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Glamis Gold Ltd. (GLG)

Q2 2006 Earnings Conference Call

July 31, 2006 3:00 pm ET

Executives

Kevin McArthur - President and CEO

Jim Voorhees - COO

Cheryl Sedestrom – CFO

Bob Bryson – VP, Engineering

Jeff Wilhoit - Director of Investor Relations

Analysts

John Bridges - JP Morgan

Victor Flores - HSBC

Elliot Glazer - DuPasquier

Patrick Chidley – BJM

David Stein - Sprott Securities

John Tumazos - Prudential

Tony Lesiak – UBS

Chantal Gosselin - Genuity Capital

Barry Cooper – CIBC

Mark Smith - Dundee Securities

Adam Frank - King Capital

Kerry Smith - Haywood Securities

Michael Fowler - Desjardins Securities

Presentation

Operator

Good day, ladies and gentlemen and welcome to the second quarter 2006 Glamis Gold Ltd. earnings conference call. (Operator Instructions) I would now like to turn the call over to Mr. Jeff Wilhoit, Director of Investor Relations. Please proceed, sir.

Jeff Wilhoit

Thank you, Melanie. Welcome, everyone to the Glamis Gold second quarter 2006 conference call. Before we begin, I need to caution that the following presentation contains statements that are forward-looking in nature. These statements involve known and unknown risks, uncertainties, and other factors that may cause actual results and/or performance of the Company to be materially different from predicted results. These statements are discussed in detail in the Company's annual information form. I would now like to turn the presentation over to Kevin McArthur, President and CEO of Glamis Gold.

Kevin McArthur

Thanks, Jeff, and welcome to everyone. As always, thanks for participating in our conference call and webcast presentation. Joining me today in the room, in addition to Jeff, are Jim Voorhees, our Chief Operating Officer; Cheryl Sedestrom, our Chief Financial Officer; and Bob Bryson, Vice President of Engineering. Before we get to questions, I would like to take the next few minutes to summarize our second quarter results. I'll spend some time discussing the latest news from Penasquito in light of this morning's news, and then move on to Q&A.

First of all, second quarter performance. In reviewing this performance, I want to compliment the efforts of all of our employees who have been working extremely hard to keep Glamis moving forward. This commitment equated to record earnings in the second quarter, and in the case of El Sauzal, the highest quarterly gold production in that mine's history.

Company-wide, you can see that we produced over 138,000 ounces of gold in the quarter, at a total cash cost of $209 per ounce, and this is on track for our 2006 guidance. The net income was slightly higher than 2Q of last year due to our growth and, of course, higher gold prices. Earnings per share were $0.20 for the quarter and $0.33 per share for year-to-date. Cash flow for the quarter was a healthy $40 million.

We had some challenges to work through during the quarter, as disclosed to the market on June 6th. Again, I believe our people are doing a great job. They have recently built two new mines. We're now fine-tuning the latest mine at Marlin in Guatemala, to provide for very nice future performance in the months and years ahead.

Finally, Penasquito in Mexico was the big focus of our attention during the quarter. In June, we announced a doubling of proven and probable reserves at the project, from 5 million ounces in the initial feasibility study to 10 million ounces currently. At the same time, we announced an 86% increase of silver reserves, as well as a doubling of contained lead and zinc.

Of course, this morning we released our revised feasibility study detailing plans for building Penasquito Mine. We're very excited about getting started on this work and I'll provide an update of those plans in a moment.

On a mine-by-mine basis, El Sauzal, by far, was the star performer for the quarter. As noted in the press release, Marlin was affected by modifications to our recovery circuit, which we expect to complete in the early part of 3Q. It's important to keep in mind that we are in Marlin's start-up year, and consequently, we should expect a few issues along the way. But the reality is that it will soon be our top-producing gold mine and a very valuable contributor to our performance for many years to come.

Marigold also had a poorer than expected quarter, primarily because of slow leaching ore and the high costs relating to the low denominator. We expect to see that mine rebound for the remainder of the year. We restated our production forecast in early June, as I had mentioned earlier, and we remain comfortable with 2006 guidance of 620,000 ounces of gold at a cash cost of approximately $190 per ounce -- that's for the full year.

On to the balance sheet. As of June 30, we had cash and equivalents of $70 million compared to $32 million at the start of the year. Strong cash flows this year continue to provide us with a number of options to pay down debt, but at this point we'll be managing our capital to prepare for building our next big mine in Mexico.

Given the metals prices used in the feasibility study and our current capital and operating projections, we will need an additional $200 million in capital to build Penasquito and we are currently working to expand our debt facility to cover that amount.

Coupled with the dramatic reserves growth experienced with Penasquito, we are now acting on three primary levers for building shareholder value. The graph in this slide represents the other two levers, those being production growth and a decrease in cash cost profile. Our existing mines are expected to provide strong free cash flow for our future endeavors, and with Penasquito, we have identified an excellent use for that cash.

This next slide shows where the project is located in Zacatecas, Mexico. This is a stable mining jurisdiction with access to port, rail, power, water and smelting capacity. In El Sauzal, we can point to our record of responsibility, stewardship, and operational success in Mexico, and we expect to replicate that same record at Penasquito. Glamis is the very definition of responsible growth in the Americas, and the benefits of that strategy will clearly be on display at Penasquito.

The question is, why did we get involved in the project? This next slide represents the before and after reserves picture, showing pretty dramatically what the project means to Glamis. Our gold reserves per share are up 117% this year to over 15 million gold ounces, and silver increased tenfold to over 600 million ounces. In addition, we gained 3.6 million metric tons of zinc, and 1.7 metric tons of lead, which is a pretty nice by-product content, placing us squarely in the game with the base metal boom we are seeing.

Next is a summary of what we released this morning, showing some of Penasquito's economics. We have a 17-year mine life, ramping up to 100,000 tons per day from an initial 50,000 tons per day. Our plan is to start with one sag mill and two ball mills initially, and add a second circuit in a couple of years, when mining is up to speed.

You can also see what gold production costs might look like if we elected to by-product the three metals against it, resulting in a total cash cost of negative $378 per gold ounce; that is gold ounce with by-product credit. This is not to say that we would elect to account for costs this way, but doing so sheds additional light on the attractiveness of the project economics.

Our rate of return of all the metals price scenarios studied exceeded 10%, and typical of a large polymetallic project, payback takes a fair amount of time at 5.6 years under the base case. From that point, gold production exceeds 0.5 million ounces annually after year 7, and over 1.5 million ounces of gold equivalent when you convert all of the revenue to that metal. In other words, a very large mine -- of course with a big capital cost -- but a big NAV of over $3 billion using a zero discount.

The next slide shows the location of the two pits. This slide indicates the potential for converting existing resources to reserves between the two pits. Each of the squares in this illustration represent a square kilometer. In addition to the numbers we just showed on the prior slide, this very effectively conveys the size and scale of the project.

Penasquito is all about future upside. Of course, backed by compelling base case current economics, we're not done yet with this tip of the iceberg story. The Glamis board has given us the go ahead to commence final engineering and construction of the project. Permitting activities are well underway, and we all look forward to breaking ground soon. For those of you eager to see the details of this project, we've posted a summary report of the feasibility study on our web site.

Listed in the next slide are the elements that make Glamis successful. We've been sticking to our knitting, building mines in the Americas, staying unhedged and continuing our search for tip of the iceberg opportunities. This is certainly a strategy that has paid off for Glamis. That's it for my introductory remarks. Operator, at this time, we are now prepared to take questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Gentlemen, your first question comes from the line of John Bridges - JP Morgan.

John Bridges - JP Morgan

Hi, Kevin and everybody. Just accounting; first, the tax number you reported, quite low. Does that relate to some adjustment related to Guatemala?

Cheryl Sedestrom

When the news on Guatemala came out, we had been undergoing Revenue Canada audits of quite a few of our past years, and we were actually able to relieve some of the tax valuation allowance we had on the books. In fact, we needed to do it because we can recognize those losses now. That is really what pushed that number through this quarter, was actually we got all of these things settled and we were able to reduce that liability recognizing that income. So Guatemala doesn't show up in there. You're going to see Guatemala coming through in taxes payable in the third quarter.

John Bridges - JP Morgan

Any sort of guidance as to what sort of rate to look for in the second half?

Cheryl Sedestrom

Yes, what you'll see is, again, a mixed rate. I apologize, it's going to be confusing for everyone. What happens is that we're going to pay a 5% of gross revenues tax, as we've disclosed, in Guatemala; but for Generally Accepted Accounting Principles we're going to be taxing that income at 16.5%. Around 16.5%, 16.25% to 16.5% coming back into Canada, that's the way we have to account for it for financial reporting.

Kevin McArthur

Non-cash accrual.

John Bridges - JP Morgan

Sounds like another line in the model.

Cheryl Sedestrom

Sorry.

John Bridges - JP Morgan

I was looking at the Penasquito report. There's a line in there talking about the power supply being ideal. My knowledge of Mexican power supply is that it sometimes doesn't work. Is this a particularly good part of the grid or? It was just a strange word.

Kevin McArthur

Yes, John, actually we're really fortunate. About 40 kilometers away from the project is the main 400 KV grid serving Mexico, and we were able to negotiate tying directly into that grid and running 400 KV to the site where we drop it down to 69 KV for distribution on the site. So, you couldn't find a better source of power in Mexico.

John Bridges - JP Morgan

And it's unlikely to get interrupted?

Kevin McArthur

That would be the theory, of course. But yes, it's certainly the best power available.

John Bridges - JP Morgan

Okay, excellent. Thanks a lot.

Kevin McArthur

You bet, John.

Operator

Our next question comes from Victor Flores - HSBC.

Victor Flores - HSBC

Yes, thank you. Kevin, I was hoping you could just give us an update on the situation in Marlin with making those fixes to the agitators. How is that going and what is the outlook now for the second half?

Kevin McArthur

Yes, Victor. I think things are going quite nicely there. I guess I'd better turn this one over to Jim for the details.

Jim Voorhees

Victor, they're actually on the last tank of the bolt saga right now, changing out the bolts on the last agitators. So we've got that issue well in hand, and I've actually been seeing some pretty good throughput in the last few days.

Victor Flores - HSBC

So no difficulties with getting yourself back up to capacity?

Jim Voorhees

No, it looks actually quite good. We're still on track for the 620,000 ounces for the year.

Victor Flores - HSBC

Okay, great. Secondly, on the numbers for Penasquito and the capital, what are your thoughts right now as to how you finance this project?

Kevin McArthur

At this time, our models show, using the feasibility numbers in terms of metals prices, my earlier comments stand that we're about $200 million short. At this point in time, we're looking to expand our credit facility to that level. This is a debt revolver.

Victor Flores - HSBC

Okay, great. Thank you.

Kevin McArthur

You bet.

Operator

Our next question comes from Elliot Glazer - DuPasquier.

Elliot Glazer - DuPasquier

Gentlemen, I wonder if you could put the size of Penasquito in historical perspective? Many of the analysts on this call, including me, have toured many Mexican gold mines. Are there any in the last 50 years, any in the last half century with 10 million proven and probable ounces?

Kevin McArthur

Yes, that's a good question. Certainly, there are operations in Mexico that have, at least in the resource base as much silver. In terms of gold, I don't have an answer for you on that Elliot. I don't think so. None come to mind. In terms of size of project at 100,000 tons per day, I believe this will be the largest mine in Mexico.

Elliot Glazer - DuPasquier

So I hate to ask this next question, but since it is an unprecedented size of gold mine in Mexico, how sure are you of your drilling data and proven and probable reserves?

Kevin McArthur

Well, I guess I should turn to our reserves expert Bob Bryson to give you the answer on that.

Bob Bryson

We are pretty happy with the amount of drilling we have in the deposit. It came to us with quite a bit of density in drilling. We proceeded to do some more infill drilling; we’re continuing to do some infill and some extensional. But certainly the quality and the density of drill data was very, very high standards.

Elliot Glazer - DuPasquier

Have the quality and density of the drill bit been audited?

Bob Bryson

Yes. it has been audited over the years. We’ve had outside parties look at it, M3 Engineering has reviewed the data.

Kevin McArthur

The original reserves work was done by whom Bob?

Bob Bryson

The original reserve work was done by IMC out of Tucson and several other people through the years.

Elliot Glazer - DuPasquier

Thank you very much.

Kevin McArthur

Thanks, Elliott.

Operator

Our next question comes from Patrick Chidley - BJM.

Patrick Chidley - BJM

Just a couple of quick questions, more detailed in nature. I was just looking through this study, on Penasquito and see you are not going to pay taxes there under your base case for quite a long time. I just wanted to get what the depreciation base would be and what kind of method you are using there?

Kevin McArthur

Sure. Cheryl.

Cheryl Maher

Right now, Patrick, what we’re looking at it is that Mexico of course has a very straightforward tax regime. We will be incurring all of these pre-operating expenses; and of course you have tax loss carryforwards there. So, until you run through all of those, you wouldn’t be paying taxes. Obviously, once we start producing we’ll have SIT considerations. But pretty much everything that you see on Penasquito with all of the construction and all of the operating expenses will be tax deductible; it’s a big, big capital number, so that’s going to be worked off over the first few years of that. You have quite a tax advantage there in terms of not paying taxes for a long time.

Kevin McArthur

Cash taxes.

Cheryl Maher

Cash taxes.

Kevin McArthur

SIT will be accrued.

Patrick Chidley - BJM

Okay. Is there also a tax holiday there?

Cheryl Maher

No, it’s not a tax holiday. It’s just that similar to here that once you’ve put all of your investments in there in terms of the capital for the construction and all of your pre-operating expenses they call them; in other words, all of the costs that takes you get the mine into production are going to be deductible. There are very few exceptions, and I couldn’t even think of them of the top of my head.

Patrick Chidley - BJM

Right. So there is no tax holiday on top of that?

Cheryl Maher

No, not at all.

Patrick Chidley - BJM

What would be the depreciable base then that you would work of?

Cheryl Maher

Well in essence, what you see in the feasibility study where you have all of those capital costs, you have the $882 million in initial capital plus the sustaining capital, and then that would be it. What you don’t depreciate or amortize there is the purchase price, if that’s what you are looking for Just the capital on the project.

Patrick Chidley - BJM

Some of the expenses as well that you would be putting on?

Cheryl Maher

Yeah those are deductible. Operating expenses would be deductible.

Patrick Chidley - BJM

Great, also on El Sauzal, this quarter is obviously not sustainable. What kind of level of throughput can you sustain at El Sauzal in terms of tons?

Bob Bryson

We are routinely seeing the 6,000 plus daily throughput and really no problems to sustain that. El Sauzal has been a great, great performer us.

Patrick Chidley - BJM

Okay, but obviously those grades were rather special?

Bob Bryson

We are in a rather special part of the ore body, I guess is the way to put it right now. We have seen half ounce material routinely in the blast hole.

Patrick Chidley - BJM

The next two quarters then, would you get out of that or is that something you are keeping in the back of your pocket?

Bob Bryson

Well we are certainly going to have other areas as well as higher grades. So I would expect us to not keep at this high pace for the rest of the year. We will see it moderate some.

Patrick Chidley - BJM

Thanks very much.

Kevin McArthur

Thank you.

Bob Bryson

You bet.

Operator

Our next question comes from David Stein - Sprott Securities.

David Stein - Sprott Securities

Thanks, good afternoon. First question, just following up on what Victor was asking about the financing. Where are you with respect to talking to banks? Would you be prepared to talk about timing of when you would get the turns and starting drawing down something?

Kevin McArthur

First of all, of course we are working very hard on the feasibility study and it took the lion’s share of our time. We’ve had a long discussion with the board on how to finance the project. We’ve got a current banking relationship between IFC, of course, and our other banks and we’ve had some preliminary decisions. It doesn’t appear that we have too many difficulties in getting our debt line up to $200 million. No timeframe on that at this point in time.

David Stein - Sprott Securities

Okay I guess you have modeled out your cash flows for the next few years in order to come up with that deficit number of $200 million, which will be probably less, given the gold price that we are seeing now. You are starting to spend to capital on it now; would you need it in ’07 or ’08? Do you have a feel for that?

Cheryl Maher

Actually the way we’ve projected it out we don’t think we will need it until 2009 but of course its difficult to do intra-year kind of forecasting. What our aim is to build this as quickly and efficiently as possible. So, we want to make sure that the cash is available if we need it.

David Stein - Sprott Securities

Okay that sounds great.

Kevin McArthur

Just for background purposes if you use today’s metal prices and forecast a reasonable capital cost for our share of D and the Cerro Blanco project which we don’t have a feasibility study on yet, so, I can’t tell you the numbers. Plus repaying the debt that we have, we don’t go negative.

Cheryl Maher

That’s correct.

David Stein - Sprott Securities

Okay great.

Kevin McArthur

It’s a pretty good cash flow situation.

David Stein - Sprott Securities

Okay and that’s a good segue into my next question which is on Cerro Blanco. I noticed that there are some delays that you talked about in the quarter. I was wondering, are you still looking at processing some of the earlier mine material at Marlin? Or should we consider this just to be a complete standalone mine on its own?

Kevin McArthur

Well, we have always considered that option. A big part of moving forward on that is getting underground and being able to get underground and touch the ore and do some test mining before we make any of those decisions. What has held us back are two things:

First of all, getting a big rig in there to do some of the dewatering that needs to be done, and some of that is pretty warm water; and at the same time we are testing some geothermal possibilities adjacent to the mine sites. So, we want the rig that’s capable of doing all of that.

Secondly, getting the permit to go underground. It’s one of these chicken or the egg things that in order to get our permits, we need to quantify and talk about the quality of that water. Without the quantification piece of it, you don’t get your permit. So, we’ve really been shut down, basically awaiting getting that drilling done. Until we can get the appropriate rig into the country, I don’t have any of those answers.

Of course, we were pretty happy to have another project to work pretty hard on and that comes in with Penasquito. Having Penasquito, we aren’t too panicked by this. We expect to have that rig shipped to the country by November, the drilling by January of next year, and then those answers will start happening.

As far as shipping to Marlin, that is still on the table as a good option for us to develop a mine without having to have huge stockpiles prior to building a mill; therefore we can make little mistakes before we make the commitment for a big mill. That’s always been the concept there.

David Stein - Sprott Securities

Do you need the geothermal power to power the mine, or is that just an extra thing you are studying?

Kevin McArthur

That’s just a nice little synergy play that we think is very good for the country and for the local communities. If we can accomplish that at the same time that we build the mine, it solves a lot of things. There is power there, however. We don’t need the geothermal possibilities in order to succeed there.

David Stein - Sprott Securities

That’s all I can think of for now. Thanks a lot.

Kevin McArthur

Thanks David.

Operator

Our next question comes from John Tumazos - Prudential.

John Tumazos - Prudential

Good afternoon. Congratulations on everything.

Kevin McArthur

Thank you.

John Tumazos - Prudential

On looking at the Penasquito feasibility study table appended to your release, it shows NPV at a 5% discount rate?

Kevin McArthur

Yes.

John Tumazos - Prudential

Then there is a line above it. I think there is a character missing. It says NPV it is 0%, but I am sure you meant 10% discount rate. Could you give us the NPV number for your low $450 case at 10% discount rate?

Kevin McArthur

No, I don’t have that number.

John Tumazos - Prudential

I am sure you weren’t 0% discount rates.

Kevin McArthur

The 0% discount rate of course is just net cash flow -- 5%.

John Tumazos - Prudential

Its $514 million, I suddenly realize.

Kevin McArthur

Right. And if you take it –

John Tumazos - Prudential

Is the NPV positive at $450 gold and a 10% discount rate?

Kevin McArthur

My sense is yes because we have a 10.2% rate of return, but you will find that the NPV at 10% will be quite low.

John Tumazos - Prudential

So, it would be near zero if internal rate of return is – so, it is something like $445 gold and a 10% discount rate, the project is zero return?

Kevin McArthur

I suspect it is something like that.

John Tumazos - Prudential

In terms of lead zinc processing or characteristics of the ore, are there any complexities that would make you want to bring in someone like Teck Cominco or is it just plain vanilla and nothing in effect that’s unusual to you?

Kevin McArthur

Well, to be perfectly frank on that answer, its all going to be new to us. I mean, a variety of us have worked in companies that had base metal credits, and base metal by-products but in terms of Glamis’ history this will be first mine that does go to a smelter and so we will have a certain amount of complexity. I will add the ore seems pretty straightforward. It’s clean. We don’t have a lot of issues with the product in terms of dealing with all of the smelters, I don’t think we are going to have too many problems. But, it’s building that in-house expertise to get that job done that is what we are tending to at this point in time.

John Tumazos - Prudential

Will there, will there be two concentrates, a lead concentrate and a zinc concentrates?

Kevin McArthur

That’s correct, and some dore metal from the heap leach.

John Tumazos - Prudential

Thank you.

Kevin McArthur

I might add most of the precious metals report lead content.

Operator

Our next question comes from Tony Lesiak - UBS.

Tony Lesiak - UBS

Good afternoon. Kevin, could you elaborate on some of the individual mine production expectations for the remainder of the year, so we can track some of their relative performances?

Kevin McArthur

Tony, I will turn this over to Jim. Keeping in mind that the 620,000 ounces is what we have disclosed as our forecast; so I think maybe in a general sense, Jim.

Jim Voorhees

Just in general terms looking forward, we will start with San Martin. The lowest figures, probably 60,000 to 70,000 ounces for the year; our share of Marigold probably around 110,000 ounces for the year. If you look at Marlin probably 215,000 ounces for the year, and Sauzal would be balance on that.

Tony Lesiak - UBS

I was hoping to get a little more specific in looking at second half. If I back calculate the amount of production you need to get from each of these operations for the remainder of the year, there are some pretty dramatic swings. For instance, at Marigold you have to increase production 50%; but, then in the text you highlight that some of the ore is still going to be slow leaching into the third quarter.

As well, just looking at the grade profile at El Sauzal, how do you expect that to go between the third and fourth quarter? I mean, are you going to be looking for a very back end loaded second half?

Jim Voorhees

Actually its interesting: San Martin, Marlin and Marigold will all be seeing improving production in the second half; and if anything, Sauzal will see a moderation of production, to give us that final 620 figure for the year.

Tony Lesiak - UBS

So, should we assume that out of the remainder of the year, 40% will come in the third quarter and 60% in the last? What kind of numbers should we be looking for for the Company?

Jim Voorhees

I haven’t tried to do that, but that’s probably good way do it or 45%, 55% or something like that would make sense, because it will be a ramp up.

Tony Lesiak - UBS

Okay, and for next year’s San Martin, 65 -- is that a good number?

Jim Voorhees

I haven’t looked at those recently, but it has got to be a number around that.

Tony Lesiak - UBS

Finally just looking at the Penasquito feasibility here. Looks likes the zinc contract terms went way up to about to about 210 a ton. Can you comment on that? Are those specific terms that you’ve been given by smelters? Maybe if you could comment on, which option you are looking at -- in country or shipping for the con?

Kevin McArthur

Well first of all we wanted to be conservative on the concentrate cost and so we did use a higher cost in terms of the lead and zinc concentrates both. We do not have specific negotiated terms with smelters, but we used a number of sources to come up with these costs, including consultants that are lining up to do some work for us in the near feature.

We figure that we will be shipping to six or seven smelters worldwide. We’re not precluding anything. We’d like to do most of our work in Mexico with some of the current smelters, though we’re looking to establish or to enhance relationships there. Also going both east and west with the remainder.

Tony Lesiak - UBS

So, just looking right now, in terms of the available capacity in Mexico, how much of the con do you think will stay in country?

Cheryl Maher

We have not spoken directly to the Mexican smelters about this at this point. Obviously, we have a relationship there already. We have just begun work with them, we told everyone we needed to the get the numbers on the feasibility study before going forward. We literally are working on this as we speak; we are moving forward rapidly, but at this point, we can’t give you that amount.

Obviously, the smelters are going to decide from whom they want to take concentrate. So, if we end up displacing someone else, it’s something I can’t answer at this point.

Tony Lesiak - UBS

All right, thanks very much.

Kevin McArthur

Thanks, Tony.

Operator

Our next question comes from Chantal Gosselin - Genuity Capital.

Chantal Gosselin - Genuity Capital

Good afternoon I just have two little questions here. First is El Sauzal. The big jump in grade that you mined during the quarter, was that expected?

Jim Voorhees

Yes, it was; as we’re getting further down to the heart of the ore body there has been some really good ore zones, but we have predicted that in our modeling.

Chantal Gosselin - Genuity Capital

Okay. So, it’s nothing that would influence your reserve resource.

Jim Voorhees

No.

Chantal Gosselin - Genuity Capital

No. Okay, and secondly is Marlin, how would you qualify the rock at the hang wall and foot wall from the slopes, and why are you changing or why are you thinking of changing your mining method?

Jim Voorhees

The opportunity to go to a lower cost mining methods presents itself, we have seen some pretty favorable characteristics not only in the wall rock, but also in the vein itself, so both the opportunity for open stoking and then maybe going overhand cut and fill are actually under investigation right now.

Through the rest of year, we will probably do some test work in that area and hopefully we can start making a sizable amount of our production in that manner and reduce some of the underground mining costs.

Chantal Gosselin - Genuity Capital

So what’s your mining method right now?

Jim Voorhees

Underhand cut and fill which is fairly conservative, but there is a significant cost involved with the back filling.

Chantal Gosselin - Genuity Capital

What’s the average width? Are they wider?

Jim Voorhees

It varies a lot. I think the average width in the deposits is three or four meters, something like that. We have areas that it seems like we go up to six or seven meters in some areas.

Chantal Gosselin - Genuity Capital

Thank you.

Kevin McArthur

Thank you.

Operator

Gentlemen, your next question comes from the line of Barry Cooper - CIBC.

Barry Cooper - CIBC

Good day, everyone. Jim, I wonder if you could run us through what the main differences are in the $500 million increase in CapEx? I haven’t had a chance to look at the feasibility, but maybe you can just run through what the differences are with what you are planning versus what was planned before, aside from the doubling of the production there, which obviously increased the costs there somewhat. But there was probably a bunch of other things that you changed. Just the major things?

Jim Voorhees

Obviously the size of the gyratory crusher went up significantly for the throughput and there is a doubling of the lines. We have 250,000 tons per day trains in the facility now. The other capital, a lot of it though gets down to mining. The strip ratio has gone up. We will be moving 500,000 tons a day. So, the majority of the capital increase is for the mining rate.

Barry Cooper - CIBC

Okay, thanks a lot then. Can you run through what’s the status of the thought process in terms of how the heap leach will work at El Sauzal and where you are with that?

Jim Voorhees

Sure. We are busy right now constructing the pad using our tailings plus some waste material to make flat ground, nice level ground, something that’s a premium. Our goal is to be stacking on that the first of next year. If things go well, I suppose we could see some production as soon as the first quarter next year.

Barry Cooper - CIBC

Okay, as early as first quarter next year. Okay, thanks a lot. That’s all I have.

Jim Voorhees

Thank you.

Kevin McArthur

Thanks Barry.

Operator

Our next question comes from Mark Smith - Dundee Securities.

Mark Smith - Dundee Securities

Just following up on the Cerro Blanco question from earlier. Could you just give me a feeling for how the infill drilling has been going in the step-out exploration? Have we seen any joy from the step-out and is the continuity being confirmed with infill drilling?

Kevin McArthur

Well, first of all with the infill, I think I’m looking towards Bob here. But I think we are seeing good things, the plus and minuses.

Bob Bryson

Yeah, exactly. We are seeing confirmation, some pluses and minus.

Kevin McArthur

Well, I think that’s gone fairly well, and that’s our 1.9 million ounce resource. The step-out drilling; I mean we have done some drilling. We have lost track of the high grade that we had found to the north. The work continues, but I don’t have any earth shattering remarks to make in that regard at this point.

Mark Smith - Dundee Securities

Just on the taxes Cheryl, going forward we saw $7.7 million go into current liabilities on deferred tax line; are these coming out in the third or fourth quarter?

Cheryl Maher

No what you are gong to see is you should see current taxes payables increasing. You are also going to see the FIT line increasing because of about $7 million of that shouldn’t be repeated. It was really the crystallization of some things that have been happening. You have still got current taxes payable at El Sauzal and at Entre Mares, Honduras; at the San Martin Mine and now with Marlin with the tax agreement that we reached there with the government, you are going to see, again, that little mixed number coming in. But those are all going to, for the most part, be current taxes. So the FIT that you see is going to be a smaller portion of that.

Mark Smith - Dundee Securities

So we should assume that the nearly $10 million just stays fairly stable going forward in the current liabilities line?

Cheryl Maher

Yes I would say so, maybe a little bit less. We just have to see how Marlin comes out in the third and fourth quarters.

Mark Smith - Dundee Securities

Okay and on the inventory, we delivered a few thousand ounces from inventory, what were the costs associated with those?

Cheryl Maher

The costs coming out of -- you know what, I don’t have a total amount of those costs. I would refer you to the MD&A that’s going to come out and be on SEDAR tomorrow. We do have the reconciliation in there, but I don’t have it with me at the current time. But you should be probably expect that they are fairly low.

Mark Smith - Dundee Securities

The $200 range?

Cheryl Maher

I don’t remember, but we do a reconciliation in there between the GAAP and the cost of fails, and I think that’s pretty explanatory.

Mark Smith - Dundee Securities

On Marlin, how’s the training going for the underground boys? They were switching over to perhaps going long hole. Is training proving to be difficult?

Jim Voorhees

I wouldn’t call it difficult, I’d call it immense -- not immense, it’s a big portion of what we are doing right now. We just brought in an additional individual to help on the training. It is a real change for a lot of the people. The thing we have going for us is that it’s a very dedicated workforce and a lot of good committed people that are making things work for us. So yes, its going to be an ongoing area of real effort for us, but I wouldn’t say that things are going poorly. They just continue to be intense.

Mark Smith - Dundee Securities

If you go to underhand or something of that nature, do you think that the training might be a little easier?

Jim Voorhees

Not so much. I don’t think the specific mining method really will have that big of an impact on the training aspect. Its fairly basic things that we are dealing with on the training side. I don’t think it will change a whole lot with the mining method.

Mark Smith - Dundee Securities

Okay, but just in general. That’s not going too much slower than you had anticipated? What kind of underground production are we getting now?

Kevin McArthur

We are seeing a full range from the 500,000 tons a day. It varies tremendously day by day.

Mark Smith - Dundee Securities

Then a final question just following up on Tony’s; you gave us the production numbers for each individual operation for the year. Could you give me the cost for those operations for the year too, please?

Jim Voorhees

No, we generally don’t put that out.

Kevin McArthur

What we did post is the total cost for the Company at 190 for the year.

Mark Smith - Dundee Securities

All right, so I just guess on the other numbers, do I?

Jim Voorhees

I am sure you will do a detailed calculation.

Kevin McArthur

I wouldn’t say guess.

Mark Smith - Dundee Securities

All right, thanks guys.

Kevin McArthur

Sure.

Operator

Our next question comes from Adam Frank - King Capital.

Adam Frank - King Capital

Thank you for taking my call. Kevin, can you speak to any plans or any more thought that you all have given to the Noche Buena area? Then, are there are any more concerns, I thought there may have been a clay content issue at Marlin. Have you got your arms fully around that as well?

Kevin McArthur

Shoot, I wish we had Alex [Ruzikian] here who's handling all of the metallurgy. But as far as the Noche Buena, I can say that we have not done a lot of work on that. We view that as upside for our future, doing a little bit of quiet land consolidation and that's it.

Other than that, our exploration has been entirely focused in the areas between the Penasquito and Chile Colorado pits; other than, of course, condemnation drilling. In terms of the clay content, Jim, do you have any comment, or Bob?

Jim Voorhees

I would just answer in terms of material handling, it's always a challenge when we have the rainy season, lots of blending required to maintain throughput. But as far as a detailed metallurgical answer on the clay content, I really don't have anything new to report there.

Adam Frank - King Capital

Intuitively, I don't have a Ph.D. in mining or geology, but why wouldn't there be mineralization between Chile Colorado and Penasquito? I mean, what can go wrong there?

Kevin McArthur

Any kind of geologic structures, but we are drilling in between the two pits right now and we're seeing some expansion success there.

Adam Frank - King Capital

Super. Thank you very much.

Kevin McArthur

You bet.

Operator

Our next question comes from Kerry Smith - Haywood Securities. Please proceed.

Kerry Smith - Haywood Securities

Thanks, operator. Kevin, for El Sauzal, you produced about 138,000 ounces in the first half, and you're budgeting about another 100,000 ounces in the second half. Is that all grade-related? I presume there's no reduction in throughput, but I just want to clarify that.

Kevin McArthur

Yes, Kerry, thanks. I've spoken to Jim about this on many occasions. That mill was designed at 5,500 tons per day. We're into the altered volcanic unit now, and capable of producing much more than that on a daily basis, sustainable. So we're seeing many days where we hit 6,000 or 7,000 tons. This is a case where we just kind of keep the throttle in the proper place to maintain this mine as a long-term producer for the Company. We can keep that throttle on harder if we need to, but we try not to. Jim, do you have anything to add to that?

Jim Voorhees

No, that pretty well sums it up.

Kerry Smith - Haywood Securities

Jim, then is the 100,000 ounces in the second half, is that budgeted based on 5,500 tons a day then? Or have you used some slightly higher throughput?

Jim Voorhees

I don't have an exact figure of what the guys at the mine have been using. I'm sure it's higher than that, but they've probably been aiming at 6,000 tons a day average.

Kerry Smith - Haywood Securities

So the reduction is more grade related, then, I guess is what you're saying?

Jim Voorhees

Yes.

Kevin McArthur

Kerry, that will all depend on how much we send to the heap leach versus the mill also. There are a lot of variables involved at this point in time.

Kerry Smith - Haywood Securities

Right. With the agitators changed out in the tanks at Marlin, is there any other operational issues that have to be rectified for that mill to run at design, or is that really the end of it then?

Jim Voorhees

The only other thing, we've been wonderfully de-bottlenecking the place. We had issues with the theaters under the reclaim stock pile, and we had the sag mill, we've had a litany of things. At this point, probably the last area that we're focusing on is the primary crusher and it's throughput. When we have the wet material and if we don't have good blending, we get a lot of plugging in that area.

That's the big focus right now, is what's the long-term scenario for that? Do we need to make some modifications? Are we going to improve the equipment we have? So, that's one area that's being focused on right now. I want to see the mill routinely being above the 5,000 ton a day level. We're getting close to 5,000 on days now and then. But if you want to average 5,000, you need to be seeing 5,500 on days, too, and we're not quite there yet.

Kerry Smith - Haywood Securities

So what would you budget this year, Jim for the second half for ore from the underground/open pit at Marlin? I think you did about 400,000 tons combined in the first half of the year. Would it be 25% over that, or what number are you using?

Jim Voorhees

Boy, I'm trying to think of a good average for the rest of the year, it must be in the high 4,000s for the total; and for underground, I'd probably average something like 750 or 800. I'm just guessing here, Kerry, but I think that's probably wise.

Kerry Smith - Haywood Securities

So 750 ton a day from the underground, and then 4,000 tons a day in total, right? Or from the open pit?

Jim Voorhees

From the open pit, yes.

Kerry Smith - Haywood Securities

Just a last question, if I could. On the proposed $200 million of debt that you would require for Penasquito over the course of time, is in the preliminary discussions that you've had with the bankers, have they suggested that you would require any hedging at all, as part of that package?

Cheryl Sedestrom

No, not at all.

Kerry Smith - Haywood Securities

Kevin, is the mill being designed in a way that if you decided ultimately that it should be 150,000 or 200,000 tons a day mill, is it being designed on that basis, or is it really just being designed as a 100,000 ton a day platform?

Kevin McArthur

Yes, it's really 100,000 ton per day; Jim used the word bottleneck. The next bottleneck is the gyratory crusher and I think somewhere down the road, you'd go to an in-pit crushing and conveying system that could get you to a higher level. But, you're talking about pumps and all kinds of capacity that all of a sudden you're going to come up against. But the way we see the upside in the project, in a few years may be looking to those considerations.

Jim Voorhees

If I could just add what would likely occur in that scenario if we did see continued reserve increases, would be probably to put in a third train for another 50,000 tons a day or something like that. Kevin mentioned the in-pit scenario for crushing. That's a very real possibility as we look at other options on haulage down the road to keep making this as efficient as possible.

Kerry Smith - Haywood Securities

What's the gyratory's throughput rated capacity then, Jim? Is it 100 roughly?

Jim Voorhees

Yeah, I'm trying to think of the daily throughput. I'm thinking in terms of tons per hour. It's probably about 150,000 tons a day on the throughput ratio.

Kerry Smith - Haywood Securities

So if you did a third train, technically the gyratory might actually be adequate for a third train then?

Jim Voorhees

Yes, if it had 100% availability.

Kerry Smith - Haywood Securities

Right, which it never does, okay. Just one last question for Cheryl. The G&A was up in Q2 versus Q1. What sort of numbers should we use for '06 and '07?

Cheryl Sedestrom

For the balance of '06 and '07, I think, not to fudge with you, Kerry, but I think if you really look at adding the first and second quarter, taking an average and then projecting that for the rest of the year, I think you're going to come close.

Kevin McArthur

I think there's some development costs in those that are --

Cheryl Sedestrom

Very little. What happens is that sometimes we're able to shift things into first quarter that relate to year end. Sometimes they hit us in second quarter. But we're growing right now, too. While we have a budget projection for the year, we're really trying to, again, grow and get Penasquito up and running as quickly as possible.

So we've got quite a few employee-related expenses coming on, and it costs us a lot of money. We don't know when we're going to add those people, but I think if you take an average and extrapolate that, you'll be pretty close.

Kerry Smith - Haywood Securities

So you're suggesting maybe $13 million a year on a run rate. Okay, thanks very much.

Kevin McArthur

Thanks, Kerry.

Operator

Our next question comes from Michael Fowler - Desjardins Securities.

Michael Fowler - Desjardins Securities

Good afternoon. In terms of the permitting, Kevin, I know that permitting in Mexico is pretty short and you've got a fairly aggressive time schedule for the permitting; and you also changed from 50,000 tons a day to 100,000 tons a day. Can you just go over some of the main milestones you have to get to get to the four permits of this project?

Jim Voorhees

Sure, Michael. The first key milestone is submission of the MIA document for the full project. We have a host of smaller MIAs for components that we're getting underway right now, but the primary submission here is at the end of August. That is our targeted date. I believe that the regulatory timeframe is 120 days review, although it's possible for them to come back at the end of 120 days and ask for more information. So we are showing receiving that permit sometime late in the first quarter is our key date right now. It could be sooner than that and of course we're all geared up for that to occur. But for our schedule, we're looking at the first quarter of next year.

And then, we've already talked with the regulators and generalities about the fact that this will likely see an increase in size down the road. So there'd be another ongoing or another phase of permitting as we go for the expansion to the 100,000 ton a day case. Don't see any problems in doing that. Everything is pretty straightforward and clear cut at the site to allow that to occur.

It ties in well with our timing of bringing the first train online in mid-2009 and the second one in late 2011. That two-year gap in there works out fairly well too, for permitting.

Michael Fowler - Desjardins Securities

Just a couple of things. Tailings, I believe they're fairly benign, but correct me if I'm wrong. The other thing is, does the public get a review of the MIA?

Jim Voorhees

Nope, there's not a big formal review process like you see in North America. It moves forward fairly quickly with the regulatory agencies.

Kevin McArthur

I might add that if we don't have our locals on board, nothing happens. So we'll be undergoing our own public reviews with our neighbors. In terms of the tailings, yes, benign. No cyanide here in the tailings.

Michael Fowler - Desjardins Securities

Okay. Just a last question. Actually, if you look at the production from the feasibility study, the gold production is actually a little bit all over the place. Is there any sort of thought as to somehow smoothing out some of this profile on the way up and perhaps on the way down?

Kevin McArthur

Well I know we've got a couple of years to do that, Mike, and we certainly will be applying ourselves to that. There's a lot more fine-tuning we could have done in this feasibility, including haulage fine-tuning that Jim referred to. You'll notice that the feasibility has 75 trucks in it. We're talking 75 300-ton trucks. That would be my worst nightmare, having that many trucks.

There are things like in-pit crushing and conveying, looking to try and smooth the gold mining, trying to optimize the heap leaching at the front end, looking for opportunities for ore that's closer to the surface. We're seeing some of that, I believe, at the north end of the Chile Colorado pit at this time. And, many things that we can resolve over the next couple of years before we really get heavily into production. So it will be turning to those kind of things, certainly.

There's also the opportunity for underground mining. There's quite an underground deposit. Of course, there are a lot of things to do, geotechnical things where you've got to make sure you can block cave, cost issues. In metallurgy, we haven't done a lot of metallurgical testing deep. And of course exploration, there's a lot more exploration deep that needs to be done, but it's kind of falling second in line to the testing of the areas between the pits.

My view is that one day we may be optimizing between how deep this open pit goes versus when you turn to underground mining. There's a lot of things to look at in the coming years that we'll pay a lot of attention to, but we wanted to get this feasibility study done. We recognize it as a project, it's time to get on with building it and we'll do a lot of the other fine-tuning along the way.

Michael Fowler - Desjardins Securities

And the Mexican elections, that has no impact on this?

Kevin McArthur

We view it as, of course there's always impact politically, but the elections went off nicely. Calderon has been declared the winner. That will be of course, contested, and regardless of the outcome there, we believe that it's still a good situation. Mexico is a NAFTA country, is very much tied to the economies of mainly the U.S. but also Canada, and a very stable country with a very strong mining history and tradition. So regardless of the outcome, we feel comfortable.

Michael Fowler - Desjardins Securities

Okay, thanks very much, Kevin and Jim. Thanks.

Kevin McArthur

Thanks, Mike. Operator, we've got time for one more phone call.

Operator

Well gentlemen, there are no further questions in queue. I would now like to turn it back over if you have any closing remarks.

Kevin McArthur

Thank you, operator. My closing remark is fairly simple. Looking forward to continued news coming out of Penasquito. Also improving third quarter production, and of course, as Jim alluded to, the fourth quarter being our big quarter for the year -- once again -- seems we always come out that way. I guess that's it. We'll look forward to the next conference call. Thank you very much.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.

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Source: Glamis Gold Q2 2006 Earnings Conference Call Transcript (GLG)
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