understand what’s going on there, especially since the 20-day shutdown seems to be less than half of what was budgeted.

Neil McMillan

Peter Longo, our Vice President of Operations will talk about that, Paolo.

Peter Longo

Yeah, in terms of production in first quarter, we’re going to be lower than we had forecasted mainly due to our grade. We’ve had a couple of higher grade stopes in our Seabee complex that we’ve had some significant problems in terms of ground failures and dilution effects. In addition, not helping out, we’ve had some equipment downtime on some of our smaller silt development, so the combination of those two issues are affecting us.

Neil McMillan

In addition to that, Paolo, I’ll make one other comment. While we knew the shaft was down, we built a stockpile of run of mine ore on the surface, a fairly significant one; and once we expected to mill that through the piece, the weather went to 45 below on us and that stockpile froze hard – it does happen. We’re just back at it now to pick it up. There’s probably over 1,000 ounces in that that didn’t get processed in the first quarter because of that stockpile. It was mined, paid for and sitting on surface, so we’ll catch up a chunk of it just by milling that.

We did put down one of the three ball mills and we had scheduled it for new ball gear as well that reduced our tonnage to 750 tons a day. We have three ball mills, so when we’re running at full capacity, we can go just over 1,000 tons. So that was about a three-week shutdown to do a new ball gear and put new—(inaudible) new pedestals, et cetera. So there’s a combination of issues.

We don’t think at the moment that there is anything that we can’t adjust to. It’s a combination of things, and we have this—each year, as I said, we have this challenge and people say, well, why does that always seem to happen in the first quarter? And it never seems to be the same reason. People’s automatic assumption is, oh, to try and make your numbers in the fourth quarter, you raided from your first quarter. We’ve never done that, so there’s so many moving parts in these things and we just--. The weather, I think, has a big part to play in it, and then the winter resupply, when we have to do major work, we try and get a lot of that done in the first quarter because we can resupply. With this ball gear, we couldn’t fly that in. So there was a combination of things.

As I said, our view at the moment is that there is no reason for us to change our forecast of 50 to 54,000 ounces.

Paolo Lostritto – National Bank Financial

How many stopes are being run right now?

Peter Longo

At our Seabee property, we like to keep in between two to three production zones on the go at any time, one in backfill, one in production, and one kind of in contingency. Right now, I believe we’re around two. The good news is that our development rates, which historically we’re just over three meters per day, our last couple months we’ve been seeing it over five meters per day which means that if that continues, we’ll be able to develop new stoping areas. So instead of having two stoping areas open, we’ll be able to have three to four, which will greatly improve our reliability of production.

Paolo Lostritto – National Bank Financial

And you expect that to happen?

Peter Longo

At Santoy 8, we’ve got two to three zones of (inaudible) production. Sorry Paolo, I didn’t grab—

Paolo Lostritto – National Bank Financial

No, I said when you do expect to be back to over three to four stopes?

Peter Longo

April. April looks to be a very good month with all our production zones open and ready.

Paolo Lostritto – National Bank Financial

Okay, and so of the two that are operating right now in the cycle, are you still dealing with ground support issues, grade issues there?

Peter Longo

Going back when these incidents first started happening probably in February, early March, we sat down as a team and did some major overhauls on our procedures, operating procedures and our methodologies. We’ve walked away from one of our different kinds of mining methods, so as these initial stopes are clearing up and finishing them off, we don’t anticipate to experience the same kind of problems we had at that point.

Paolo Lostritto – National Bank Financial

Okay. Maybe then translating more on the financial side, Rick, if you can give us a sense of where the cash balance sits right now.

Rick Johnson

Sure, Paolo. I guess like Neil has mentioned and Peter has mentioned, our production is a little off what we had expected in the Q, and combine that with the winter road resupply – I mean, everything’s fine, it’s just tight. As expected, it’s tight when we’re more off our production targets, but that being said that’s why we did the Canadian Western Bank, we increased our line of credit there, and we also got a revolving loan on top of that.

Paolo Lostritto – National Bank Financial

Right, and so—but the Canadian Western Bank line of credit is closed. Has all of it been earmarked as part of the winter resupply?

Rick Johnson

Canadian Western Bank – yes.

Paolo Lostritto – National Bank Financial

Okay. All right, I’ve got no further questions.

Operator

Your next question comes from the line of Kevin Chiew from CIBC. Your line is open.

Kevin Chiew – CIBC

Good morning, guys. Just a few questions for me. First, maybe just to follow up on that question on the capital position for the company. I was wondering if you could maybe comment on the CCP facility in terms of the overall process for closing it. Has it been longer than you guys expected?

Neil McMillan

I think that’s a fair comment. I can tell you there’s no problems. All of the terms have been negotiated. Everything is fine. We started legal 10 days ago, probably, the legal stuff started, and we’re led to believe that’s—well, we know there are no issues there so there’s no liability, outstanding litigation or title issues or anything like that. So yeah, it took us longer.

I can tell you, and compliments to Crown Capital – these guys are seriously thorough, and we’re comfortable with that. We view them as a long-term partner in what we do and they’ve really—the amount of work they’ve put into going through our models, our long-term models, et cetera, and coming out comfortable with what we’re doing, frankly it should be a vote of confidence to the rest of our shareholders that they see the same things we’ve been talking about. But it definitely has been a thorough process.

Rick Johnson

I think too, Neil—I mean, with their due diligence focused on different sensitivities and how we would respond to different gold prices, and I think like Neil said they were very thorough on that and it should give shareholders confidence in what we can do in those situations.

Kevin Chiew – CIBC

Right, okay. And then just on the Canadian Western facilities that you have, how much of that total has been used?

Rick Johnson

Well, the total facility is $25 million and we’ve got a 10 million line of credit, a 5 million revolver, and a $10 million master lease line. And we’re into that right now at about $20 million.

Neil McMillan

So it’s not fully utilized at this point, Kevin, and this is the point in the year when our cash consumption is obviously the highest because we are incurring 10 to $15 million worth of inventory costs. We’re prepaying for 10 to $15 million of the inventory costs over a three-month period. So I’m quite encouraged by that. What happens then obviously after about the end of March, we start to draw that inventory down. We expense it, but there’s no cash expenditure associated with it on a monthly or quarterly basis because it was prepaid. So of the $20 million that we’ve drawn down here, I’m guessing close to 15 million of it is just going to be prepaid for inventory or capital items that we put on site.

Kevin Chiew – CIBC

Great, okay. And just maybe a bit of a maintenance question. For the last—for Q4 basically, what were the per-ton unit costs?

Neil McMillan

Rick Johnson, our CFO has got that here.

Rick Johnson

I’ve got the—I’ve got it broken out here. I’ve got it by total. I have the 2012 totals. I’ll just give it you for the company as a whole. It was $176 per ton.

Kevin Chiew – CIBC

Okay.

Rick Johnson

I haven’t broken out between Seabee and Santoy. I mean, I could get you those numbers on the detail like that, but I have them broken out by mining, milling services, camp and admin as a group annually, and I have it by Seabee/Santoy on the quarter.

Kevin Chiew – CIBC

Okay yeah, if you could—

Rick Johnson

I’ll send them to you.

Kevin Chiew – CIBC

Sure, okay. That’s all for me, guys.

Operator

Again if you’d like to ask a question, please press star then one on your telephone keypad. Your next question comes from the line of Sam Crittenden from RBC. Your line is open.

Sam Crittenden – RBC

Thanks, good morning. Just a follow up question on the ground failure in those two stopes. Were those in the L62 or in the Seabee deep?

Peter Longo

I wouldn’t say they were ground failures. A little bit of sloughage – when you open up your stopes on the ground, it’s not uncommon to get sloughage, and we just had a little bit more than we typically do. The answer to the question is both – we saw some in L62 and we saw some in 2B deep.

Sam Crittenden – RBC

And is this something that you’ve seen sort of off and on in the past, or is this something newer as you get deeper in the mine?

Peter Longo

It’s not—we’ve seen it pretty regularly. We do plan for a certain level of it. We’ve just see a little bit higher volumes than we had expected, and of course as you get deeper it will get worse if you don’t change things and adjust to it. We are looking at different ways we can reduce that in terms of additional ground support by cable bolting or consolidated fills. The good thing about L62 is that we’re starting at the bottom of that deposit and going up, so the problems should become less.

Sam Crittenden – RBC

Okay, thanks Peter. And just on the grade throughout the year, is the grade going to stay relatively consistent or is there sort of one quarter that’s less or more than the others?

Peter Longo

It should be relatively consistent for the most part. Certainly it will be above our dilution impacted grades in the first quarter. It will fluctuate a little bit, just depending on which stopes are in our production sequence; but overall, the quarter was to be budgeted lower ounces than the rest of the three quarters so we should see improvements going forward.

Sam Crittenden – RBC

Okay. And then just a bit of a different question – if gold prices were to correct in some sort of meaningful way, how quickly do you guys think you could respond to that and sort of change your cutoff grades? Is that something you could do within a couple quarters, or is that sort of a 12-month thing? What do you think on that?

Neil McMillan

Brian and Peter can answer that for you.

Peter Longo

Certainly it’s not an immediate turnaround. Probably take about two to three months to revisit our mine plans on that, at which point we can start implementing it; and depending on which blocks are already developed, we can selectively mine the higher grade components of it. So I would think certainly by—you know, after three to six months, you could have the majority of your revised plan into gear, but it would take a couple just to evaluate that.

Brian Skanderbeg

A little further to that, Sam – it’s Brian here. As we have availability of the Gap deposit and combined with L62, there’s certainly a lot more grade flexibility and in particular those two deposits have some characteristics that would allow us to respond to gold price more quickly. So as time moves on over the next year and a half, I think our capacity to respond to a gold price correction increases.

Neil McMillan

I can add to this, my personal concern is that if we move—even if we move tomorrow to make a major change to our cutoff grade and high grade, we still have—we’ve paid for all of the consumables necessary to mine tons – that’s already on site, so we’re really talking about dealing with the labor component if we’re going to change anything. We start to lay off development crews if—say the price of gold went to $1,250. If we have—firstly, we have the capacity to do that, frankly, and not everybody does. That’s one of the good things about our operation. But my concern is that you see a significant drop in the price of gold, you move very quickly, lay off your crews, et cetera; and then a month later the price of gold is back over $1,800 again.

So it’s a tough call. Again, the good news is we can do it. We had positive cash flow at Seabee when the gold price was under $350 an ounce, and we did that for a variety of reasons but one of them was we mined higher grades. So it’s a tough call, Sam, and it does take time even if you went at it tomorrow. The balance is do you damage your longer term potential for a short-term advantage, and as I say, we haven’t ruled it out but it’s certainly—we’ve done a lot of scenario planning over the last few months about how and when we’ll respond.

Our total cost of production now at Seabee is in the 1,400 to $1,500 an ounce range for everything, so we have still got quite a bit of room – our Canadian dollar gold price is about $1,630, so Seabee is still generating free cash from its ongoing operation, and this year not enough to cover all of our G&A in the company and debt service, but we didn’t budget for very significant amounts of negative free cash, and next year we expect to have positive free cash flow and growing from thereon.

So it’s a great question. It’s one we deal with here, and we’re doing scenario planning. We’re scrambling to aggressively cut our operating costs – started that last year but ongoing with some enthusiasm here in the new year.

Sam Crittenden – RBC

Okay, great. Thanks for the update, guys.

Operator

I’m showing there are no further questions at this time.

Neil McMillan

All right, Marc. Thanks everybody for taking the time to sit on the call, and we’ll keep you posted as we go forward.

Operator

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.

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