Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Theresa M. Thom - Vice President of Investor Relations

Randy Buffington - Chief Executive Officer, President, Chief Operating Officer and Director

Stephen M. Jones - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Zachary Zolnierz

Sam Crittenden - RBC Capital Markets, LLC, Research Division

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

Jeff Killeen - CIBC World Markets Inc., Research Division

Daniel McConvey

Allied Nevada Gold (ANV) Q2 2013 Earnings Call August 6, 2013 11:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Allied Nevada Second Quarter 2013 Earnings Conference Call. [Operator Instructions] I would like to remind you that this conference is being recorded today, August 6, 2013. And I will now turn the conference over to Tracey Thom, Vice President, Investor Relations. Please go ahead.

Theresa M. Thom

Thank you so much. Good morning. Thanks, everyone, for joining us this morning.

We issued Q2 production and earnings earlier today and the press release is posted on our website. On the call today, Randy Buffington, President and CEO; and Steve Jones, Executive Vice President and CFO, will discuss the Q2 earnings results, expansion updates and the catalyst behind the decision to defer the Hycroft mill construction.

Before we begin, please note that certain statements we'll make during this call may contain forward-looking information. For additional information, I refer readers to listen to our cautionary statements regarding forward-looking information contained in our press releases and on our website.

I'll now turn the call over to Randy Buffington.

Randy Buffington

Thank you, Tracey, and thanks, everyone, for joining us on the call this morning.

I have several things I'd like to cover this morning, starting with the Hycroft production update. As you've seen in the press release this morning, we did not achieve our first half guidance, primarily due to poor leach pad performance from the Lewis pad. It was discovered in late May and early June that there were some operational decisions that were very poor that were made in late 2012 and early 2003 (sic) [ 2013], which resulted in a large amount of ore being placed on the Lewis pad that did not get leached. A multitude of issues were found. They're all centered around poor solution-to-ore ratio, which we've talked about in the past; poor leach pad management and poor planning and execution. These resulted in ore being mined and placed on the leach pad but not placed under leached.

We looked at the issues that were really the driving factors behind that. First and foremost, the mine simply did not have enough freshwater to leach the ore. Second, and what was discovered late in the quarter, was the drip tubing that was being used to apply the solution was not the appropriate size for the area that we are putting under leach or the size of panels that we now place with the higher ore flows. And one of the other issues that we found was the process infrastructure was inadequate to pump flows that were in the plan. This is the piping, the solution, the pumps.

We've taken steps to right these issues. They're not permanent and they're not unfixable. All of the plans are in place and we're starting to see results out of this program.

We've also completed a 27-hole drill program on the Lewis pad to identify affected areas and to develop remediation plans. Based on this drilling program, we estimate that there could be as many as 70,000 recoverable gold ounces on the Lewis pad just in the dry area that have not been wetted by process solution.

When we reiterated first half guidance in early May, I truly believe that the plan was achievable and did not fully understand the magnitude of the Lewis issues. Having had time to review the problems and remediation plans, we appear to be about 3 months behind the original expansion plan that was put into place in mid-2012. We’ve made great strides in the past months and we're confident we'll be able to make up for much of this during the remainder of the year.

I now believe I have a better understanding of what we're dealing with and have reduced guidance from 175,000 to 200,000 ounces of gold.

During the last 45 days of operations of the new North pad, it has given us a better understanding of the leach kinetics and has confirmed our model recovery and the metallurgy is correct. In addition, we brought in an outside consultant to look at both the historical leach data, as well as the North pad data. And what we have been -- we are very confident now that there is not an issue with the metallurgy. This issue started when we increased the ore on the pad and we were simply not prepared on the processing side to manage this amount of ore and it has impacted production.

We have detailed remediation plans in place and are well on our way towards executing this plan. The site has been working diligently to mitigate these issues and we're starting to see results. July was a record production month for Hycroft, with daily production increasing around 30% from the beginning of the month till the end of the month.

On the Lewis pad, remediation Phase 1 of the program is complete. First and foremost, we had to change out all of the irrigation tubing, the piping and the pump and get the appropriate standards and people in place to ensure that we have the leach pad running and applying the solution as planned. We've also completed the drilling and geophysics and core analysis. And core analysis was done by Kappes, Cassiday consulting lab in Reno, Nevada, and we're confident that the silver and gold that have been placed on the pad is recoverable.

Phase 2 of the program is well on its way. This program includes completing wells to allow for the solution to be introduced deep into the pad and get the piping and infrastructure to support these in place. This allows for us to actually quickly saturate the ore and hopefully, impact this quicker than just a surface application would do.

By the end of Q3, we expect to double our available freshwater and to receive permits to increase the flows to the pad. We have all the freshwater rights from the large mill expansion and we have the permits and infrastructure in place to begin utilizing this as soon as possible.

It will take some time to wet this amount of ore and to start to transport solution to the Liner and Process Facility. We have not put this production into the production profile but fully expect to get some of this during 2013. The reason for not including this is we simply don't know how long it's going to take to saturate and get the solution to the liner. We know this program works. It's worked on -- it has been working for over 15 years at different operations. We've used these operations as a model for our program. We're just uncertain at this time at how quick it's going to happen.

We're very pleased with the direction the new team has taken in the mine. They've been faced with a number of challenges and this team is fairly new, starting in Q2. They've dealt with these as swiftly as possible, made the right decisions and they're very clearly focused on safety, making ounces and controlling cost. We continue to see good improvements as the team moves the mine forward.

Just real quickly on the expansion achievements. The first few cells of the North pad were placed into production ahead of schedule. The remaining pad is now fully complete and will be the main producer for Hycroft for 2013 and 2014.

The Merrill-Crowe and crusher construction are nearing completion, and we expect to commission both of those facilities in Q3, as planned.

In addition, on the mining site, we've commissioned both large wire rope shovels and we're seeing good production and productivities on these shovels. These were commissioned ahead of schedule as well.

These will be a big help as we move through the remainder of the year, lowering mining costs as we stand down the smaller, expensive hydraulic shovels and reduce our loading cost.

To complement the mining fleet, the dispatch system is now operational and we'll begin to see efficiency improvements with the loading and hauling fleet.

On the mill construction, as you've read this morning, we have made the decision to defer the construction of the mill. Several factors have influenced this decision. First and foremost, the operation is not providing the cash flow we need to proceed with the deal. We need to focus all of our attention on getting the Hycroft Mine running as planned. We are well on our way with these plans and we're confident that we will get there shortly.

We believe there are a number of opportunities to optimize the mill plans by looking at mill sizing, flowsheet and on-site oxidization.

As we mentioned in recent calls, Allied Nevada has been actively engaged in looking at economic alternatives to concentrate sales for over 2 years now. This process started with autoclaving and then moved to bio-oxidization and then onto coring treatment. All of these tests were positive and provided economic alternatives. But the one thing that these tests really did lead us to is that the Hycroft concentrate have high gold and silver recoveries with a low to moderate level of oxidization. And with this information, several months ago, we commissioned an additional program with Hazen Research out of Golden, Colorado. They were tasked with identifying several low-cost alternatives to -- for oxidization. And what they -- what the test program was used for is we commissioned ore oxidization, intensive cyanide, atmospheric leach, low-pressure leach and Air/SO2 leach and ultrafine grind. And as they moved through this program, what we found out is alkaline ambient pressure oxidization was giving us very good results with wrapper concentration. We're very excited about the results and they show great promise and we expect to expedite this program and we hope, over the next few weeks, we'll have a report on Phase 1 of these tests completed.

In this metal price environment, it's imperative that we have a solid plan for the mill construction and flowsheet, and we are confident that the heap leach is providing consistent operating performance. We'll get there quickly and efficiently, but we need to have a solid platform for this with the operation running smoothly. This is where our focus will be for the next few months. We will take this time to optimize the flowsheet and complete a detailed third-party feasibility study incorporating all of this information. This will take some time. Also, with permitting being as far along as it is, we have an opportunity to look at optimal locations for the mill and other facilities, which may improve costs.

Just before we began the call this morning, we announced that Steve Lang has joined the board for Allied Nevada. Steve has run a number of large mines and has a strong technical and operational view to the board dynamics. We're very excited to have Steve on board. He'll definitely be a big help as we move through the next phases of the Hycroft operation.

Now I'll turn it over to Steve Jones for his update.

Stephen M. Jones

Thank you, Randy, and good morning, everyone. Let me start with the balance sheet. We ended the quarter with a cash balance of just under $247 million. We started the quarter at $243 million. So from a cash standpoint, more or less ended up where we started.

In terms of inflows, the primary inflow for the quarter was the stock issuance in May of $142 million net of issuance costs. We also collected the receivables, $32 million, that we had on the balance sheet at March 31.

In terms of outflows, our cash flow from ops was actually a use of $18.7 million, so we did not generate cash from operations. Primarily as -- due to the fact we continue to build inventory on the pads, an increase of $39 million.

We also added during the quarter $11.3 million in receivables from the current quarter carbon sales, as our strip plant cannot keep up with all 4 sets of carbon columns, totaling 6,500 gallons a minute. And we do expect by the end of the quarter to be no longer running the carbon columns when the new Merrill-Crowe plant is in operation. We'll focus all of our production through the Merrill-Crowe plant, which has a capacity of 21,500 gallons per minute.

Obviously, the biggest outflow was capital spending of about $120 million. We spent $32.7 million on the crusher, focusing on installation, including the Hill [ph] wall; $9.1 million on the Merrill-Crowe plant for foundations, precip filtration and a de-aeration package; $17.7 million on the mill itself. That's primarily for the mills and motors, engineering and final excavation of the mill site. We spent $42.5 million on mobile mining equipment, finalizing the trucks and also additional payments on the shovels and $10.7 million on other items, including some housing support and as well as payments on the carbon columns themselves.

Focusing on the ore on the leach pads for a minute, and you can look at Note 4 where we break this out, but we have $201 million on the balance sheet in both current and long-term inventory on the pads. That represents 177,000 ounces. That's an increase of 18,760 ounces in the second quarter. Just to put that in perspective, that grew by about 15,300 ounces in the first quarter. Obviously, some of that growth has directly resulted to the issues that Randy just outlined on our Lewis pad.

If you do the math, overall, on a dollars per ounce basis, we're carrying inventory at $1,137 per ounce of gold. That obviously ignores the silver that's out there as well. Put that in perspective, we were at $971 at the end of the first quarter so, obviously, we had a very high cost quarter from an operational standpoint, and I'll talk about that in more detail here in a minute.

As Randy noted, we just spent a lot of time looking at the metallurgy, looking at our pads, engaging an outside consultant, as well as the fact that we have a new process manager that joined us right at the end of the first quarter. We wanted to make sure that our overall recovery was adequate, and we determined that it is.

We also focused on the timing. Historically, we had 80% of the ounces shown as expected to be recovered in a year, 20% thereafter. We've changed that to 70% current, 30% after a year. Based -- looking at the history, as well as looking at the North pad, given that we had fresh ore on the liner in the North pad beginning in May, we're able to really look at the North pad and really understand the flows. Obviously, we're seeing higher than 70-30 but, as Randy said, we have as many as 70,000 ounces on the Lewis pad, which we know we're going to get but we're not sure the timing and so therefore, we ended up with 70% current, 30% noncurrent.

If we look at our debt for a minute outlined in Footnote 8, our capital lease has increased during the quarter by $28 million. That's net of $9 million in repayments. Our balance at 6/30 is $216 million. We expect to increase that by $18 million to $234 million by the end of the third quarter, and then we would expect a decline, thereafter, as a result of the fact that we will have all of our capital leases in place and those capital leases are equal of principal and interest payments and so they'll continue to decline after the end of the third quarter.

Randy mentioned -- did discuss our decision to defer construction of the mill. We do not expect this decision is going to result in a decrease in capital spend this year. The majority of the capital that was to be spent and is yet to be spent on 2013 is related to our heap leach expansion. That's the completion of the crusher, completion of the 21,500-gallon per minute Merrill-Crowe plant in the North pad and related piping and water balance tie-ins and of course, the acquisition of the mobile mining fleet.

We will complete the purchase of all 3 electric rope shovels, and we've already completed this year the purchase of all the required haul trucks. We'll spend some more capital on the mills in the last half of this year, primarily related to completing the mills themselves. That's the 2 SAG mills and the 3 ball mills and the related motors. That's about $50 million we expect yet to be spent in the second half of 2013. We will take delivery of this equipment and store it for future use.

Overall, 2013 capital expenditures we're forecasting at $470 million, of which we'll finance with capital leases of $138 million. In the second half yet to go, we're forecasting $175 million spend with $30 million of capital leases paying for that spend.

Moving on to the income statement. Our gold and silver ounces sold in the quarter exceeded production due to a net reduction in the gold and silver that we had in inventory on precip and carbon at the beginning of the first quarter. But we did have higher sales and production and as a result, a reduction of our precip and carbon inventory overall. Specifically, from revenue outlined in Footnote 9 in the Q, we had $59 million of sales revenue. That's a $9.8 million increase from the prior quarter and over $25 million increase from Q2 2012.

We had gold sales this quarter of 41,512 ounces at $1,348 an ounce. That compares with a price of $1,609 an ounce or $261 less from -- that we achieved in Q2 2012 and we achieved $1,300 -- $1,613 an ounce in Q1 '13 or $265 an ounce less.

Our silver ratio was much lower this quarter, 3.5:1, resulting in silver sales of 146,303 ounces. We had an average price of just under $21. Comparing that silver ratio to prior quarters, first quarter this year was 6.4:1, Q2 2012 was 9.8:1. So much, much lower silver, which I'll talk about more in a minute.

Moving on to the adjusted cash cost per ounce. That is our cash cost net of silver. They were $775 for the quarter, that's compared to the prior quarter of $608 and the prior year of $527. The main driver there is the silver and the silver credit. Our silver credit was $74 an ounce. It's $100 an ounce lower than what we had forecast, $117 an ounce lower than Q1 and $212 an ounce lower than Q2 2012. Obviously due in part to price, we were using a forecast of price of $25 and we ended up at $21, as I mentioned. But more importantly, it's that ratio, that 3.5:1. This was lower in the quarter due to the fact that so much of our production was on carbon and our silver recovery on carbon tends to be about 2:1. The Merrill-Crowe is greater than -- typically greater than 6:1. Also, silver typically leaches slower than gold, so we saw relatively even less silver coming from the Lewis pad. Again, when we have -- when we're no longer producing on carbon, when we have the Merrill-Crowe plant up and operating, we should see that silver ratio back to normal 6:1 level.

Overall mining costs were high this quarter at $219 due to poor productivity for the loading and hauling equipment. So what have we done about it? We've reduced the fleet of trucks we're running. We began running a dispatch system, as Randy mentioned. Also, as Randy mentioned, we've added and put in place the wire rope shovels. We're still getting the operators trained, but we're seeing some marked improvement in terms of the tons that those wire rope shovels are moving on a per-hour basis or per-ship basis, however you want to measure it. Our goal is to get to $1.75 for the fourth quarter.

Our processing costs were $268 per ton due to higher lime and cyanide additions, as well as drilling in the Lewis pads. Our goal is to get under $250 a ton.

As we noted in the press release, we reduced our workforce by 24% at Hycroft in July. The employees that were laid off were given 60 days' pay, but it will be the fourth quarter before the financial impact of the reduction to payroll is seen in the financial statements. But, obviously, we've now been running for the last couple of weeks a much leaner, more focused, disciplined operation and we're seeing the fruits of that as production, as Randy indicated, has actually increased.

G&A for the quarter was $8.8 million, which is $2.9 million more than the first quarter. This increase is attributable to severance payments we made, primarily to our former CEO, some in cash, as well as an accrual for future RSU vesting and a small addition of severance payment cost for another executive.

Since the beginning of the second quarter, we have reduced our corporate office personnel by 40%. We will have further severance costs in the third quarter of about $1 million as a result. But again, we're very focused on the cost and very focused on running a disciplined, low-cost operation going forward.

Our exploration costs during the quarter were $1.2 million or about $200,000 less than forecast, as we wound down outside exploration in April. We have no further outside exploration work ongoing or planned for the remainder of 2013.

Interest expense for the quarter was $3.2 million. Plus we capitalized $8.6 million during the quarter, including amortization and net interest cost. Overall, interest burden during the quarter was $11.8 million.

We had net income for the quarter of $4.2 million or $0.04 a share. That compares to $6.1 million for the second -- for the quarter of 2012 or $0.07 per share.

If we look ahead, we are forecasting adjusted cash cost per ounce for the year to be between $800 and $825 an ounce. As I've already mentioned, we currently have a very high cost inventory due to the issues with the Lewis pad and some other operational issues that we've discussed. We need to experience some lower mining and processing cost to bring these numbers back down, and we expect to do that here beginning in the third quarter and into the fourth.

As I've already noted, we've implemented several actions to help achieve this. The 24% reduction in workforce at Hycroft, we've got -- we've parked several haul trucks, we started with the -- and now have both 2 wire rope shovels in operation, much more efficient than the hydraulics. We have implemented a dispatch system. We've reduced our per ton lime consumption, and we've reduced the contractor presence on site.

We've got a new team in place out at the operations, and they're working very efficiently and very focused. We've reduced our corporate overhead, as I mentioned, and we're very focused on getting our costs back in line and running a much leaner operation.

At this time, I'll ask the operator open up the call to any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question today will come from the line of Zach Zolnierz of GMP Securities.

Zachary Zolnierz

My first -- I just want to touch on the CapEx. I think this quarter compared to last quarter, you had revised the full year 2013 Hycroft gross spending from the $395 million to $470 million. I'm just wondering if you can touch on that and maybe other reason for the changes?

Stephen M. Jones

Yes, hey, Zach, this is Steve. Couple of things. We're finding that the Merrill-Crowe plant and the North pad are running at probably about $20 million in total higher than what we had expected. And then we're -- and then the remainder is the cost to finish the mills. So we have made the decision that the mills -- and the mills and the motors themselves are far enough along that it makes sense to finish all that work this year, pay for that and then put those in storage for when we pick up construction of the mill again. So those are the 2 reasons for the difference.

Zachary Zolnierz

So I think that makes sense. And when we back into -- I think you talked about what CapEx would be in the second half. So is it right -- and I think you mentioned $175 million, but is it right to look then at your committed obligations of about $200 million at June end, you have maybe a little less than that in the back half of this year? So is it right to think that for 2014, the amount of CapEx that's actually walked in required to be spent outside of maintenance CapEx is not that significant?

Stephen M. Jones

Yes, that's right. Yes, in 2014, and you're kind of pointing out the difference between what's committed in the capital, call it $25 million or $24 million, and most of that we're spending this year, obviously. Plus we met some of those commitments. If you look in the footnote, it also talks about the ability to reduce some of those commitments and some of those commitments we think we can probably reduce so that we're spending minimal amounts at all in 2014. The 2014 capital is really going to be focused on the South pad, the South leach pad.

Zachary Zolnierz

So I know this might be a tough question but is it possible to give us maybe a range? I mean, is this something like sub-$100 million in CapEx next year?

Stephen M. Jones

No, no, much lower than that we would expect. Yes, much lower than that. I'd -- I'll say $50 million or less.

Randy Buffington

Okay, that's correct.

Zachary Zolnierz

.

Great. That's very helpful. And then my second question is probably for you, Randy. I just want to touch on the ambient pressure alkaline oxidation. I'm just wondering if you could help us maybe compare it to the autoclaving and the BIOX. And sort of what does it exactly entail on-site? And ways to think about sort of maybe how you ended up there? Just any color there would be helpful.

Randy Buffington

Sure, Zach, no problem. Just real quick. The process has been an evaluation process, starting with the autoclaves, to have an alternative to concentrate sales. And the autoclaves is very known technology. It's used in the Carlin-type deposits and it's very effective, high-capital and fairly high-operating cost. But for the complex refractory ore, it's been very successful in developing a lot of reserves. So we initially went right there just to make sure that it worked, and we've seen that it worked. As we transition to BIOX, the BIOX program was a long program that was developed. A pilot plant was run in South Africa. And what we've seen was lower capital and lower operating costs and very high recoveries and very high oxidization rates. But what that information actually gave us was the information that low oxidization produced high recoveries in our ore. So we went down the pathway, the next logical step was to look at chlorine. Chlorine was used in the early development in the Carlin trend to oxidize ore and dilute resources forward, and what we've seen in that testing was again good results. The new test program with Golden, Colorado with Hazen was really focused around what are the industry standards used right now. And as you know, there's a lot of work that's done out there, a lot of mining operations have developed alternative to concentrate sales, high-intensity cyanide is -- and atmospheric is very common, ultrafine grind is very common. The alkaline oxidation is simply -- it's -- the concentrate goes into a tank, it's got an agitator and you control the pH at about 11.4 and you add oxygen or air and time. Typically, you come out of the regrind circuit at about 40 C, so we tested this at 40, clean up to 100 C to see that. The factors are simply that you evaluate oxygen pH, temperature and time. And what we've seen immediately in this test is, one, we've seen higher recoveries on the rougher con than we did in the cleaner con, which gives us 2 opportunities. It's larger mass but there's a 10% to 15% more metal in it, and we were seeing a higher recovery. We've also seen that there's an opportunity to use air instead of oxygen, which further lowers the cost. But it's a simple flowsheet. The concentrate comes out, goes into regrind; you do your mass pull it goes into regrind, goes straight into simple agitator tanks, the same tanks we use for leaching; you add -- you modify the pH to 11.4, and in a very short period of time, as low as 6 to 8 hours, we are seeing oxidation rates in 50-plus and we're seeing recoveries in both gold and silver in excess of 90% in the early stages of this test. One of the factors that really have made this successful is through this test program, we're using Hazen Research but also a third-party consultant to run this program. And what we found early in the program is that if we use lime as a pH modifier, which we've used in the past, we've seen very poor results. And the consultant and Hazen looked at a report that was written in 2003 of International Journal of Mineral Processing titled Pyrite Oxidization in Alkaline Solutions. And what we found out is the lime was actually passivating the surfaces of the pyrite and it was keeping it from oxidizing. Once we used sodium hydroxide or calcium chloride, we -- the oxidation was very rapid and very consistent in the results. So that's kind of led the path. It's been a 2-year process, a little over 2 years that this program has been going on. And I think we're getting down to the final stages of it. We're seeing very, very good success with this and very excited about the results and the program is going to continue down that pathway.

Zachary Zolnierz

That was extremely helpful. And then just to clarify, in the next few weeks, I think you talked about maybe coming out with some of those results. Is this -- so this will just be some more color on this as opposed to the full mine plan? The feasibility will take some time, as you mentioned.

Randy Buffington

Yes, what we expect to have is the third-party consultant, Hazen, is going to put together a status report. And they're updating that right now with the current results and the process we went through and we hope to be able to share that with you as soon as we get it completed.

Operator

Your next question will come from the line of Sam Crittenden of RBC Capital Markets.

Sam Crittenden - RBC Capital Markets, LLC, Research Division

A couple of questions on the heap leach-only operation. Just wondering if you can tell us what grades and recovery you're assuming for that level of production you've got on the press release?

Randy Buffington

Sorry, Sam?

Theresa M. Thom

Mike, this is Tracey. I can get back to you on that in a few minutes.

Sam Crittenden - RBC Capital Markets, LLC, Research Division

Okay. And then it looks like you're factoring in about a 1:1 strip ratio. Does that factor in stockpiling any sulfides? Or would that be over and above your 80 million tons of mining?

Randy Buffington

Yes, Sam, we've run quite a few different mill scenarios or mining scenarios and what we've tried to do is minimize the mill ore stockpiling. But, of course, with this deposit, you do have to stockpile some but it's not nearly as much in this program as what we've had to do in the past. So it's really trying to maintain that 1:1 strip ratio and deliver the oxide ore to the leach pad.

Sam Crittenden - RBC Capital Markets, LLC, Research Division

And does that affect your ability to get into certain areas if you were to proceed with the mill down the road at some point?

Randy Buffington

No, actually it enhances it. Sam, when we -- when you look at that, it actually -- we have a lot of ore in place in this plan as we move through the progress of the steps of the oxide leaching, so you could rapidly-- it actually gives you more ore faces 12 months from now when we have right now to dive into the mill ore.

Sam Crittenden - RBC Capital Markets, LLC, Research Division

Okay. And then just to follow up on the metallurgical testing. Once the Phase 1 results are out here over the next couple of weeks, is that going to give you enough information, do you think, to proceed with that as your sole option in the feasibility? Or are you going to do more tests? Or is feasibility going to be looking at a few different options?

Randy Buffington

Well, I think as we move through this, there will be additional testing. We have to engage the third-party. We're looking at a couple of them like Hatch and some others to come in and take this on and move this test work to feasibility level. But what we expect to get out of this first phase is basically the cost factors and the cost model that we can start to put together scenarios and look at alternatives and sensitivities and start to look at graphed flowsheets.

Sam Crittenden - RBC Capital Markets, LLC, Research Division

Okay. And then just on the mill equipment, I wonder if you could just explain the decision to still spend the $50 million this year. Is there a penalty if you didn't take delivery of that equipment? Or is there some other -- look, I'm just curious why you'd still proceed with spending that money this year.

Stephen M. Jones

Yes, basically it's half-half or 60% built. And so the penalty would effectively be to walk away from that, so call it $70 million. So the decision is to complete it. I mean, we're not -- we're just deferring construction of the mill. It has long-term value to us and we certainly didn't want to lose that investment that we had already made.

Sam Crittenden - RBC Capital Markets, LLC, Research Division

And does that -- so does that lock you into proceeding with the 75,000-ton per day operation in the future? Or could your resize the mill if you wanted to?

Stephen M. Jones

Well, at that point, we own the mills and motors. So I think your focus -- our focus would be on the 75,000-ton per day operation. I assume that you might be able to do some trading if you decided there was another way to do that. But we will own the mills and motors. So that'll be the focus of the work going forward, Sam.

Theresa M. Thom

Yes, back on your previous question, the mine plan and the overall grade for heap leach is 0.009 that's per ton, crushed is 0.012. We crush about 45% life of this plant. The oxide plant, we crush about 45% of the ore. And the recoveries for heap leach is about 50% gold and 11% silver. And then on the crushed, it's about 66% gold and 25% silver.

Sam Crittenden - RBC Capital Markets, LLC, Research Division

Okay. Do you happen to know what kind of crushing cost would be included in that on a per ton basis?

Randy Buffington

Yes, it's around $1.65 a ton.

Theresa M. Thom

Yes, crushed.

Sam Crittenden - RBC Capital Markets, LLC, Research Division

So if you got your overall processing cost down to $2.50 by Q4, then you'd be adding in that extra crushing cost on top of that for the 44% that you're crushing?

Stephen M. Jones

That's right, Sam. Yes.

Operator

Your next question will come from the line of Trevor Turnbull of Scotiabank.

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

Maybe just to follow up on the stuff that Tracey was just mentioning. When you talk about averaging like 225,000 ounces a year under the new plan, I assume that isn't just from the material that's going to be placed on the leach pad? But is that incorporating some of the material that's in inventory that's expected to come out over time?

Randy Buffington

Yes, Trevor, this is Randy. It does factor in some of that as you go into next year and you're behind -- because it's a 1-year leach curve, you're always lagging behind. But the 250,000 ounces per year is the ore placed and recovered ounces coming out.

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

Okay. Because I was a bit confused because when you -- because I was looking at it, about 225,000 ounces of gold through 2020, so I was thinking call it 7 years, which would end up with almost 1.6 million ounces and 2 million ounces of reserves. It seemed to me recoveries -- it would imply the recoveries would be much higher than, say, 50% on the non-crushed and 66% on the crushed. So I was having trouble kind of backing into those numbers.

Theresa M. Thom

Yes, I will have to look at that, Trevor, and I'll get back to you.

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

Okay. And then the other question was just following up again on the cost. You talked about the goals for Q4 getting the mining cost down to, say, $1.75, processing down to $2.50 a ton. Are those the kind of costs that you would project for the new mine plan, say, 2014 onwards? Or are you looking for even more improvements as the shovels and everything are at full speed?

Stephen M. Jones

Yes -- no, I think we are looking for even better -- more improvements than that into 2014.

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

And so can you give us any kind of ballpark on what like cash cost might look like in that period? Understanding that you do have to factor in some of the inventory ounces and the costs that are associated with those but, say, for new ounces that are going to come out of this new mine plan, can you give us any kind of sense on cash cost?

Stephen M. Jones

Yes, we really don't have 2014 numbers at this point. I mean, given how important the ounces that are in Lewis are. And we really need to do some work there to begin -- to start to see how that -- how those ounces, how quickly they -- how quickly the ounces come out of Lewis before I want to put out any numbers for 2014.

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

Okay. And then maybe just changing gears and going back to -- question's come up a couple of times here. So with the CapEx estimates for the second half of the year, $175 million, and you talked a little bit about CapEx for 2014. When we look at the purchase obligations, I think that Zach mentioned there are almost $200 million of purchase obligations over the next year, is there capital over and above the purchase obligations? In other words, are you spending a bit of cash completing the Merrill-Crowe and the crusher that isn't actually included in that $200 million of obligated spending?

Stephen M. Jones

No.

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

Okay. So that -- so then I think that you said it's like $175 million this year and -- sorry, is that $199 million then, is that essentially all 2013? That doesn't include, say, the South leach pad and any spending you would do in 2014?

Stephen M. Jones

It does not include the South leach pad, Trevor, that's correct. But there is no -- the $175 million that I said we'd spend this year, that's -- all those dollars are in that $199 million. And as I mentioned, I think the $199 million, there's probably -- the footnote it says there's probably some ability to reduce that. Those are just -- those are commitments that we have. But some of those commitments have the ability to be reduced and I would expect that, by the end of the year, we would have minimal 2014 expenditures yet to be spent. Substantially, all the money we're going to spend is in 2013.

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

Okay. And then I guess my last question, with respect to the capital leases, there was a note in there that said that some of the -- or certain of the capital leases referenced the same financial ratio covenants as your revolver. And I was wondering if you could tell us how -- it says certain of the capital lease obligations. Can you tell us how much of the leases are referencing those financial covenants?

Stephen M. Jones

Yes, about $35 million. We have a facility with Bank of America and they referenced the covenants and -- just to be clear, when I say referenced -- when we say referenced the covenants, what that means is to the extent the covenants are changed on the revolver, the capital lease covenants are automatically -- I'm going to use the term reset to those covenants. In other words the Bank of America and the people that they've participated out those leases to, they're not party to the covenants -- to how the covenants are set, one way or the other. They just follow them. They just follow them, they reference them.

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

Right, they reference them. And if they're amended, they just reference the amended versions?

Stephen M. Jones

Exactly, yes.

Randy Buffington

Trevor, this is Randy. Just on your question on the production in the reserve ounces, the 1.6 million ounces of production does include inventory coming out. If you back the inventory out, the recoveries are as Tracey stated.

Operator

Your next question will come from the line of Jeff Killeen of CIBC.

Jeff Killeen - CIBC World Markets Inc., Research Division

First question, just wondered with respect to the mills and motors, again, coming back to previous question. Do you believe that those will be applicable for the new concept going forward? And if so, would it not be until the feasibility is complete until that sort of indicated to the public or what do you think the time line would be for that?

Randy Buffington

Yes, Jeff, I -- no, it's still a large lower grade operation that we need to push tons through. So I think the mills still are applicable in this case. And they're good mills and it's a good size and gives you a lot of flexibility in the flowsheet, if you look at how those mills are aligned and how they're staged up. So I wouldn't see the mills changing. I wouldn't see this going to a very small mill. In respect of the feasibility, we're going to be using as much of the information as we can that we already have here. But bringing in a third-party, I expect the feasibility to be -- I mean, it could be a year before we get through that. So what we intend to do with the mills is to have those in storage and ready to go so that we can put them in place and continue with build as soon as we have the feasibility complete.

Jeff Killeen - CIBC World Markets Inc., Research Division

Okay, great. And just switching to the Merrill-Crowe, you said that it should be completed and commissioned in Q3. Can you give us a sense of -- would that be towards the middle of the quarter, towards the end of the quarter? Do you think it's going to impact significantly in Q3 or is it more of a Q4 type of impact?

Randy Buffington

Yes, you never know when you get to these stages of the construction. But we truly expect to have it running in Q3. The Merrill-Crowe changes the face of the Hycroft operation, being able to process 21,000 gallons a minute through the Merrill-Crowe and instead of using the carbon columns. But right now, we expect to have it commissioned in Q3 as we're nearing the end of the project.

Jeff Killeen - CIBC World Markets Inc., Research Division

Okay. And final question, with respect to the balance sheet. Obviously, a good chunk of the cash available is going to be spent this year. How comfortable are you at this point in time with the cash on hand?

Stephen M. Jones

Yes, we're comfortable, Jeff. Obviously, it's something that we are very focused on. As I commented earlier, we've taken some pretty significant actions around the employee base to make sure that we're running the rightsized operation. The operating guys out at Hycroft that Randy has brought in. I mean, maybe just comment, I'm not sure if everybody appreciates but the team we have today is -- I joined the company 17 years ago and Tracey and myself are really the only 2 executives of the company in that time frame that are left. So the team has been completely remade, very focused and very focused on reducing our costs. And so with that focus and me being able to see the changes that have been made in the last 3 months, I'm comfortable with the cash position we have today and going forward.

Operator

And your final question will come from the line of Daniel McConvey of Rossport Investments.

Daniel McConvey

Steve, I just -- on the $200 million, I think you brought this down but how much was for the mill again?

Stephen M. Jones

About $50 million, Dan.

Daniel McConvey

And how much has been roughly spent for the mill so far?

Stephen M. Jones

About $90 million.

Daniel McConvey

Okay.

Stephen M. Jones

The mill itself.

Daniel McConvey

Okay. And then if we --

Stephen M. Jones

Which is primarily engineering and then these mills and motors.

Daniel McConvey

Okay. And so last to be spent on the mill in rough terms under the current plan was roughly how much? Percentage spent of the total based on current...

Stephen M. Jones

Just the mill itself or do you mean the whole?

Daniel McConvey

Just the mill.

Stephen M. Jones

Just the mill. Well, the mill budget was in the, call it, $550 million range. Just the mill. Not ignoring power and lots of other ancillaries. But the mill itself was in the $550 million range.

Daniel McConvey

Okay. So we're about 25% of the current estimate was spent. And the equipment, that's going to be idled. Is there a rough value -- rough cost value for the equipment that's going to be idled for now?

Stephen M. Jones

The mills and motors, you mean?

Daniel McConvey

No, I'm sorry. I'm switching here to the mining equipment.

Stephen M. Jones

Well, one shovel which is about $27 million, which we won't build. So there's one shovel we won't build right away. And that's a shovel that, frankly, we may not need long-term and so we may sell it. And then probably about half a dozen trucks.

Randy Buffington

Yes, about 6 to 8 trucks and 1 of the large wire rope shovels.

Daniel McConvey

And what would the value be...

Stephen M. Jones

The trucks are $4.5 million -- Dan, the trucks are $4.5 million each and the wire rope shovels are $9 million, cost -- in terms of cost.

Daniel McConvey

Okay. So that would all add up to another, I don't know, $30 million, $40 million, plus the $27 million? Does that make sense?

Stephen M. Jones

Correct, yes.

Daniel McConvey

Okay. And what is the market like for -- you have been in this market, but is there much demand for equipment right now here in Nevada, which is a good place?

Stephen M. Jones

Yes, there is demand for the -- there's probably demand for the shovels. Trucks, a little less so. Sorry, the hydraulic shovels. Trucks, a little less so, but some demand. And they're currently not much of a demand for the electric rope shovels. But there's not -- there's also not currently one being built by CAT. So presumably, the next party that is going to build a shovel, we've got one ready to go. So there's not much of a market out there, but there's also no others that we're aware of that are brand-new, ready to be purchased.

Daniel McConvey

On the Merrill-Crowe, just going through numbers for the crushed, you have 25% recovery for the silver. Does that -- and I think that's going forward. Is that assuming the Merrill-Crowe plant?

Randy Buffington

Yes. I mean, the 25% recovery just comes out of the ore by crushing it to a finer fraction. That increases the recovery. But the Merrill-Crowe recoveries for solution recovery is higher than the carbon columns. So our overall solution recovery and our solution processing capacity goes up once the Merrill-Crowe is commissioned.

Daniel McConvey

Okay. But that -- the 25% is assuming everything is running with Merrill-Crowe going forward?

Stephen M. Jones

Correct.

Operator

And Mr. Buffington, there are no further questions at this time. Please continue.

Randy Buffington

Thank you, everyone, and thanks for joining us on the call. And I just want to reiterate we've done an exceptional amount of work in the past few months to identify issues at the mine. We've put the right people and the systems in place to ensure that these issues don't continue.

Sound operational performance is going to be imperative and the foundation for our business plans going forward. We have the right team in place and are more confident than ever this is a project that needs to be built. The large, low-cost operation with simple metallurgy in the right jurisdiction. I've been with Allied since February, I guess. 5 months now and it's been somewhat of a whirlwind and a fast pace. But as we started to settle into the last couple of months, it's quite evident that this is a world-class operation and it's a project that needs to move forward. And I think the right focus from the Allied team is there now and we're starting to see the results that we need to see on the operation.

Theresa M. Thom

Thank you, everyone.

Randy Buffington

Thank you.

Operator

And thank you. Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation, and you may now disconnect your lines.

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

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

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

Source: Allied Nevada Gold Management Discusses Q2 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts