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Executives

David Quinlivan – CEO

Rod Antal – CFO

Analysts

Michael Slifirski – Credit Suisse

Tony Mitchell – Ord Minnett

Paul Hissey – Goldman Sachs

Stephen Gorenstein – Merrill Lynch

Jo Battershill – UBS

Brett McKay – Deutsche Bank

Joseph Kim – JPMorgan

Alacer Gold Corp. (OTCPK:ALIAF) Q1 2013 Earnings Conference Call April 30, 2013 7:00 PM ET

Operator

Good day and welcome to the Alacer Gold Quarter One 2013 Earnings Conference Call. Today's conference is being recorded.

At this time I would like to turn the conference over to Mr. David Quinlivan, Chief Executive Officer. Please go ahead, sir.

David Quinlivan

Yeah. Thank you, [Joyce]. Good day everyone. Thank you and welcome to Alacer Gold's conference call to discuss our first quarter 2013 financial results.

Joining me on the call today is Alacer Gold's Chief Financial Officer, Rod Antal, who will now give a brief presentation of the results that were released earlier today, after which we'll hold a Q&A session. We will speaking to a presentation summarizing our financial and operating results which is available on our website.

Can I please ask you to move to slide two of the presentation?

During today's call, certain forward-looking statements will be made relating to future business plans and other matters of a forward-looking nature. These forward-looking statements are subject to many risks and uncertainties, many of which are detailed in our public filings and can be found on www.cedar.com. There can be no assurance that such forward-looking statements will prove to be accurate as actual results and future events can differ materially from what they are forecasted or projected to be. Please take the time to read the cautionary statement and understand that all forward-looking statements made today are subject to the disclaimers set out on slide two of the presentation.

Additionally, all dollar amounts in this presentation are expressed in US dollars unless otherwise noted.

Our MD&A and earnings release which are both posted on our website at www.alacergold.com include a reconciliation of certain non-IFRS financial measures to the most directly comparable IFRS measures including all and sustaining cash costs, cash operating costs, total cash costs, and adjusted net profit which may be used on this call.

Could I please ask you now to turn to slide three for an update of our business?

I'd like to spend a couple of minutes to address the recent volatility in the gold price and steps Alacer will be taking to preserve the balance sheet during these times, and on top of that, the challenging first quarter results of our Australian operations. We will be implementing a strategy to save cash across the business, and in addition, increase the production of higher-margin ounces to maintain our strong net cash position during 2013.

As I've said before, all options are being considered in respect to enhancing value for shareholders, and this will continue. We are targeting approximately $60 million in cash savings and incremental production revenue for the remainder of 2013 to ensure we deliver on production and guidance.

These measures include reduced mine capital and operating development at Higginsville without affecting production performance for 2014 and 2015. Reduced exploration spending. Reduced G&A at both corporate and sites. Increased incremental high-margin production at Copler. Increased incremental higher-margin production from the Artemis lode at the Trident Mine. Reduced mining costs across all operations. Reduced G&A at both corporate and at sites. And eliminate discretionary expenditure.

Can I please ask you now to turn to slide four for a more detailed discussion of our Australian business unit?

Our Australian operations were impacted by adverse weather conditions during the first quarter and produced lower grades than expected. This resulted in higher costs and lower production. However, we are confident that through the combination of our cash-saving initiatives, increased incremental production and the development work that is ahead of schedule, our Australian operations will turn around to become cash positive for 2013.

We have previously disclosed that 2013 is a transition year for our Higginsville mine and production should be stronger in the second half of 2013. And I'm pleased that this is ahead of schedule. The new phase at Higginsville should provide higher production and lower costs as we move into 2014 and '15 from the high-grade ore bodies at Trident and Chalice.

We also expect grades to increase at Pernatty in South Kalgoorlie as well.

Can I please ask you now to turn to slide five for a discussion of our first quarter results?

During the first quarter we announced a new corporate strategy that is driving all aspects of our business. We also announced the sale of our 49% non-controlling interest in the Frog's Leg mine and the special dividend of approximately $70 million or $0.24 per share. Alacer has also extended its mining contract at Copler with Ciftay mining contractors effective January 1, 2013, which is expected to result in approximately 18% savings on mining costs which currently translates to approximately $60 per ounce.

From an operational point of view, attributable production of 87,499 ounces was in line with our internal plans. Attributable cash costs were $932 per ounce.

Treatment services of the Frog's Leg ore began on February 16, 2013 at South Kalgoorlie operations Jubilee mill. South Kalgoorlie will continue to use a single mining fleet and supplement higher-grade ore from Pernatty to the Jubilee mill. Mining will then move to the SBS28 area in the second quarter with production in the second half of 2013.

Our balance sheet remained strong, finishing the quarter with $254.6 million of cash and working capital of $164.7 million. Attributable net profit was $4.2 million and adjusted net profit was $9.1 million or $0.03 per share.

Can I please ask you now to turn to slide six for an overview of our production profile?

Copler's production increased for the third straight quarter to 43,683 ounces with head grade increasing 20% over Q4 2012. This continues to demonstrate a strong track record of delivery from its world-class asset.

Whilst Higginsville's production was down quarter over quarter, we are starting to see the initial results of our development efforts with Chalice ore contributing 26% of production compared to 14% in the fourth quarter of 2012. We expect increased grades in production in the second half of 2013 as we move into the high-grade Artemis and Helios zones at the Trident underground mine and the Olympus zone at the Chalice underground mine.

At South Kalgoorlie operation, production was hampered by higher-than-expected rainfall and limited mill availability due to toll treatment of Frog's Leg ore.

I'd now like to turn the presentation over to Rod Antal, our Chief Financial Officer, for the financial section of the presentation.

Rod Antal

Thank you, Dave, and hello everyone.

Just want to turn your attention to slide seven. Please note that our accounts compare financial results with the corresponding period from the prior year to statutory reasons while David compared mine performance with the prior quarter in 2012.

As previously reported, our mines produced 87,499 attributable ounces in the first quarter of 2013 and we saw 92,986 ounces. As you can see in the table, production cost has increased by $14.2 million, primarily as a result of the increased production costs at both the Australian business unit and the Turkish business unit due to a number of factors that I'll discuss in a minute.

Attributable net profit has decreased due in large part to the net loss of the Australian business unit of $29.8 million and increased costs at the Copler mine. Also in Q1 2012, the profit reflected non-cash mark-to-market adjustments of the debentures and a decrease in the foreign exchange impacts. At Copler, cost increase is a result of higher reagent consumption and in particular cyanide and increases in electricity consumption and higher unit rates. Additionally, one-off costs of about $15 per ounce were incurred to complete the 2012 business improvement initiatives.

At Higginsville, higher mining costs were incurred as a result of the focus on mine development to access the higher-grade ore bodies at both Trident and Chalice later in 2013. Exploration costs increased due to 8,000 meters of drilling in the quarter for ore body delineation and grade control drilling of Artemis, Helios and Olympus ore bodies. Additionally, power consumption costs increased as a result of increased electricity usage at the new Chalice mine, electricity unit costs and the cost of diesel fuel and the introduction of the carbon tax in Australia in the second half of 2012.

The increased costs were offset by lower royalty components as more ore was mined from the Chalice mine which is not subject to the private royalty with Morgan Stanley.

At South Kalgoorlie, heavy rainfall contributed to the increased costs by the devaluing mining and accessing higher ore grades from the [inaudible] an increase in the surface holes and the requirement from a remedial work to be completed during the quarter. We also booked the $576 per ounce non-cash charge resulting from the reevaluation of stockpile at South Kalgoorlie which were also affected by the heavy rainfall.

You will note that [inaudible] Frog's Leg in Q1 2013. This was due to the accounting treatment required as the Frog's Leg mill did not [inaudible] until April 5. Therefore we had control at the end of the quarter and the Frog's Leg's assets were accounted for as if they were held for sale.

It is important to note that the Frog's Leg's P&L has two parts. There was approximately 3,900 ounces posted in Q1 2013 that were mined in 2012. These ounces will not be included in the wrap-up of the Frog's Leg sale and are 100% attributable to Alacer. The remaining ounces will be accounted for in the final sales price adjustment under the terms of the sales agreement with La Mancha in Q2. The final accounting entry will also be made in Q2 2013.

Our DD&A charges have increased as capitalized mine stripping costs have been recognized mainly at South Kalgoorlie and also Higginsville open pits, as well as the impact that capitalized [inaudible] in 2012 at Copler. Again [inaudible] units of production method utilizing tons mine rather than ounces produced.

[inaudible] please turn to slide eight for a discussion of Alacer's financial position.

Alacer maintained its strong balance sheet, ending the quarter with $254.6 million in cash and our borrowings dropped to $60.8 million. As previously discussed, we sold our 49% interest in the Frog's Leg mine on April 5 and we see sales proceeds of approximately $144 million. This has helped further strengthen our balance sheet since the end of the quarter and allowed us to pay off $61 million of debt in Australia and return approximately $70 million to shareholders in the form of a special dividend. As of today, our current debt is approximately $8.7 million.

Total assets decreased by $26 million from the previous quarter, primarily due to a reduction in cash yield of $22.6 million as we paid our Copler minority interest partner a $31.2 million dividend in 2012. And we also saw a decrease in our inventory balances of $22.5 million. Offsetting this decrease was the increase in the mineral properties and equipment of around $37 million.

Please turn to slide nine, and I'll hand the call back to David for him to discuss the 2013 outlook.

David Quinlivan

Thanks, Rod.

Slide nine provides an overview of the previously announced guidance for 2013. I would just like to reiterate that while we are maintaining our production guidance, all capital and exploration costs are under review as part of our cash-savings efforts. We have identified approximately $60 million of cash savings including increased revenue from high-grade production. The 2013 cash savings measures are expected to permit Alacer to meet its cost guidance.

Could I please ask you now to turn to slide 10 for a discussion of Copler's stage growth strategy?

In the face of our current environment, we remain committed and focused on developing our world-class asset at Copler mine. Whilst many of you have seen this slide before, I'd like to remind everyone of our development schedule at Copler and that we are on track to provide the results of our CIL plant study and the marketing study on the sulfide concentrate at the end of May.

This now concludes our presentation concerning our first quarter 2013 financial results. Thank you for your interest in Alacer Gold. I will now hand back to [Joyce] to open questions on the Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions].

We'll take our first question from Michael Slifirski with Credit Suisse.

Michael Slifirski – Credit Suisse

Yeah, thank you. I've got a few small questions. First of all, guidance that you said Australia will be -- still be cash positive for 2013. What kind of price assumption does that assume? And how are you measuring that? Is that inclusive of exploration and capital please?

David Quinlivan

Yeah, good day, Michael. Thanks for that. Look, the gold price that we were working with was $1,400, and that include exploration and capital development.

Michael Slifirski – Credit Suisse

Okay. Thank you. With respect to the stockpile write-down due to rain, what causes a stockpile to be written down [in the mine]? What's the cost effect? I can't quite understand that. And that cost, that's included within that [very high] cost, so that's something that we should -- reverse that to get sort of underlying cost to the operation [inaudible].

David Quinlivan

Yeah, look, just in regard to that, the prime driver of that is the gold price and it's also linked to the cost of production. So at the end of each quarter, the accounting standards require us to revalue all of our stockpiles, and this was the result of the valuation of that stockpile.

Perhaps I can just ask Rod to give you a few extra comments on that.

Rod Antal

Sure. Sure, Mike. Hi. Look, the reason it was linked to heavy rainfall is because during the quarter the pits -- we had the actual fleet down for quite an extended period because they couldn't move around with all the water that we had retained there. And also -- post the rain, we had to use the fleet to do some remediation work. So given all those extra costs as well as the lower ounces that came out of the pits, and particularly in Pernatty, made that -- it's quite -- stockpiles [inaudible] are quite sensitive to the price increases. We really don't have that many ounces that sit there. And the increase in the cost per ounce really escalated the weighted average price that we have.

So when you take all that into account, we had to then go the, as I said, the NAV test on it and the $574 per ounce [inaudible] was the result from it.

And to answer your second question, yes, that's right. If you just -- if you took that $576 off, that would probably get you back to what you would -- that would have been the price without the adjustments.

Michael Slifirski – Credit Suisse

Okay. Thank you. And then finally, your comments with respect to the Copler high power consumption, high power costs, high cyanide consumption costs, was that all assumed in your initial guidance or is there something about your mix that changed and surprised you?

David Quinlivan

There was a couple of things that changed. We're actually seeing a little bit more sulfide type material coming up that has resulted in some slightly higher cyanide consumption. We've also seen increases across the board in the general price of cyanide. Cyanide is in quite short supply in Europe at the moment and we're actually sourcing from Korea cyanide at the moment and we are having to pay a little bit more from the cyanide suppliers in Korea than we were paying out of Europe for our supplies. So it has been a normal price increase. It wasn't something that we saw at the time we were preparing the budget.

Sorry, what was the other part of the question, in regard to power, was it?

Michael Slifirski – Credit Suisse

Correct, yeah.

David Quinlivan

There was an unusual period whereby we had a lower power rate under an agreement there. Our power rate has now moved up to about $0.12 per kilowatt-hour. And as a result of that shift in power cost, we've seen a slight increase in costs roll through the operation.

Michael Slifirski – Credit Suisse

Okay, thank you. And the power consumption being higher, that was a known or [inaudible] something like that?

David Quinlivan

What we did was, if you recall, we went to an area where we were mining more harder competent material, and that has slightly increased crushing costs because of the hardness of the material. And we moved away from that clay material that was in main pit. So there was some slightly increased power costs or power usage that came through from there.

We're also getting higher onto the heat leach, so some of the pumping costs in shifting the quantity of water up onto the heat leach pad has increased slightly as well.

Michael Slifirski – Credit Suisse

Okay. Thank you.

Operator

Your next question comes from Tony Mitchell with Ord Minnett.

Tony Mitchell – Ord Minnett

Hi, David. How are you doing?

David Quinlivan

Good, thanks. How are you?

Tony Mitchell – Ord Minnett

Good, good. Thanks. Thanks.

Can you, with the $60 million you've got in cost savings, you've listed the various items that again lead to that cost saving, can you actually quantify each one that you've listed?

David Quinlivan

Look, I can give you a -- we're in discussions with a number of our team at the moment in terms of these areas, but I can give you a broad breakdown of where they sit. At this point, where some of them sit, at this point in time we're targeting approximately $15 million in exploration area. We're targeting as a result of the new Ciftay contract approximately $4 million, and this is slightly offset by the increased cyanide costs at Copler, $4 million in reduced mining costs at Copler. We're targeting $5 million in reduced mining costs in Australia. On the capital development side we are looking at approximately $15 million in deferring some of that capital development in 2013. We are looking at some reductions in G&A at both the sites. And we're also looking at a $5 million reduction in discretionary spending. And add to that, we are looking at increasing some production from some higher-margin areas to round out the $60 million.

Tony Mitchell – Ord Minnett

Okay. Now when you talk about this new contract that's starting from January 1, is it next year?

David Quinlivan

No, it's January 1 this year.

Tony Mitchell – Ord Minnett

Oh, January 1 this year. Okay. So the figures that you've given here for the production costs for Copler this year, cash costs of $340 to $375, does that include that contract price reduction?

David Quinlivan

It does, and it also includes the increased processing costs.

Tony Mitchell – Ord Minnett

Right. Can I ask you, whatever you use in Turkey, was this -- obviously, were you doing these negotiations prior to the recent sharp drop in the gold price or was the drop in the gold price the reason that you renegotiated that figure?

David Quinlivan

No. These were in play long before the gold price dropped.

Tony Mitchell – Ord Minnett

Right. Okay. And how long a contract -- and how long do those reduced costs stay in place for?

David Quinlivan

This is a four-year contract.

Tony Mitchell – Ord Minnett

So of that 60, there was, per annum, is it a fixed price for the next four years, is that how it works?

David Quinlivan

No. It's a cost per BCM.

Tony Mitchell – Ord Minnett

Okay.

David Quinlivan

When you bring it back and look at our whole distances traveled, there's a number of variables that -- that is obviously the drilling, the blasting, the loading, the hauling. And the hauling has some variable components depending on where the material goes to [inaudible]. So there's a number of makeups in it. What you're seeing is an overall number that looks at all of those combined parts of the mining program.

Tony Mitchell – Ord Minnett

Right. Now just in terms of -- so I mean you believe now that you can, with these changes, the Australian operation to be cash positive going forward. But with South Kalgoorlie, I mean you're looking at gold production of 30 to 35 ounces. Is it -- I mean obviously you think it's worth it, but what do you expect the 2014 production or '15 production to be like?

David Quinlivan

At South Kalgoorlie we have the obligation at the moment of toll treatment for La Mancha. And that toll treatment agreement lasts for 230 days in 2014 and 115 days in 2014 -- sorry, 2013, '14.

So our ability to treat ore at South Kalgoorlie is limited to time that's outside of those committed toll treatment times. What we've done is we've slowed down our mining program so that we're only mining enough ore in 2014 and in the first half of 2015 to fill those available production slots. Once the toll treatment period at the end of -- or end of June 2014 occurs, we then have the opportunity to fully utilize the mill's processing capacity again. And that's what we'll do.

Tony Mitchell – Ord Minnett

So if we fast-forward to take you out 2014 and assuming that everything else is equal in terms of costs and prices, you'd still do that, would you? And what level of production would you be doing if that was the case?

David Quinlivan

Look, the main area for action for us post -- or July, 1 July, post 30th of June 2014, from 1 July 2014 is the SBS complex area. We are also fast-tracking some exploration work in the [Location 48] area which is immediately a couple of kilometers to the south of the treatment plant. But I expect -- I don’t know what the production numbers are going to be for 2015 at this point in time, but if you look at where we're going for the second half of 2014, I guess our production range is going to be somewhere in the order of 80,000 to 90,000 ounces on an annualized basis. So, 40,000 to 50,000 ounces for the half-year.

Tony Mitchell – Ord Minnett

Right. That's at South Kalgoorlie you're talking there?

David Quinlivan

That's correct.

Tony Mitchell – Ord Minnett

Yeah. So the situation is like this, if you've got a gold price where we are now [$1,470], your cash cost of [$1,210] to [$1,230], I mean it's really a marginal exercise, isn't it? I mean you have to get those costs down pretty substantially to make it worthwhile to go ahead, don't you?

David Quinlivan

Yeah. Look, South Kalgoorlie has always been a higher cost operation, it's always been an area where the grade has sat around the 2 to 2-1/2 grand, and we've got to take all of those sorts of things into account. But what we have right now is an obligation to toll treat and we have an opportunity to use the time that we have, and that will continue for the next 15 months or 14 months from now. And look, I guess a lot can change in that period.

Tony Mitchell – Ord Minnett

The other question I have is some companies have engaged in gold hedging exercises. Would you ever contemplate doing that if the gold price basically stays, you know, on the $1,300, $1,500 range?

David Quinlivan

Yeah, look, we -- I have no problem with the hedging provided it's done on a risk-assessed basis and what we're getting out of it is what we need to get out of it after having gone through a detailed risk assessment. As you know, there's nothing for nothing in the gold hedging today. The provider that meets the criteria that we need to deal with, then we would certainly consider it.

Tony Mitchell – Ord Minnett

But are you doing that, Dave, that's the question? Would you actually -- but what would cause you to do -- okay. So, what would cause you to do it?

David Quinlivan

At the current gold price, I don’t think, you know, there would be any reason that we would be looking to hedge at the current price. If the price is going to be up and we're looking at a capital expenditure program, we would look at some hedging possibly.

Tony Mitchell – Ord Minnett

Yeah. Well, it would seem a prudent exercise to do to me. I mean, because clearly, David, in your current situation, the truth of the exercise is Turkey is what it's all about. I mean the Australian operation, it's hard going for you, isn't it? And I would have thought that a prudent thing to do would be to look at the hedging situation and see if you can come up with a model that works. Because you have to be conservative in this game and it would seem to me that, you know, you have to just basically operate on the assumption that the gold price is going to stay where it is.

David Quinlivan

Look, the gold price is not something that we opine on. We take it as it is. It's something that we have no control over. We look at what our cost base and whether we can make our operations work at different cost numbers. And if they can work at that price, then that's good. A lot of people don't want you to have hedging. I mean hedging seems to be coming back to be a bit of the flavor of the month at the month because of this dip in the gold price. But, you know, over the past six or seven years, there's not been too much of hedging. It's now coming back onto the table. It's always been something that's been considered, but it's, you know, on a risk assessment. And what you need to do is go through the process of doing that risk assessment and the right decision may be to hedge or maybe not to hedge. But you need to go through a process to actually see whether that's the thing that you want to do.

Tony Mitchell – Ord Minnett

All right. Now in terms of these savings you mentioned, the reduction in exploration, will that affect the Turkish operations as well or will it purely just be in Australia?

David Quinlivan

Well, I said that there were some Turkish exploration reduction in expenditure. There's approximately $5 million of exploration planned to be taken off the table in Turkey.

Tony Mitchell – Ord Minnett

Right.

David Quinlivan

The decline in gold price certainly affects Turkey as well. I mean Turkey is a 200,000 ounce producer, so if you take $200 off the gold price, that affects the Turkey revenue lines on $40 million.

Tony Mitchell – Ord Minnett

Right.

David Quinlivan

You're interested in across the board, preserving our position.

Tony Mitchell – Ord Minnett

Okay. All right. Well, thank you very much. Thanks.

David Quinlivan

Thank you.

Operator

Your next question comes from Paul Hissey with Goldman Sachs.

Paul Hissey – Goldman Sachs

Yeah. Hi, guys. At the risk of sort of laboring the point a bit, I just was wondering if I could get you to expand a bit more on a similar line of questioning that Tony had pursued. You know, one of the key pillars going forward is sort of a focus on high-margin ounces. It would seem to me that something like South Kal perhaps didn't fit the bill there. And perhaps, you know, in keeping with that same theme, can you just perhaps explain whether the far-reaching strategic review you conducted over the second half of last year ends and whether the new cost-saving push begins this year. I mean I just -- I would have thought that the results of last year is sort of soul searching, for want of a better word, may have delivered sort of most of the costs out or the operational savings that were there to be had. But it just seems as though we're sort of, you know, we're going around again given the current climate. So is this an extension of sort of the previous strategy or is it a whole new sort of way of looking at things, you know, because the situation has become more serious with the falling gold price?

David Quinlivan

Yeah. Thanks, Paul. Look, I guess, you know, you got to take the circumstances of the day as I can. When we're doing the review before, there was a gold price on the table, there's a different gold price on the table now. When we planned our budgets in September or September through December of last year, there was a different gold price. There's now a new [lesser] gold price. The gold price obviously went down as low as $1,320 and it's now back sitting at $1,470 or thereabouts. So we've gone back and looked at all of the inputs and assumptions that we made on our regional structured budget with a view to preserve what we saw as the bottom line of our 2013 budget.

We do have obligations, as I mentioned, on the toll treatment side of things that we need to comply with. And we do have some ore to process in South Kalgoorlie. We have, as I mentioned in the cost savings side of the story, looked at putting back some of the costs that we were going to incur in 2013 at Higginsville from a capital development point of view. And also looking at downsizing the exploration to meet the new revenue stream that we get from where we sit in the current gold price.

Important to realize that the gold price that went down was only two weeks ago when it went down. There's still a lot of blind panic in the market about where the gold price might be, where it might get to, what might happen to it. Again we can and don't have any control over what the gold price is. What we can do is look at where it is and look at how it impacts our operations and look at preserving what we have in terms of balance sheet, cash, et cetera.

I don’t know if that answers your question, but that's the status as of the moment.

Paul Hissey – Goldman Sachs

No. I understand that, David. I guess I'm just -- what I'm trying to get my head around is cost out and whether the previous exercise was designed to save you $100 an ounce and once you got to $100 an ounce that was it. And then gold prices, it's shifted, it's fallen only recently, and maybe that was a violent reaction. But let's say we think the gold price is going to be a bit lower again going forward, so do you search again for another $100 an ounce or, you know, what I'm trying to get a sense of is your tolerance for cost saving, or at what point do you have to do something really big, like actually close one of these mines or, you know, because we're sort of chipping away, chipping away, we're saving $50 an ounce. I'm just wondering sort of how much scope there is to eke out another $50 an ounce saving and then another $50 and then another $50 before, you know, something has to give and we get a big strategic change?

David Quinlivan

At this point in time, the Australian operation is obviously a different basket than the Turkish operations. The Turkish operations will still be in operation if the gold price is down around the $700 or $800 an ounce. That's not a space where the Australian operations can be, but there is still a lot of scope left in our Australian operations if we have to, to reduce costs. And I mean at the moment we've taken a view that we can slow down some of the development without impacting on our forward estimates for 2014 and '15, and that's what we've done. If the price changes, then we will look at something further.

But right at this point in time, it's not something that's on the horizon to continue looking at, you know, different scenarios. We still have quite a lot of scope left in the Australian operations to cut further costs there. There's obviously an impact on them, on your forward production profile once you start stopping your development programs, but end of the day that's what you have to do, this is [hard], that's what you have to do.

Paul Hissey – Goldman Sachs

Yeah, sure. Okay, thanks. Perhaps just a couple of more really quick ones in. Firstly, the grade of Higginsville. Obviously you've been talking for quite a while now about an improvement in grade there. Was the grade this quarter a disappointment for you, guys, or this is still sort of the track we're on to improve over the next perhaps six to nine months?

David Quinlivan

The grade was lower than we expected. The grade is still coming from the lower grade Apollo load [inaudible]. You would have seen from the press release that we only just intersected the higher-grade out in the Helios and Olympus loads right at the very end of the quarter. We do expect the grades will pick up based on all the underground resource definition drilling that we've done. And look, yeah, that's it, we do expect them to pick up. We're currently developing or through April we've been developing in the Artemis loads, Helios loads and the Olympus loads. So as we progress sort of through this quarter and into the third quarter, you see development of these areas continuing. And then following that, bringing into production or the first production starts in these areas in Q3.

Paul Hissey – Goldman Sachs

Okay, great. And the sustainability of sort of a 2 gram grade at Copler?

David Quinlivan

The overall resource grade and reserve grade at Copler is, on the oxide side, is slightly less than that. The areas where we're mining are dictating what the grade is today. Having said that, we've always had a positive reconciliation on grade out Copler. So I don’t know whether 2 gram is going to be the picture. It will be slightly based on the reserve grade basis. But what we've seen on an actual to deliver to the heat leach pad has certainly been in that area.

Paul Hissey – Goldman Sachs

Yeah. Well, in total, oxide resources are sort of closer to 1 gram I think.

David Quinlivan

Yeah. And there's always been a positive uplift in reconciliation on it. Whether that continues to be the case or not I don’t know. But it's been historically the case there.

Paul Hissey – Goldman Sachs

Okay. Thanks, Dave. I'll leave it there.

Operator

The next question comes from Stephen Gorenstein with Merrill Lynch.

Stephen Gorenstein – Merrill Lynch

Hi, David. Just a few questions from me as well. Just firstly, just a very quick question on guidance. In terms of South Kal, the 30,000, 35,000 ounces, can I just assume that that excludes any contribution you had from Frog's Leg?

David Quinlivan

Yeah. Hi, Stephen. There was carryover milling in January of about 20,000 tons of Frog's Leg's ore from December. That was treated. And of the guidance number of 30,000 to 35,000 ounces, there was about 3,900 ounces attributable to ore mined at Frog's Leg in December that was treated in January. So in answer to your question, 3,900 ounces was attributable to Frog's Leg ore.

Stephen Gorenstein – Merrill Lynch

Okay, so it -- not the 20,000 that was -- that was --

David Quinlivan

No.

Stephen Gorenstein – Merrill Lynch

-- quarter. Okay, great. Next -- yeah, sorry.

David Quinlivan

The 3,900 is included in the 10,000, but the 10,000 relates to -- because we have -- had not completed the sale by the end of the quarter, we had to actually report as though we still owned 49%. So what you see is a large portion of that La Mancha had economic interest in.

Stephen Gorenstein – Merrill Lynch

Great. Thanks for that. That's very good.

And next question is just in terms of exploration budgets. Can you just run us through what you'll be spending at each of the regions for this year, just remind me?

David Quinlivan

We had originally planned for, in Australia, for $16 million of Higginsville and $20 million at South Kalgoorlie. That's now been reduced or the remainder of that has now been reduced by $10 million. I'm not quite sure of exactly what our exploration spend has been sort of through the first quarter. I can get you those numbers if you like.

Stephen Gorenstein – Merrill Lynch

Yeah, that would be great if I can get those [inaudible] later on, that'd be great.

And last question --

David Quinlivan

Sorry. Go ahead.

And in Turkey, we targeted to reduce by approximately $5 million our exploration spend there.

Stephen Gorenstein – Merrill Lynch

Great. Okay. And the last question is coming back to the strategy at South Kalgoorlie. The way I seem to understand it, you've pretty much given yourself 14 months while you're toll treating just see what you can find to improve your operation. I think there's probably plenty of us thinking that maybe if things don't improve, you should maybe look at closing. I mean I think that the line of questioning has certainly been around that.

If we take gold price out of the equation, so we just assume, you know, constant gold price from this point forward, I suppose, what should we be looking at that would turn that decision around? You know, what sort of [inaudible] is it million ounces, is it a particular grade? What thing would make you say, yeah, we have no choice but to kick this open and what thing would make you think we're going to close this?

David Quinlivan

Let me just take one example of what we've got from our exploration results that are out in the marketplace at the moment. You know, one of the areas that we've been concentrating on and looking at from an exploration front is the Location 48 zone. You would have seen the first round of [inaudible] that's been testing the oxide section there. And there's been a number of very, very encouraging holes over an area of 2 square kilometers with a core area of about 600 by 600 meters.

If you take that area, and this is an area of about 2 or 3 kilometers from the plant, the mineralization in that area starts from very close to the surface, so, you know, about 2 or 3 meters below the surface you have intersection there of 4 to 7 meters of 5 to 6 grams. At that sort of strip ratio, right on the surface, if you were to put, you know, over the area where this thing has come from, we've done some preliminary sort of numbers around the shapes that are there and it's now part of the second round of exploration work, but if you had half-a-million tons of 3 grams from that area, that would certainly more than pay for all of the money that we've spent on exploration at South Kalgoorlie over the last two to three years and still generate a $30 million to $40 million go-forward for somebody.

So I guess, you know, it just depends on where we're at. It's not what we're looking for. This is a [super-gen] oxide zone that we've hit, and we're now doing some further work on it. We're looking for bedrock intersection down there. But I don’t think, you know, you would not go ahead and do a small pit on those sort of tons and grades if the next phase of resource drilling work were to confirm the meters and the grades that we've got from that area.

Stephen Gorenstein – Merrill Lynch

Sure, sure. I mean I think, you know, most of us would agree that, you know, there's got to be little pods of good potential within the area. The question is, can it ever become, you know, a solid operation on a continuing basis? I mean that's I suppose where the questioning is coming from. That's really what I'm trying to get my head around, is what would it take for that to occur and what would it take for you to say, well, maybe it's better off in somebody else's hands. But I thank you for it and thanks very much.

David Quinlivan

Yeah. Thanks.

Operator

The next question comes from Jo Battershill with UBS.

Jo Battershill – UBS

Yeah, guys. Just a quick question. You mentioned earlier the power rates at Copler shifted to $0.12 per kilowatt-hour, now [inaudible] at the time of the merger when total power cost was on a long-term contract of 4.5 cents per kilowatt-hour. Can you just expand on that please?

David Quinlivan

Yeah. Hi, Jo. The initial subsidized period for power at Copler has now passed and we're on a different rate. This is the new rate.

Jo Battershill – UBS

Is that on a long-term contract?

David Quinlivan

Look, I'm not entirely sure on what length of contract that is on. I can and find out for you and come back to you with some more details if you like.

Jo Battershill – UBS

Yeah, that'd be great. Thanks.

Just one other question, with regards to savings in corporate costs, have you got any further down the decision point as to where you close one of the offices on Perth or Denver?

David Quinlivan

On the table for discussion as part of the Q&A review, but essentially the Perth office is only here to support from an accounts payable point of view the two operations in Gold Fields region over here. It's essentially accounts payable, some geology exploration, and ore reserve team sits here. There's also a couple of members of the technical team here that serves both the Turkey and Australia.

So the Perth office is in essence not a corporate office. Denver remains the corporate office. And at this point in time there's no plan to shut it down. But again, a lot of things are on the table for review at the moment.

Jo Battershill – UBS

Okay. Thanks.

Operator

Your next question comes from Brett McKay with Deutsche Bank.

Brett McKay – Deutsche Bank

Good morning, guys. Just two questions for me this morning. Just wondering how long you can [leave yourselves] this year until your cost guidance for the full year becomes unfavorable? So, how far through the year do you think you can recoup the poor Q1 performance?

David Quinlivan

Yeah. Hi, Brett. Look, the main thrust of the cost guidance for Australia brings around an increase in gold production profile for Higginsville. What we've said before was that our production profile at Higginsville steps from 28,000 ounces in Q1 through 35,000 ounces in Q2 through the 47,000 ounces in Q3 and 45,000 ounces Q4. So as you step through those various increases in production with the bringing online of some of the higher-grade [spokes], that we'd planned in this year's budget, we are in a physical sense on target. Some of the cost drivers were incorporated into our South Kalgoorlie and Higginsville budget were impacted by some weather and part of the savings that we put forward in this plan has been specifically targeted at making sure we call back what those costs -- those cost overruns in Q1 were.

As the timing, look, it will be -- we'll be in a reasonably good position at the end of Q2 to see where we're going with the cost reduction programs. If there's any change to the guidance, we'd be looking to make it then.

Brett McKay – Deutsche Bank

Okay, great. Just the second question just relates to the impact of higher grade ore or focus on high-margin ounces, particularly in Australia and specifically at Higginsville. You've noted that it won't have an impact on the [inaudible] production. But beyond that, I just wonder if you could quantify what the impact on [inaudible] might be at Higginsville.

David Quinlivan

Yeah, thanks. What we've done with the 2013 budget, as we'd actually targeted to try and get ahead a little bit with some of our development, and we were pushing hard on that at both Trident and Chalice. The impact of this gold price and the slowdown of some of our development work in 2013 means that some of that work now gets down 2014. And the end of the capital development program at Chalice, instead of finishing in 2013, will now get finished in 2014. So it doesn’t have any impact on this year's production. It shouldn't have any impact on 2014's production because the production has been [sequent] with the development going ahead at, you know, specific rates. All we've done is taken a little bit more of our -- or taken a bit of -- what we plan to do in by way of getting ahead on the development curve way.

Impact post 2015, look, I don’t know. I haven’t looked at that yet.

Brett McKay – Deutsche Bank

Okay. But can we assume that there is going to be some higher grading and therefore some reduction in [inaudible]? It seems like that's the sort of sensible conclusion for?

David Quinlivan

I think the ore reserve that stands for Higginsville and Chalice at the moment is all planned to be mined out. It's I guess bringing some of the higher-grade material forward from the areas that we have available to us to go on working rather than pushing it out or letting it come online. So we've actively targeted some of these higher-grade areas. Obviously means that there's likely to be some lower-grade material at the tail of the mine that would come on stream at the end of the development program.

As I say, I'm not sure of the impact on that. I've not gone and looked at what for 2015 and '16 production profiles might be based on our review over the last two weeks of the remainder of 2013 and 2014 and '15.

Brett McKay – Deutsche Bank

Okay. Thanks very much.

Operator

[Operator Instructions].

We'll go next to Joseph Kim with JPMorgan.

Joseph Kim – JPMorgan

Hi, David. Just extending on what Brett was saying with the focus on high-margin ounces but for Copler specifically. How does [inaudible] change with the focus on the high-margin ounces given just on, you know, strip ratios and [rehandling] costs?

David Quinlivan

Yeah. Hi, Joseph. One of the things that you might have seen from Q1 production was that we stacked quite a lot more ounces than we actually recovered gold for. And in terms of those high-margin ounces, what we're looking at doing is, because of the snowfall in January, what we had to do was build a [pond] on the heat leach pad which prevented some of the area from being irrigated properly.

We're looking at relocating that [pond] in a more fixed position away from the heat leach pad so we can get back and get those -- there was about 20,000 ounces extra that was stacked but not recovered on the pad in Q1. So most of the high-margin ounces that are referred to for Copler come from material that's already been stacked on the pad that we're now looking to recover.

Joseph Kim – JPMorgan

Okay, great. And just on the $60 million in cost savings. Can we assume that these are mostly one-off in nature?

David Quinlivan

Certainly some of the G&A cost reductions are going to be ongoing. Some of the exploration work again lead us to a savings. There is in 2013 the deferment of development is savings 2013. Some of the reductions in costs in operating costs and development will come from a review of the mine plan to further optimize the mine plan and look at how much development we have to put in. But yeah, look, I guess it will be a mix.

Joseph Kim – JPMorgan

Okay. And just in terms of the gold sales from Frog's Leg. It looked like you include all the gold sales in the operating cash flows for the March quarter. What sort of adjustment can we expect to see in the transaction price?

David Quinlivan

No, I'm --

Joseph Kim – JPMorgan

Okay, so you're --

David Quinlivan

So the transaction price is the transaction price.

Joseph Kim – JPMorgan

What -- in terms of the consideration that you received, should we assume adjustment in the headline transaction price in terms of what you receive next quarter or this quarter?

Rod Antal

Dave, I might take this one if you like.

David Quinlivan

Yeah.

Rod Antal

If you're asking, Joseph, if the -- are the ounces in the cash flow going to be backed out? The answer to that is yes. But there's also an opposing adjustment that we have to make for all the cash [call] that we provided to the joint venture during the quarter. So on a net-net, it should be -- it should watch itself out. So there won't be an impact to cash flow.

Joseph Kim – JPMorgan

Okay, sure. Thanks for that. And just on, finally, on the recoveries on the [inaudible] location that you announced earlier, what sort of [mass pull] are you getting on the concentrate from that [inaudible]?

David Quinlivan

Eighteen to 20%.

Joseph Kim – JPMorgan

Sorry, in terms of the gold, are you getting about 20 grams a ton?

David Quinlivan

It's less than that.

Joseph Kim – JPMorgan

Okay, great. Thanks very much.

David Quinlivan

It's -- yeah.

Operator

And your last question comes from Michael Slifirski with Credit Suisse.

Michael Slifirski – Credit Suisse

Thank you. Just wondered if you could talk me through your reserve cutoff grade assumptions. When I look at the reserve prices, series reviews and different [inaudible] and the different cutoff grades, and compare those cutoff grades to head grade, if I was to assume cutoff grade as the head grade, then the cost implication is horrendous, which to me sort of questions those cutoff grade assumptions. So, are the cutoff grade assumptions, can they be maintained or are they too low?

David Quinlivan

Look, just a couple of comments on the cutoff grades and talking specifically to Copler in this particular instance. What we have as a cutoff grade at Copler of 0.3 grams for oxides and 0.8 grams for sulfides. And the main, you know, the theoretical economic cutoff grade, operating cutoff grade, all they're designed to do is capture all of the ore blocks that might have a value above that level. And then the next stage, as you know, is to go through and optimize from a cash flow point of view what the mining shape or the optimum pit that sits around those or the [inaudible] all of those resource blocks that are in the model. And what we get when we do optimum pit shells, as we see, the optimum pit shell coming through for Copler [hits] at somewhere around $800 to $900 gold price pit shells.

When you talk about the cutoff grade, it's simply to get all of those blocks in the model that has value in that's above a 0.3 gram grade and then the next step is to optimize whether those actually come inside an economic open pit shape.

I don’t know where you're going sort of other than that, Michael. Is there something specifically you're looking for?

Michael Slifirski – Credit Suisse

I was looking more at the Australian operations, and I know South Kalgoorlie, who cares, it's so small, it's -- not going to be value for it, so it probably doesn’t matter. But looking at the cutoff grades for reserves that you've got there, comparing to the head grade. And typically it's about, you know, less than half. Just trying to understand the sort of methodology there.

David Quinlivan

Yeah. Look, in terms of the underground operations, each of the identified all blocks have a mining shape put around it. You know, as a development -- quantity of capital development and operating development associated with it to see whether it's economic in its own right. And that's the basis that we look whether these things actually shift from a resource to a reserve from the underground mining point of view. It might well be in a resource of a certain cutoff grade, but it doesn’t mean that it falls into an economic mining shape.

Michael Slifirski – Credit Suisse

Okay. Thank you.

Operator

And that concludes today's question-and-answer session. Mr. Quinlivan, at this time, I will turn the conference back to you for any additional closing remarks.

David Quinlivan

Okay. Thanks, [Joyce]. I would just like to thank everyone for dialing in today. If there's any further questions or anything that you wanted to take onboard afterwards, then please feel free to contact us. And with that, I'll say thank you and good day.

Operator

And this does conclude today's conference. We thank you for your participation.

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