Alacer Gold's CEO Discusses Q2 2013 Results - Earnings Call Transcript

| About: Alacer Gold (ALIAF)

Alacer Gold Corp. (OTCPK:ALIAF) Q2 2013 Earnings Conference Call July 30, 2013 6:00 PM ET

Executives

David Quinlivan – CEO

Rod Antal – CFO

Analysts

Michael Slifirski – Credit Suisse

Jo Battershill – UBS

Paolo Lostritto – National Bank

Paul Hissey – Goldman Sachs

David Haughton – BMO Capital Markets

Dan Rollins – RBC Capital Markets

Andrew Knuckey – Commonwealth Bank – Australia

Leily Omoumi – Scotia Bank

Cathy Moises – Evans & Partners

Don MacLean – Paradigm Capital

Tony Mitchell – Ord Minnett

Brett McKay – Deutsche Bank

Joseph Kim – J.P. Morgan

Operator

Good morning, ladies and gentlemen. Thank you for standing by.

Welcome to the Alacer Gold Q2 Financial and Operational Results Conference Call and Webcast.

[Operator Instructions]. As a reminder this conference call is being broadcast live on the internet and is being recorded.

Your conference speakers today are David Quinlivan, President and Chief Executive Officer, Rod Antal, Chief Financial Officer.

I will now turn the call over to Mr. David Quinlivan. Please go ahead, sir.

David Quinlivan

Yes, thank you, [Saatchi]. Good morning or good evening to everyone and thank you and welcome to Alacer's conference call to discuss our second quarter 2013 financial results.

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

Could 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 provide 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 cash operating cost per ounce, total cash cost per ounce, all-in sustaining cost per ounce, all-in cost per ounce, and adjusted net profit which may be used on this call.

Could I please ask you now to turn to slide three for our second quarter highlights?

We've continued to actively manage our asset portfolio during the quarter. In June we announced the initiation of the sales process for our Australian assets. Due diligence including site visits has been undertaken by a number of interested parties. The sales process is ongoing and our Australian business unit will be reported as a discontinuing operation under the relevant accounting standards whilst the ABU assets are available for sale.

This requires that our Australian assets are recorded in a summarized form and separated from our continuing operations in our financial statement and as a single business unit in the statistical tables and in the MD&A. This presentation enables a better understanding of the relative financial performance of each business unit.

The sale of our 49% minority interest in the Frog's Leg Mine was completed early in the quarter and the $148 million proceeds received to date have been largely used to pay a $0.24 per share special dividend and for the repayment of an AUD50 million credit facility.

As flagged with our first quarter results, 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 cost guidance and our initially targeted free cash flow in this challenging gold price environment. We have executed on approximately 80% of the programs required to achieve the $60 million target and we're confident the full target will be achieved by yearend. Alacer's total cash position increased by [$14 million] during the second quarter to $269 million at the end of June. This includes $50 million of cash in our Australian business unit.

Copler has now been operating for two-and-a-half years and reached the half-million ounce production milestone in July of 2013. Copler's performance also set new records with monthly production in June of 28,178 ounces and record quarterly production 68,195 ounces on a 100% basis. This quarterly record was 10,395 ounces or 18% more than the previous record production.

Total cash costs of $395 per ounce drove operating cash flow from continuing operations of $41 million for the quarter. This was prior to a number of one-off capital expenditures of approximately $14 million for the SART plant, clay sizer, material handling circuit and the new agglomerator. Last is adjusted net profit was $24.5 million or $0.08 per share for the quarter.

Could you please now turn to slide four for a summary of our attributable gold production?

This chart clearly shows Copler's strong second quarter gold production in comparison with the previous quarter. Positive grade reconciliations continued through the quarter. The tons and grade of ore stacked totaled 1.8 million tons at 2.13 grams per ton gold during the second quarter, which was similar to the first quarter of 2013. For various reasons, the ratio between gold produced and contained gold in stacked ore increased to 50% for the -- 56%, correction, for the second quarter.

Crushed ore increased to 72% of total ore stacked with the remainder of the ore being dump leached. This is planned to increase further when the new clay-handling circuit is commissioned in the fourth quarter. The SART plant is also on track to be commissioned during the fourth quarter.

In Australia, production also increased by 26% quarter over quarter. We have started now to access higher grades at Higginsville Artemis and Helios ore bodies.

Could I please ask you now to turn to slide five for an update on the Copler resource estimates that we announced last week?

The Copler resource continues to grow and measured and indicated resource is estimated to total 8.5 million contained ounces of gold as at the end of June. This new resource has more than replaced mine production over the past year.

May I please ask you now to turn to slide six for an overview of our strategy?

We're continuing to implement our strategy and manage our assets portfolio which includes reducing costs and increasing production of higher-margin ounces. In June, Alacer's Board made the decision to sell the Australian assets after careful consideration of the best way forward for Alacer. Whilst the timing of the sale may not be optimal in terms of the volatile gold price environment, the weakening of the gold price was a contributing factor in the decision taken by the Board to pursue a sale of our higher production cost Australian assets. If an acceptable offer is not received for our Australian assets during the current sale process, all options, from continuing with our current high-grade operating focus to care and maintenance will remain on the table.

At Copler our immediate focus is on maximizing value from the existing open pit and heap leach oxide operations. In line with the current lower and more volatile gold price environment, we have recently commenced studies to reevaluate the construction of the CIL processing facility and to determine the optimum value process route for treating sulfide ore. And we will advise the market further as the results of these reevaluation studies become available.

I would 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, David, and good morning and good afternoon to everyone.

I'd like to turn to slide seven for an overview of our profit and loss statement. Note that the summary table on this slide is for our continuing operations only.

Gold sales of about $90 million were very similar to the previous corresponding period. Although we produced 9,964 more ounces, this was offset by $254 per ounce decrease in the average realized gold price.

Total production costs increased by $6.6 million to $26.1 million and total cash costs increased by $48 an ounce to $395 an ounce. Key drivers of these cost increases were the increase in [inaudible], higher reagent consumption, and increased electricity consumption and [inaudible]. These increases were somewhat offset by the lower unit rates from a new mining contract with Ciftay.

Depreciation and amortization increased to $10 million for the quarter or $151 per ounce, mainly as a result of the increase in tons mined. This resulted in a mining gross profit of $53.5 million for the quarter. After deducting exploration, administration and miscellaneous other costs, Alacer reported a profit before tax of $42.2 million.

General and administrative costs are higher due to a change in the administrative process utilized by the company and requirements of accounting disclosures for discontinued operations. Instead of completing all inter-company rate charges at the end of the year, the rate charges are now down on a quarterly basis and year to date equal approximately $4 million. We anticipate that overall our G&A will be lower at yearend compared to 2012 on a like-for-like basis.

The income tax expense is $15.6 million, being primarily driven by the following. Firstly, we are now operating under our second incentive tax credit certificate which has an applicable tax deduction rate of between 20% and 40% and is lower than our [first] certificates which had a 70% rate. The incentive tax credit provides an additional tax deduction for eligible capital expenditure over and above the normal depreciation claimable. And the incentive is designed at encouraging investments in Turkey.

Secondly, our capital spend for 2013 will be less than budgeted and we have therefore -- have less capital expenditure qualified for the incentive tax credit. The reduction in capital spend arises from our cash generation initiatives and also the capital we will not incur on the sulfide project in the current year.

The outcome of this is an increase in the effective tax rate from approximately 12% to 18%. And in Q2 we applied this revised rate across the first half.

All-in sustaining costs were $885 per ounce and all-in costs were $916 per ounce. These new measures are based on guidance issued by the World Gold Council in June 2013, and comparing numbers with 2012 have not been prepared. The cost basis for both measures include one-time sustaining capital project costs related to the SART plant, the clay sizer and material handling circuit, agglomerator upgrade and the information systems upgrade. These costs represent approximately $212 per ounce in both of these measures.

As mentioned earlier, we are reporting our Australian mine separately in the financial statements as discontinued operations. Our Australian mines produced a total of 41,622 ounces and the total cash cost is $1,268 per ounce for the quarter. The carrying value of the Australian business unit assets were reviewed and resulted in a payment loss of $412 million. The reduction in the value of the Australian assets has largely been driven by the significant decreases in long-term gold price assumptions and associated market sentiment during the first half of 2013.

Now please turn to slide eight. Alacer maintained its strong balance sheet ending the quarter with total cash of $268.7 million with our borrowings decreasing to only $5.4 million.

As previously discussed, we sold our 49% interest in Frog's Leg Mine on April 5 and we have received sales proceeds today of approximately $147.5 million, with the remaining payment of $1.7 million to be paid later this year. This enabled us to pay off AUD50 million of debt in Australia and return approximately $70 million to shareholders in the form of a special dividend.

Note that during the late 2013, the corporate paid AUD64.4 million or approximately $58 million of Western Australian stamp duty taxes related to the merger in 2011. We believe that the assessment is understated and have prepared an objection against the assessment which will be launched with the Western Australian Office of State Revenue. Should the objection not yield a suitable outcome, we will progress the matter to the courts at that time. The amount is included in account liabilities at 30th of June 2013 to discontinued operations and is in Note 10 of our financial statements.

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

David Quinlivan

Thanks, Rod. Slide nine provides an overview of previously announced guidance for 2013. I'd 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 higher-grade production. The 2013 cash saving measures are expected to permit Alacer to meet our targeted full-year free cash flow margin.

Ladies and gentlemen, this concludes our presentation concerning our second quarter 2013 financial results. Thank you for your interest in Alacer Gold. I'd now like to hand back to [Saatchi] to coordinate the Q&A session.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Due to limitations, participants -- due to time limitations, participants will be limited to two questions only. [Operator Instructions].

The first question is from Cathy Moises of Evans & Partners. Please go ahead.

Cathy, your line is open.

The next question is from Michael Slifirski of Credit Suisse. Please go ahead.

Michael Slifirski – Credit Suisse

Thank you. I'll limit myself to two questions but there's a great many more I'd love to ask. First of all, the grade over core continues to occur with the oxide. Is that assumed in our guidance? And if not, why has the guidance not been adjusted?

David Quinlivan

Good day, Michael. Thanks for that.

The grade over core does continue, as you noted. And with the resource statement upgrade, we also made a note there that the year-to-date historical grade over core of about 11% in regard to the new model was also evident on material mines for the first half of the year.

All we can do when we do our guidance numbers is we take the reserve case numbers and we apply the reserve case numbers. We would rather be estimating on the cautious side rather than putting in something that we don't have. And whilst the grade over cores are nice, we don't factor it in to forward estimates.

Michael Slifirski – Credit Suisse

Okay, thank you. Second question then please, on the sulfide ore and the treatment of cost associated with it. So considering the assets, the increase in the assets [inaudible] sulfide, if I divide it by the sulfide tons during the quarter, I get a ridiculous dollar per ton amount. So what other costs are behind that? Is there an amount of stripping that's also tied into that asset please?

David Quinlivan

Perhaps I can hand you over to Rod to give you a heads-up on that.

Michael Slifirski – Credit Suisse

Thank you.

Rod Antal

Hi Michael. Look, it's -- we are accounting for it. I mean it is going on to the balance sheet now as you quite rightly pointed out. The categories are basically just taking out a portion of stripping costs over the period as well as the mining costs for the ore itself, and that's going on to the balance sheet.

Michael Slifirski – Credit Suisse

Okay. But can you help us allocate stripping cost between what gets allocated to sulfide and what gets allocated to oxide?

Rod Antal

Basically it's a pretty simple exercise, Mike. It's just done on a tons basis, so I can, offline, I'll give you the breakdown if you like.

Michael Slifirski – Credit Suisse

That'd be great. Thank you.

Operator

Next question is from Jo Battershill of UBS. Please go ahead.

Jo Battershill – UBS

Morning, gents. Just interested to get a bit more color on your comments regarding the CIL processing plant, you'll reevaluate in studies. I'll be honest, I thought we were expecting to get an update on the CIL process plant and potentially a decision on whether you go ahead with that this quarter.

David Quinlivan

Yeah. Thanks, Jo. Look, the gold price environment and the drop in gold price environment of sort of around $400 an ounce has created obviously a revenue shortfall on what was expected when we first started on the CIL exercise. We're now going back and having a look at that study again. The primary objective that's driving us here is we have a heap leach operation and open pit operation that generates the base case cash flow. And for us on an economic basis, to generate anything, it needs to be better than that base case cash flow. And when you have the revenue shortfall that comes with the drop of nearly $400 in gold price, it creates a different financial outcome. So we just need to get back and make sure that we're happy with what's going on in terms of that process.

Jo Battershill – UBS

Okay. Thank you.

Operator

The next question is from Paolo Lostritto of National Bank. Please go ahead.

Paolo Lostritto – National Bank

Yes. Can you give us a sense, there is a line item in your income tax note talking about this potential treatment on previous taxes, can you give us a sense of the magnitude on what the regulators are thinking about [backtracking] you there?

David Quinlivan

Rod, can I hand over to you to that?

Rod Antal

Yeah. Look, I'll take it, Dave. Thanks.

Paolo, the process itself has really only just begun. So it's really just to highlight an emerging I guess process for us in a tax order sense with the authorities in Turkey. They're particularly focused on the deductions that we've made for the tax incentive payments that we'd receive, or tax incentive credits that we've taken from historical years in 2011 and '12. It's really too early to say anything but that because we don't really know any size of quantum or really any issues that have been brought forward so far other than the process has just started off. So we just wanted to make sure that the market was informed that that process is ongoing, and we'll keep you informed as we get more information.

Paolo Lostritto – National Bank

Okay. And then a follow-up question, you guys have reiterated your exploration guidance, $10 million in Australia, $5 million in Turkey. Can we get a breakdown on what capital item was expensed?

David Quinlivan

You got that, Rod?

Rod Antal

Sure. So all of our exploration programs or a majority of our exploration programs are in Australia expensed, Paolo. And for Turkey we -- basically I think it's probably the majority of our exploration for the remainder of the year will be expensed as well because a lot of is [district] exploration. So there isn't a lot going on within the Copler area.

Paolo Lostritto – National Bank

Got it. Thank you.

Operator

The next question is from Paul Hissey of Goldman Sachs. Please go ahead.

Paul Hissey – Goldman Sachs

Yeah, hi. First one for me, just I think I missed you guys talking about tax implications. Can you just remind me again of the likely effective tax rate in Turkey going forward?

Rod Antal

Paul, it will be on our current -- our current numbers will be around for this year 18%. And so, remember, the [inaudible] in Turkey is 20%. So I mean that's the worst-case scenario. What will vary though in the years looking forward will be our tax incentives that we'll not be able to get with any capital programs that we put in place in Turkey. So it's hard to predict exactly the timing of all of those, but that's what will have the major impact on the effective tax rates.

But for 2013, if you use a number that would guide to around 18%, that will get you close to where we'll end up.

Paul Hissey – Goldman Sachs

Okay, thanks. And one more from me, just looking at the Copler sort of resource update, I mean it looks to me like we've sort of got a higher tonnage at a lower grade generally speaking. I'm just trying to get a feel for how much of that is new tons and how much of that is tons that were in there previously which are basically being reclassified.

David Quinlivan

Yeah, Paul, Dave Quinlivan. There is a portion of the measured and indicated resource that has been uplifted from the inferred category that's coming to now -- which would go into a redesign or reoptimized open pit. There's also some new material that sits outside the boundaries of what was the original measured and indicated resource. That's a combination of both. And in terms of quantity, well, you can look at the numbers in the table that are in the presentation. But in broad-brushed terms, what's come back in to the measured and indicated resource is what was mined out over the previous year. So what we've done is effectively replaced all that we've mined this particular year.

Paul Hissey – Goldman Sachs

Okay.

Operator

The next question is from David Haughton of BMO. Please go ahead.

David Haughton – BMO Capital Markets

Yeah, hi David and hi Rod. First question is, looking at CapEx, given the various savings that you've got at the moment, what are you shooting for, for CapEx for 2013 split between Turkey and Australia, and in each of those cases, between sustaining and expansion?

Rod Antal

You want me to take that, Dave?

David Quinlivan

Yeah, please, Rod.

Rod Antal

Hi, David. So in Turkey I think the balance of the remaining capital program for 2013 is going to be focused on completing the SART plant, the agglomerator and the clay sizer, which is they're all sustaining capital items of around 23-odd million dollars, is what's left in the second half of the year, and probably another couple of million dollars just on general type of small capital programs around the site.

In Australia the capital program has been, you know, almost eliminated really in terms of what we'll be spending for the remainder of the year. And the development programs that we have at Higginsville for instance will be expensed.

David Haughton – BMO Capital Markets

Okay. So do you have a total number that you're shooting for, for 2013?

Rod Antal

To use the guidance that we put in the -- from our original guidance to what we put out in that cash generation and took off -- take off the announced $15 million in reduction of the capital development, that will get you close to those numbers in Australia. But again there might be a lot of capitalized expenditure going into Australia for the remainder of the year.

David Haughton – BMO Capital Markets

All right. Looking at the SART, going to be starting up later this year, what's your expectation for copper recovery and implications for the costs going forward at copper?

David Quinlivan

Good day, Dave. Look, I -- we haven't done a lot of work on copper recovery for the SART plant this year. Our modeling indicates on the SART plant that as a standalone item the full cost of the SART plant in terms of construction costs, et cetera of 31-odd million dollars would be recovered over a two-and-a-half-year period by copper [inaudible]. That gives you an order of magnitude of what sort of the amounts of copper that we're currently expected to produce out of it. The main thing for us is that in terms of the SART plant, is to ensure that the buildup of cyanide soluble copper doesn’t get to a level where it affects gold production out of the heap. We have the risk mitigation thing on the gold side of it but it does pay for itself over a couple-year period.

David Haughton – BMO Capital Markets

All right, great. Thanks, David.

Operator

The next question is from Dan Rollins of RBC Capital Markets. Please go ahead.

Dan Rollins – RBC Capital Markets

Yes, thanks very much. David, I wonder if you could provide a little bit more color on the CIL study and then more importantly on the sulfide studies. It sounds to me that construction of the CIL in this current price environment is a no-go, and wondering how that actually affects the sulfide, the study [inaudible] the previous high-pressure oxidation circuit was just too onerous and didn't have the return that, you know, much higher gold price earlier this year. I mean [inaudible] circuit. Am I reading between the lines there saying in the current gold price environment that neither the CIL plant or sulfide development of resource is a go right now at $1,250, $1,300 gold?

David Quinlivan

Yes. Thanks, Dan. Look, in terms of the CIL plant, the CIL, I guess the estimate -- capital construction estimate costs that we had for a 5 million tons a year plant that we originally looked at for came in within the guidelines that we previously advised at sort of $250 million with plus or minus of 10% error margin on it or variance margin on it, so $200 million to $300 million. The question for us at the moment is, does the capital spend of what it takes to build the CIL facility of that size give us a better operating outcome than going forward with a heap leach and the current open pit operation that we have?

So from my point of view [inaudible] going forward with the CIL plant, this is going to get the best value out of the operation at the current gold price. And remember, we're using the consensus gold price that currently sits down there in the mid $1,250 sort of range from a range of different analysts that we're working with on it. We also have the requirement to look at the trailing gold price which is slightly higher.

But it's a question of what's the best value in terms of options going forward. And in this current volatile gold price environment with gold moving around and particularly downwards by quite a significant amount so far this year, we need to get back and reevaluate what all those things are and the range of gold prices that weren't on our sensitivity horizon a little while ago.

So that's the stage we're at with it at the moment. It needs to make sense financially and it needs to give a better return than what we already have.

In terms of the sulfide process, look, I believe the way forward for that is still very much a stage development process and that part of that work going forward is to look at how to best [inaudible] to stage that given the gold price environment that we have at the moment. I don’t know whether that answers your question, but that should give you a sense.

Dan Rollins – RBC Capital Markets

Okay. So maybe another follow-up then. Of the options you're considering within the current gold price environment, what is the [inaudible] approach for the sulfide?

David Quinlivan

We're looking at all options in regard to that at the moment. If you go back to the CIL plant, the CIL processing route, the majority of the equipment that was needed for the CIL processing route was also going to be needed for the sulfide processing route. And that hasn't changed. The gold room and a number of other facilities used for oxide treatment hasn't changed. So it's a question of looking at capital costs versus operating costs versus operating route. And what we have done is we've gone back and said, all right, if we're going to go back and reevaluate, well, all options now need to be on the table. We need to go and make sure that it's not just a pressure oxidation or a flotation concentrate, that we're also looking at whatever else in terms of technology there is out there to treat refractory sulfide ore. So things like, you know, two-stage or three-stage roasting are also back on the agenda to be looked at.

Dan Rollins – RBC Capital Markets

Okay. And then when could we expect maybe to get the studies, results for the studies?

David Quinlivan

Look, we don't have a firm timeline on that. At the moment, Dan, we're just back re-gathering information on a lot of processing or different processing routes and going through a lead-in analysis on reviewing all of the internal material from -- back from earlier days, you know, going back [inaudible] did a lot of test work on Copler for different types of ores. So we're going back and having a look at that, going back and having a look at all of the historical test work that's been done. And we're sort of seeking I guess expressions of interest from a number of parties at the moment to look at undertaking that global overall study in terms of the best process route for us.

Dan Rollins – RBC Capital Markets

Good. Thanks.

Operator

Next question is from Andrew Knuckey of Commonwealth Bank of Australia. Please go ahead.

Andrew Knuckey – Commonwealth Bank – Australia

Yeah. Hi, David. David, I just want to come to the timing of the studies as well on a little bit, just trying to correlate with earlier in the year. Obviously we waited a long time for the sulfide study last year and that finally in February we heard that, you know, essentially you're looking at an alternative better value add growth with the CIL plant. And I also expected that we were going to hear from that in this -- at least in this upcoming quarter.

It sounds now like basically we're back to the drawing board again. Is that an unfair way to characterize it? Because I'm not getting a sense of any real timing or certainty as to just what the road forward is or what the timeframe is in terms of key milestones and with regards to the Copler expansion.

David Quinlivan

Yeah. Well, Andrew, just so if you haven't noticed, there's been quite a bit of a drop in the gold price just recently, and that sort of puts a bit of a dent on what your revenue streams might come out. I'm sure that you guys will be the first to be sort of jumping and down if we start spending money on something where we don't have a fairly good handle on what the economic or the value outcomes over these.

Our first priority is to make sure what we do makes sense in the environment that we're operating in. And yes, there were a number of things that have gone on over the period of time in terms of studies, but we are where we are at the moment and the gold price is what it is at the moment. And it's significantly lower than we were talking this time last quarter.

But we're in a completely different space at this point in time and what we need to do is go back and make sure that what we're doing in this particular marketplace, I mean we have people calling gold price as low as $800 or $900 an ounce. Look, if we went forward with the project that was going to basically be operating in an $800 an ounce gold price. But we haven't done that work and it would be premature to come out with anything in terms of the timeline for the way forward for the Copler when we haven't done the work.

Andrew Knuckey – Commonwealth Bank – Australia

Yeah. I guess the only question I have around that is obviously the development was always going to be, you know, in terms of production and revenue streams, was always going to be up in 2015 onwards, and I just wonder how much the long run sort of real prices have actually changed. Nevertheless we'll wait for that.

I guess the second question I had was with regards to Copler, I guess in the absence of any firm guidance, the 43,101 which you published in March shows a falling gold production of Copler, about 33% in CY '14 [inaudible] 137,000 ounces. Is that what we should be assuming going forward for Copler?

David Quinlivan

Well, you should probably go and have a look at the new resource numbers that were published a couple of weeks ago and, you know, worst-case scenario, reading into that, is what's been mined in the last year was replaced. So you've effectively added another year where the mine production side of the story is just on the basis of the resource numbers that are there. So, yes, the 43,101 was [trader] resource. Look at the new resource numbers from an oxide point of view and they have the latest numbers. We haven't incorporated them into new mine [claims] yet, that's part and parcel of the 2014 budget year, work program that now that we have the new resource model is just about to kick off.

Andrew Knuckey – Commonwealth Bank – Australia

Okay. Thanks.

Operator

The next question is from Leily Omoumi of Scotia Bank. Please go ahead.

Leily Omoumi – Scotia Bank

Thank you. Again most of my questions have also been answered. They were regarding the CIL study.

But I guess my question now is given that it seems the processing of sulfide is a bit on the backburner or you're going back to the drawing board on that, can we assume that maybe the focus now is on finding more oxide reserves going forward? And having said that, I guess the budget that you just brought -- Rod mentioned earlier on the call, 5 million for regional, that doesn’t seem like a really big push on exploration either. So can you maybe provider some color on that?

David Quinlivan

Yes, sure. Hi, Leily.

Look, I think in terms of finding more oxide or, that's certainly high on the agenda for exploration. One of the things that we have with exploration is that, you know, the high end of the exploration cost comes on the drilling side of the programs. And right at the moment a lot of the work that we're doing on exploration in Turkey is still very much at the low end of the cost spectrum for exploration work, it's things like geophysical work, it's things like soil sampling across wide areas. It's targeting of structural features. It's sort of aeromagnetic and detailed ground-based magnetic work.

So whilst we've cut some of the high-end exploration costs out in terms of drilling, we've not stopped any of the more I guess structured front end of regional exploration programs. We still have a fairly large commitment to regional drilling. But it's the case of doing the exploration work in the most cost-effective manner. And we're continuing with a fairly big exploration program, regional exploration program in Turkey across a number of areas. We had done some drilling down there, but the majority of the work this year was targeted around completing the detailed ground-based soil sampling and carrying out a number of geophysical programs to try and target some of these areas that we identified last year from the soil sampling and geophysics programs.

So I guess wrapping it up, the broad brush is, yes, we are looking at more oxides in the region. And in terms of the exploration cuts, I don’t think they're in any way impacting what we're doing on the ground in terms of targeting higher-grade oxide target areas for the next phase of the exploration program which may be, you know, RC drilling or potentially diamond drilling as the final stage.

Leily Omoumi – Scotia Bank

Okay. But is it safe to assume that the $5 million that we assumed, sir, that you mentioned for the remainder of the year are essentially going to be spent on, you know, only regional exploration and not really areas immediately adjacent to the current pit, for example, the -- where the old Copler village was?

David Quinlivan

Yeah, that's correct. The majority -- we work inside the pit area during the winter months and we're just now in the process of wrapping up the last of our drilling results coming in for work that's being done around the western end of the pit looking for extensions to the oxide ore [floorings] that are up around the western end of the pit. I don’t know if you could recall that there was a small pit light at the end of west pit that was an oxide pit that we've been doing some work around looking to finalize the boundaries on where that pit will sit. But pretty much from here on in, the sole focus of exploration in the Copler district is going to be outside of the immediate mine footprint area.

Leily Omoumi – Scotia Bank

Thank you very much.

Operator

The next question is from Cathy Moises of Evans & Partners. Please go ahead.

Cathy Moises – Evans & Partners

Good morning, David. With respect to the Australian operations, why haven't you provided a detailed [breakdown] in the report? It makes it difficult for us analyzing the variance. Just following on from that, your suggestion of closure, the potential auction, what sort of project costs could [inaudible] outcome? And can you provide the all-in sustaining costs of the Australian operations?

David Quinlivan

Hi, Cathy. Look, the accounting standards require that we report in the fashion that we have reported in. So it's a consolidated business entity in Australia. That said, I'll hand over to Rod to give you a bit more background and information on that.

Rod Antal

Cathy, look, it's pretty simple as Dave explained, there's not much really to add. We've taken the Australian operations there as discontinued. Obviously there's a minimal amount of reporting that's required because of that determination. So it's been reported as our requirement.

But, you know, with things that you require like splits of gold production between the operations, you know, we can provide that to help you.

Cathy Moises – Evans & Partners

Okay, thank you.

Operator

The next question is from Don MacLean of Paradigm Capital. Please go ahead.

Don MacLean – Paradigm Capital

Good morning, David and Rod. Just two quick ones, David, can you remind us what the heap leach recovery was for the sulfides? Was that test work done sort of satisfactorily in your opinion?

David Quinlivan

Yeah, good day, Don. Thanks. Look, the heap leach model from all of the preliminary work that we've done on the feasibility study work that was done indicated that over its life the heap leach would be looking at a recovery of around 64% to 65%. And that was at a time or over a time limit whereby when you stop putting material on the heap leach, we then continue to irrigate the heap for a period of two to two-and-a-half years. And at that point in time you get maximum possible gold recovery out of the heap.

So here the numbers were around 64% to 65% recovery, theoretical recovery out of the heap leach. And at the moment we're sitting sort of around about the -- as we're going forward on a day-by-day basis, in about 50% I believe.

Don MacLean – Paradigm Capital

And the metallurgical test work that you did on the location for the sulfides, what kind of recovery were you, you know, net getting on that?

David Quinlivan

Gold and sulfides recovered was in the 75% to 80% in sulfide and about sulfide flotation concentrate.

Don MacLean – Paradigm Capital

[inaudible] question, 10%, 15%, where is it?

David Quinlivan

In the sulfide ore, you mean?

The ore in the sulfide pit comes in a number of different forms. The gold and sulfide which is predominantly in our [inaudible] there's also gold in some carbonates and gold in some silicates. That portion of it that you don't see reporting to a sulfide flotation concentration area is either in sulfide [tail] or it's in the silicate -- the gold in the silicates or the gold in carbonates.

Don MacLean – Paradigm Capital

Okay. That's very helpful. Thank you.

Operator

The next question is from Tony Mitchell of Ord Minnett. Please go ahead.

Tony Mitchell – Ord Minnett

Well, hi guys. Just in terms of the Australian operations, when do you expect that you'll be able to make a definitive decision as to whether you sell them or go to some other alternative?

David Quinlivan

Yeah, good day, Tony. Look, we don't want a process that goes on and on. I'd be looking to have something that we can take to the Board certainly within the next month whereby we're putting management's recommendation to the Board that this is the way that we believe we should be going forward.

Tony Mitchell – Ord Minnett

Right, okay. The other thing is based on what's happened with Copler in the first half of about 68,000 ounces, you're forecasting at 162 to 178. That implies 94,000 to 110,000 ounces in the second half, which is a decent increase. What's that attributable to? And will it be at a similar grade?

David Quinlivan

Sorry, I'm not quite sure I follow you there, Tony. Perhaps you could --

Tony Mitchell – Ord Minnett

No. You're saying that the first half production at Copler is about 68,000 ounces. And giving --

David Quinlivan

No, no. The first half production was different to that. The second quarter production was 68,000 ounces on the 100% status.

Tony Mitchell – Ord Minnett

Okay, okay. So what does the guidance of 162 to 178 imply for the second half then, what sort of production --

David Quinlivan

Look, at this time we're tracking let's just say at the upper end of that guidance. And, you know, look, when we get a little bit further down the track and if we're confident that we're going to exceed that guidance number, then we'll revise it.

Tony Mitchell – Ord Minnett

Right. And one thing I've been rabbiting on for a while is that you should be hedging, but clearly now that becomes a complete -- it doesn't [inaudible] because if you're going to divest the Australian, we'll put them on care and maintenance, it's irrelevant, isn't it, because you're clearly going to be operating out of Turkey.

David Quinlivan

That's correct.

Tony Mitchell – Ord Minnett

Thank you very much.

Operator

Next is a follow-up question from Michael Slifirski of Credit Suisse. Please go ahead.

Michael Slifirski – Credit Suisse

Yeah, thank you. Just on the sulfide material [inaudible] how has that been selling compared to expectations? So is it showing also on over core? And is there any issue with storing that material over time? Does that give you an acid problem or does it oxidize and perhaps compromise recovery longer term as you have to store for an extended period please?

David Quinlivan

Yeah, good day, Michael. Look, in terms of recovery and performance against model, the sulfide ore has been higher grade again than we anticipated in the model. The order of magnitude is approximately the same.

In terms of problems with sulfide storage, what we have is the sulfide ore stored in -- or stockpiled in such as a way and in such locations as that it doesn’t cause us any issues or an acid problem -- or an acid drainage problem.

Michael Slifirski – Credit Suisse

I had a question about the deterioration over time if it is oxidizing, that gives you lower recovery [inaudible] storing it for an extended period?

David Quinlivan

Look, I don’t know exactly the question to that -- the answer to that, but I'm guessing, you know, that's going to be in long term rather than the sort of timeframe that we're looking at. This type of stuff traditionally doesn't oxidize when it's on the surface for tens or hundreds of years as opposed to sort of short-term oxidation.

Look, I don’t know, we've not done any work on it, but my gut feeling is that, no, it's not going to deteriorate to an oxide -- to a state where it could go to an oxide process as opposed to a sulfide process.

Michael Slifirski – Credit Suisse

Okay, thank you. A second question please is with respect to hedging. Given that the environment, the gold price environment is so uncertain, it makes it very difficult to deploy new capital if you don't know what the price outcome is. Is there an option to consider hedging to underpin perhaps a sulfide investment decision?

David Quinlivan

Short answer to that is yes.

Operator

The next question is from Brett McKay of Deutsche Bank. Please go ahead.

Brett McKay – Deutsche Bank

Just following on from a couple of the earlier questions around grade, can you give us a sense for when the grade for the oxide is likely to pull back toward that reserve grade which is, you know, around half of what the current grades are pulling off [inaudible]?

David Quinlivan

Yeah, good day, Brett. Look, I guess in our models we have the grades declining towards the backend of the mining program. And once -- well, we've just now got a new resource model that also looks like it's going to be [under core] and [inaudible]. When we've done our 2014 optimized mine plan based on the new resource model, I guess we'll be in a bit better positioned to give you the most accurate and up-to-date information on that. But it's obviously going to tail off towards the backend of the life. But if I give you information today, it's going to be sort of outdated by, you know, in the next couple of months when the new resource model comes in. Happy to talk to you about it once we've done a little bit more on the optimization and mine plan side of it but it's going to tail off towards the back end of the life.

Brett McKay – Deutsche Bank

Does that imply the backend is quite a bit lower grade given the reserve grades are at 1.1 and you're mining 2.1 [inaudible] at the moment? Does that imply that the tail-end is, you know, certainly [inaudible]?

David Quinlivan

Look, if you're doing the pure math on that, yeah, that's what it indicates.

Brett McKay – Deutsche Bank

Okay.

Operator

Next question is from Joseph Kim of J.P. Morgan. Please go ahead.

Joseph Kim – J.P. Morgan

Hi guys. Just a quick one on your balance sheet. You set aside $60 million for the Australian assets which presumably is for working capital. Can you just confirm the stamp duty you've paid has been drawn from the 218 reported as of June?

David Quinlivan

Yeah, good day, Joe. No, the 218 is not a number that sits there. That's a number that sits outside of Australia. The stamp duty is being paid out of Australia.

Joseph Kim – J.P. Morgan

Sure. So from a working capital perspective -- so from a working capital perspective you'll be funding the Australian assets from the 218?

David Quinlivan

The Australian asset is funded from their own ongoing operating cash flow at the moment. We don't expect that the Australian assets will be, from here on in, drawing any capital from the 218 cash reserve that we have. We expect month on month that these operations will be cash-positive from here on in.

Joseph Kim – J.P. Morgan

Okay. Thanks very much.

Operator

This concludes the time allotted for questions on today's call. I will now hand the call back over to Mr. Quinlivan for any closing comments.

David Quinlivan

Yeah, thanks. I don't have anyone, but thank you all for taking the time to listen in on the conference today. And good day.

Operator

Ladies and gentlemen, this concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

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