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Claude Resources Inc. (NYSEMKT:CGR)

Q2 2013 Earnings Conference Call

August 7, 2013 11:00 ET

Executives

Marc Lepage - Investor Relations

Neil McMillan - President and Chief Executive Officer

Rick Johnson - Chief Financial Officer

Brian Skanderbeg - Senior Vice President and Chief Operating Officer

Peter Longo - Vice President, Mining

Analysts

Sam Crittenden - RBC Capital Markets

Paolo Lostritto – National Bank

Chris Campbell - National Investor

John Tumazos - John Tumazos Very Independent Research

Joseph Snider - Investor

Marc Lepage - Investor Relations

Good morning everyone. Thank you for joining us on our 2013 Second Quarter Earnings Call. We would like to welcome all analysts, current and prospective shareholders and the media. On the conference call today, we have Neil McMillan, President and CEO; Rick Johnson, Chief Financial Officer; Brian Skanderbeg, Senior Vice President and Chief Operating Officer; and Peter Longo, Vice President of Mining.

I’d like to announce that during today’s call, the company may use forward-looking statements. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. Further information regarding forward-looking statements, you are welcome to read our cautionary note located on page two in today’s presentation. Please note that today’s presentation is located on the homepage of our website within the Corporate Presentation icon on the left hand side. You may also view our 2013 second quarter MD&A and financials on our website in the Investors page under Financial Reporting.

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

Neil McMillan - President and Chief Executive Officer

Thank you, Marc, and thanks everybody for taking the time to join us. If you are following along on website with the slides that we are presenting starting on page three, our highlights of the second quarter produced ounces 12,400, we sold 11,500 of those ounces during the quarter for revenue of $16.1 million. Total cash cost per ounce of gold was $875, down substantially from the first quarter and at a level that we believe is not only sustainable, but will be improved upon.

Cash flow from operations was $0.02 a share at $3.7 million. We incurred a net earnings loss of $9.9 million after an impairment charge of $10.8 million offset by deferred income tax recovery. Our adjusted earnings were a net loss of $2.3 million, or $0.01 per share. And I would refer you to footnotes with respect to the calculation of adjusted net loss as it’s a non-IFRS measure. We did as well during the quarter actually bordering the first and second quarters made two significant additional discoveries in the Santoy Gap and Santoy 8 area. And if you are on the slides, you can see 18.8 grams over nearly 14 meters and 330 grams over 1.5 meters. Both these holes were significantly outside of existing drill envelopes and demonstrate the potential for us to expand the size of Santoy 8 and the Santoy Gap deposits. In fact, one of these holes would indicate that these ore bodies potentially do come together. We will wait and see. We have more work to do there in the future.

On page four, just bit of an outlook on our strategy. What we are trying to do? Like everyone else in this environment, we are working hard to reduce our corporate expenditures. We have made significant progress on this front. Our total expenditures for 2013 we would expect to be 20% less than the total expenditures in the company in 2012. We have decreased our year-over-year capital expenditures by 30%. Some of that is in the normal course of business. For example, in 2012, we were still working to complete our shaft extension at Seabee. We completed that in January 2013. So, it’s not like we were cutting back on every project that we have planned. We have deferred some of them, but some of that big decrease is a result of us completing projects that were underway at year end.

We are now clearly focusing our efforts on value available in the Seabee operation ounces that we can’t access currently that help us in the short-term and but not losing sight of the immense potential for us to build the Seabee’s long-term value. The real priority there is completing the Santoy Gap Pre-Feasibility study Santoy Gap is close to exiting infrastructure, it’s a large extremely good grade and we contracted Stantec Engineering to come in and work with us on putting together the mine plan for Santoy Gap that is nearly complete. I would think in the next two weeks or so we’ll have that completed. And we are parallel to the ore body with our ramp right now and it won’t take a long to get into Santoy Gap and start to develop it. As a matter of fact we would expect to be developing Santoy Gap in the third and fourth quarter. And through out 2014 we could be mining in Sill muck before the end of this year and certainly most through 2014 and it’s possible that we will be in production phase of the Santoy Gap before the end of 2014.

Extremely important part of our operation Seabee as you know is capable of producing in the 45,000 ounce to 55,000 ounce range Seabee and Santoy 8. The ore that we are planning for at the Santoy Gap is incremental to what we are currently doing out of Seabee and Santoy 8 and within new limits has the potential to increase our production in to that 75,000 ounce to 95,000 ounce range over the next two to three years. So, if the big, big part of the Seabee’s future and at this point in time we are not sacrificing our development of that project because of the financial constraints.

Obviously our balance sheet is as usual challenged and in order to ensure that we have adequate liquidity going forward we have deferred a number of our capital projects. We have substantially reduced our exploration budget. In 2012 we spent about $13.6 million on exploration, our budget for 2013 is total of $1.6 million and that includes the drilling that we did do in the first quarter and just finished up early in the second quarter.

We’ve reduced G&A costs, general and administrative across the board on a wide variety of fronts by rationalizing staff, executive compensation reductions and anything also we could find that we could defer or reduce in order to take some pressure off of our operating financial situation. And we are also investigating strategic opportunities for the development of our assets. We can talk about that a little it later, but nothing is off the table at this point.

Financial results in the second quarter again I have highlighted sales of 11,500 ounces of what we did produce 12,400 week four every two weeks, so at week four and it’s usually every the second Tuesday if week four ten days before the end of the month, the next four will be four days into the new months, so we can accumulate reasonable inventory in our circuits and that represent the difference between what we actually produced in the quarter and what we actually sold in the quarter.

Gold prices are obviously is down dramatically from what it was last year just under $1400. Total cash costs as I said were $875 are all in costs at Seabee in the quarter we are about $1350 to $1375. So, it’s largely a breakeven quarter for us from a cash point of view. And again the revenue down $4 million over the same time last year largely due to the drop in gold price. Cash flow down a bit but still positive and the adjusted net loss of $10 million much more importantly from our point of view most people’s adjusted net loss kind of a reflection of our ongoing operation was negative $0.01 a share.

We did have the $10.8 million impairment charge out of the Seabee operation as simple function of reviewing our life of mine plan and applying current forecast gold prices to it, it did result in $10.8 million adjustment to the carrying value of the asset modest in comparison to some, but not unexpected in this kind of an environment. In deferred income tax expenses and/or recoveries, it’s likely to be an ongoing issue for us on a quarterly basis depending on whether we are profitable or not, so it does add some volatility to our non-adjusted earnings. And beyond that, again, the adjusted net profit number, which is kind of a reflection of our ongoing operations, was the modest loss in the quarter.

Page seven of the slides, operating results, tons were up just about 10%, grade was down a bit, recovery stayed the same, and as you saw, gold production was up slightly. Real credit at this point to our operating staff, they did 10% more production at a slightly lower grade, and still we are able to bring our operating cost down substantially. And again, we believe on a sustainable basis, all the time doing this significantly improved safety results, more productive improved development rates, I know at the CB operation, we went from 3.7 meters per day of advance development to 5 meters per day with some of the changes that Peter Longo and his staff have brought in. And so we are doing more with the same or fewer people at site and doing it in even more safely than we historically do it. And that is nothing short of a real credit to the people that work at the Seabee operation. They have done a superb job under difficult circumstances.

Moving on to Seabee itself, again, we started the year forecasting 50,000 to 54,000 ounces of production. We are behind after the first two quarters. We think at the moment we are likely going to come in at the low end of our forecast, but there is a few wildcards out there yet that we can’t be certain of. We have a number of initiatives underway to recover some of our production. We are behind those initiatives. We are not in our mind plan. So, they do represent incremental ounces. One of the big ones will be how fast we can get into Santoy Gap and start to sell in development there. We do think that’s a possibility before the end of the year and that could have an impact on our production as well. So, that forecast is it’s going to be – it’s a challenge and we are not expecting to get near 54,000. So, we expect to be in at the lower end of that.

Our unit costs are estimated to improve over the 2012 numbers. And obviously while the first quarter was tough for us, we expect to continue our cash operating cost in that $875 or less range through the last two quarters. And if we are capable of doing that, we will come down quite significantly over where we were in 2012. A big part of that is the L62 Zone, which is parallel to the original Seabee ore body fairly close, and we are really just getting into the heart of that from a production point of view as we speak. It is a higher grade structure 7.7 grams per ton in the reserve category and we are really starting to see that now as we speak our grade has been improving and we would expect that to continue. Certainly, L62 is a big part of that. And again Santoy Gap is the real game changer at Seabee. And we are very, very much focused on that and moving as quickly as we can.

Again, on the exploration front, like everybody else we cutback rather dramatically, Seabee, we will spend most of our money in the Seabee area this year. We did drill, I think, 8 holes in the first quarter and the start of second quarter with significant success, particularly at Santoy. We don’t expect to do any additional drilling for the balance of this year. We do have a very modest program of boots on the ground doing soils and stripping. And again, with in near mine locations, we have been very encouraged by what we have seen there. So, we will continue to do that for the balance of the year.

And again, the big focus, if you are looking at your slides on slide 10 gives you a long section or a side view of the Santoy Gap deposit, and you will see why we are so excited about what it can produce for us. On the right hand side, you have the Santoy 8 mine, which we are currently producing from. And then we have driven the ramp from Santoy 8 and again it’s parallel to the structure at Santoy Gap now and about 70 meters away. So, when we have completed the mine plan, we will turn that ramp hard left and crosscut the structure and start to develop.

The price there in the yellow is the indicated resource, 8.8 grams per ton to 281,000 we are just in the process of converting that into a reserve by adding both internal and external dilution to that number. So, the 8.8 grams is going to come down, but the reality is extremely wide structure. We would expect our operating costs per ton to be lower than normal and the grade to be good for us. And it’s also large between the indicated. And then third, you can see there we have well over 600,000 ounces there now. And then truth, the hybrid drill that we had the big wide one 18.8 grams over 14 meters is below in between Santoy 8 and Santoy Gap and well below. So, there is significant potential for us to expand the ounces in those envelopes. And we believe Santoy Gap will be a significant value driver for Seabee going forward maybe starting as early as the end of this year and certainly ramping up through 2014 and 2015.

Again, you can see on that slide, we suggested that we’ll be in sill muck in Q1, 2014 if things go well for us if possible that will get there before the end of the year, but again, we are not done. Stantec has not completely finished our mine planning there. We do again – we expect to start commercial production in 2014 at the end of the year ramping up to 600 to 700 tons a day. And I can tell you without Santoy Gap so far this year, we are averaging 770 tons per day out of Seabee and Santoy 8. So, we can get in a position, where we can add 600 or 700 tons a day to that profile. Our production is going up dramatically and our operating cost we would think would come down in a material fashion.

Just a quick note on the other two projects, the Amisk Gold Project, which is a Greenfield exploration project with nearly 1.6 million ounces. It’s an open-pittable project, big, big land package very, very prospective for us to expand on the ounces that are there, the 1.6 million ounces a year ago did warned up doing a preliminary economic assessment on the project. We have completed that or in the process of finalizing it and would expect to release it in the third quarter. At the moment, the project has minimal exploration activities on it.

Madsen, even nearer to some of your hearts, we finished our deep drilling project on Madsen last fall and started in the New Year an internal scoping study on the 1.3 million ounces of 9 grams that are on the project. That scoping study we completed and it was quite positive for us. And we are utilizing that as a driver of the strategic options that we are reviewing. We did say on the last conference call in response to a question that yes, we were interested in the monetizing that asset in one fashion or other whether it be joint venture or whatever, that process is underway and encouraging. At the moment, we have no further work plans on Madsen pending the outcome of our strategic review there.

Again, the 2013 outlook, in summary, we obviously have no choice, but to be financially disciplined and we can’t be. As a company, we have come through a couple of these markets before. I have been here 18 years now we came through a sub $300 million gold environment and have positive operating cash flow. And there has been few times over this last many years when our balance sheet was at a level that everybody else was comfortable with. I am confident that we will be able to manage or to put in place enough liquidity to develop Santoy Gap and to increase our production. And again we are reiterating our production forecast although we expect to be at the low end of it and unit operating costs we said on the slide are estimated to improve modestly. I think we have the potential to do better than the modest improvement there. And we have reduced our capital expenditures forecast over last year and we will continue to be disciplined there. On that note, I will stop and we can take questions if anybody has them. We are happy to deal with them.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Sam Crittenden with RBC Capital Markets. Your line is now open.

Sam Crittenden - RBC Capital Markets

Hi, good morning. I am just wondering if you could refresh us obviously you have seen some improvements in your costs and maybe you could give us and sorry if you put this in your disclosure somewhere and I missed it, but just your unit costs now for mining, milling, G&A, where you guys are currently at?

Neil McMillan

At the risk of getting bogged down in detail, our mining cost year-to-date landed up between Santoy Gap or Santoy 8 and Seabee are $154 a ton. Just looking for mine milling cost whether we break them out here in the sheet that drop out we have in there $28.16 a ton site services. I can go through them quickly for you, the cap is $5.94, site services $7.03, safety $2.93, electrical $4.01 for a total of $13.97, or site services admin $18.53, and then supply chain, IT, HR are modest numbers. So, where are we at $76.37 a ton I think at the moment, and that was our total mining costs. So, total cost per ton mill at $154.

Sam Crittenden - RBC Capital Markets

Okay, that makes sense. And then – but you still think you are working to improve value, you still think you could see a bit of an improvement from there?

Neil McMillan

Yes. I think we can. The guys have done such a great job already. I think there is some additional improvements to do. We are, for example, just to give you some idea how hard we are working at it. We are starting a test top right now using a different mining method that if it works it could have a really dramatic impact on our development and operating costs. So, it’s too soon to know where it will end up there. I think we will have a better idea by the end of September whether it’s going to be effective. So, we have some potential there. The improvements we have made in productivity on the development, I think there is some potential to broaden that benefit outside of the Seabee mine.

The biggest driver for us though Sam is not so much on our per ton cost is grade and we are optimistic about our grade continuing to improve and that really drives our per ounce cost down. So, when we are looking at $875 an ounce that’s not done off of a robust quarter from a grade point of view. So, I think there is lots of potential for us firstly to become even more productive on our direct operating cost. And with improvements to grade, I am optimistic that our cash operating cost per ounce can come down as well.

Sam Crittenden - RBC Capital Markets

And I know you are getting in the L62 that should have some better grades, have you made any other changes consciously to your mine plan recently to try to tweak up the grades, I think your rethought things is based on the current gold price?

Neil McMillan

Peter, you can answer that one. Peter Longo, our VP of Mining.

Peter Longo

Yes, there have been due to the drastic reduction in gold price we have modified our mine plan to a certain degree to not mine self economic ore. Outside of that, we have done a complete review of our operating procedures and practices in terms of grade control. We come up with a few recommendations that should help improve it incrementally, but overall things seem to be functioning reasonably well.

Sam Crittenden - RBC Capital Markets

Okay. And then another question on Santoy Gap, what kind of capital number would need to be required from now until you get into production in middle of next year?

Neil McMillan

We don’t have that final number yet, Sam, because we are just in the process of finalizing the mine plan. But I can tell you in our life of mine plan, we typically had Seabee run about $20 million in development expenditures annually that’s driving tunnels and treasuries etcetera and another roughly $10 million in sustaining capital to do upgrades to the mill replaced equipment etcetera so a total of $30 million quite frankly at the moment, we expect to be able to bring Santoy Gap into production without an overall change to those numbers. There maybe some shifting we have obviously (indiscernible) drive and things like that that are incremental at Santoy Gap, but it’s not very much I think peak what is about $5 million or $6 million, that’s specifically will be dedicated to Santoy Gap on those kinds of things. That’s the nature of the change. We’re close to it now. So, on some respects it’s no different than if we had a very, very large new ore body only 70 meters away from where we are mining underground at Seabee, where that closed to it and there is nothing special to do there. We are looking given the width to the ore body and these are the things we’re trying to finalize we may have to use transverse mining method on part of that, that may change the amount of development we have to do. But in our mine plan going forward including Santoy Gap, we are looking at roughly $16 million to $20 million a year of development and $7 million to $10 million year in sustaining and that’s for the slight there is a whole. So, this a very little additional capital we can have a dramatic impact on our production profile.

Sam Crittenden - RBC Capital Markets

Okay. And then the extra I guess you need to ramp it at a little bit further is that offset any cost benefits you might get from a more bulk mining method or would you actually see some what the unit cost at Santoy Gap be less than near cost at Santoy or Seabee just because of the bulk of the more bulk mining method.

Neil McMillan

I’ll Peter respond to that one.

Peter Longo

Obviously, Sam, there will be more development, further transverse area in the gap, but that will be more than offset by the reduction in increased production profile out of that transverse zone, but the transverse own is probably accounts for 40% of the ounces in that August, the remaining is launched (indiscernible) so that increased development would apply throughout.

Sam Crittenden - RBC Capital Markets

Okay. And then just one last one you mentioned you are looking at external funding for the 2014 winter resupply, any thoughts on what that might look like is it depend on may be if you could spell some of your ancillary assets.

Neil McMillan

Yeah, I mean the number at the moment is $10 million to $15 million to be comfortable going into the winter read supply and again that includes all the work will be doing on Santoy Gap this year. We have a variety of ways to do that. We have talked about the possibility of monetizing the Madsen asset because there has been interest in that. We would expect that would satisfy and itself that should satisfy that we were able to do that. Again there are a variety of things we can do, we haven’t ruled any of them out.

Sam Crittenden - RBC Capital Markets

Okay, thanks guys, I appreciate the call.

Operator

Your next question comes from the line of Paolo Lostritto with National Bank. Your line is now open.

Paolo Lostritto – National Bank

Good morning, guys.

Neil McMillan

Good morning

Paolo Lostritto – National Bank

So just a quick question, none of you touched on this all, with regard to this scope and opportunity of the change in mine method that you guys are doing the testing on or give a sense of what your cost productions could look like, I mean, I recognized that still inflects, but just an order of magnitude.

Peter Longo

Tough question, Paolo, it’s Peter Longo here. We certainly looked at it the mining method is being used in other operations in Northern Ontario. So, we get a sense from mix from their operations and it’s certainly very attractive and encouraging to us. But at this point, I don’t want to forecast what that impact would be. The largest would definitely be our development meters required.

Paolo Lostritto – National Bank

Right.

Peter Longo

So, again, we reduce some help on dilution reduction, but it’s too early to kind of forecast the success that we have.

Paolo Lostritto – National Bank

Okay and during the quarter, how representative of the cost that you did record during the quarter, how representative that is going on a go forward basis.

Neil McMillan

I think the cost that we are seeing first and second quarter of this year are sustainable in the long-term, where we cut our personal on site by about 10% as we’ve increased our production from last year 3% to 4%. So, we are doing quite well. We are continuing to push on our suppliers and getting better prices on materials and labor pressure is in the province that reduced so, I see no reason why the changes – the successes we are having so far are not.

Paolo Lostritto – National Bank

Okay, thank you.

Operator

Your next question comes from the line of John Tumazos with John Tumazos Very Independent Research. Your line is now open.

John Tumazos - John Tumazos Very Independent Research

Good morning.

Neil McMillan

Hi, John.

John Tumazos – John Tumazos Very Independent Research

What would be implication of postponing some of your spending, non-increasing production is quickly as you scheduled and possibly not doing an external funding for the seasonal borrowing for the winter road and of course not counting on any monetization of Madsen or Amisk because it’s tough time to other people too?

Neil McMillan

We reviewed that some area, John obviously the challenge for us I think if we didn’t have to do a (indiscernible) every year that scenario is one that we would – could spend more time along, but the reality is…

John Tumazos – John Tumazos Very Independent Research

I am assuming to do it, but you just paid for it from here (indiscernible) borrowing.

Neil McMillan

Yes, again we – our concern is twofold. One is that really tight from a liquidity point of view going into the winter resupply and it has the potential to disrupt the development of Santoy Gap which to us is really important. The other side of it is we do have our bank, Canadian Western Bank and our new finance partners, Crown Life that we have to make sure whatever we do, we are doing in best interest from our ability to continue to make our payments which we do without fail and mild concern when looking at that scenario was we cut back on what we plan to do it take things that up. So, we have look at John and it’s possible I mean if there are alternatives from a financing point of view we may be end of that plan of necessity, we have to do that before but at the moment.

John Tumazos – John Tumazos Very Independent Research

I don’t understand I’m not spending money hidden things up.

Neil McMillan

Because we can’t.

John Tumazos – John Tumazos Very Independent Research

Are you employing that if you steady stated, the 40,000 50,000 as output range without going into the Santoy Gap that the order parts of the mine are going to have great decline so unfavorable geometries and won’t generate cash well.

Neil McMillan

I think we can definitely assume working for the time being. We can continue to manage out of the Seabee and Santoy 8, but again given the very little expenditures additional expenditure that’s required at Santoy Gap and the near-term production increase, we think that’s the best scenario to pursue and again I don’t discount it if we cut back in our expenditure to Seabee now production will go down, might take three months or six months, but if we cut back going into winter resupply and what we spend our money on I assure you our production for full year 2014 will go down and that’s what we are balancing against the expenditure to not only maintain it, but to expand it. So, it’s definitely it’s a legitimate question John it’s a tough one and we do review those, but reality is our view at the moment is to spend both the same amount of money in 2014 that we spend this year, which is substantially less than we spend last year and do that and see our production go up. We haven’t done a forecast for 2014 production yet, but my expectation is spending the same amount of money in 2014 as we do this year, we will see us have a significant increase in production. So, it’s just balancing the two out. The other problem is if you cut back further we start to get behind the 8-ball both on development and on equipment. And it’s a hole that becomes harder to crawl out. So, again legitimate question at the moment if we can realize some benefits to the company from additional financing we are going to see what we can do there, haven’t ruled it out but at the moment we are that’s not the path we are pursuing.

John Tumazos – John Tumazos Very Independent Research

We will penetrate underground mines laid off development crews Hollister (indiscernible) and etcetera, we are really making a counterproductive action?

Neil McMillan

Could you really cut back on development three months later our production will go – start to go down and then that’s not a scenario we would like to get into. We have some really good years in front of us based on where we are at today and to defer that benefit in 2014 by not funding to the same level that we are accustomed to I think it would become productive from not only a value build I think it strains our relationship with our financiers so.

John Tumazos – John Tumazos Very Independent Research

Thank you.

Operator

Your next question comes from the line of (indiscernible), Stakeholder. Your line is now open.

Unidentified Analyst

Yeah, my question is do you expect the ore from Santoy, excuse me. You expect the ore from Santoy Gap to replace what you are getting from Santoy 8?

Neil McMillan

At the moment, the answer is no. The Santoy department has a lot of ounces left in front of it that are economic, we will continue to produce those ounces. Santoy Gap ore at the moment is completely incremental to what we are doing at Seabee and Santoy 8. The challenge for us at the moment is if we continue to produce 750 to 850 tons a day out of Seabee and Santoy 8, our mill is only cable of producing – processing at 1050 tons a day. You heard me suggest that the early indications out of the Santoy Gap maybe able to produce 600 to 700 tons a day and that would put us in the range of 1300 to 1400 tons a day of available ore in a mill that is only capable of only processing a 1050. So, if we don’t expand the mill and at the moment we have no plans to do that in 2014, then as the Santoy Gap ore comes in we may very well cut back on feedstock from other parts of the mine. And if gold prices that’s where they are today, clearly we will be dropping off stocks that are lower grade, we will be pursuing our higher margin areas. I would think Santoy Gap would be at the front of that list. If in fact the gold prices come back up as I expect they will then we would expect to be in a position to make a decision to start to expand the mill. You can do that incrementally and again not for very much capital. It’s probably going to take us at least two years to get Santoy Gap up to full production of 600 or 700 tons a day. And on that basis we have time to do that transition either to expand the mill if it’s warranted or to make a transition from a development stay at a 1000 tons a day, but mine at higher grade.

Unidentified Analyst

Okay, thanks very much.

Operator

(Operator Instructions) Your next question comes from the line of Chris Campbell, National Investor. Your line is now open.

Chris Campbell - National Investor

Hey Neil, to the extent you guys maybe required to draw off from either Canadian Western or Crown to what extent will they require you to sell any production forward or beyond that particular issue have you thought about the necessity or need to do that.

Neil McMillan

We are not assuming that we are going to expand our facilities with Canadian Western or Crown, between the two of them we have $50 million in available financing, we have not drawn it all down, but there are no conditions at the moment about forward selling. So, that’s the first issue. We wouldn’t expect that to be a condition, it’s not a condition in our credit facility. Going forward, I mean, I think everybody’s attitude towards hedging has changed in some respects, I wish that our financiers have been straitened with us, enforced us to hedge with $1750 gold. But we haven’t – we don’t rule out the possibility of doing some hedging. We used to do a bit of it up to one fiscal quarter’s production which would be 12,000 to 15000 ounces. We would do that to manage cash flow I can tell you is the price of gold builds back to 1750 my own view is that will be revisiting that strategy and possibly becoming more aggressive on locking in our budgets as we’re going forward. But again its academic at the moment I’ve know interest in hedging at breakeven or a loss. So we are not there yet.

Chris Campbell - National Investor

Okay. Well that’s good to hear. You talked about the – you are it’s going to be doing the test of using different mining method, is the mining method that you have used in the reason past responsible for the grades having come down from 7 or 8 grams that they ir historically were the little over 5?

Neil McMillan

Wide variety of reasons why that would have happen Chris. It’s a great question because in the upper levels of the mine where the ground pressures were last we used shrink mine which is handheld drills on the narrow vein stokes and that some suggestion that you can control external dilution barrier as we got deeper particularly below (technical difficulty) Seabee. The ground conditions made it difficult for us to continue to shrink mine we did transition into long-haul mining which you run the risk of having higher dilution.

I’m impressed with the job our guys have done in that respect. So, the biggest decision our changes that reduce the grade some of that might be related to the mining method or way. I don’t think that’s the biggest one, it’s the function of the economics and that where before $600 gold we needed 8 grams stokes before we could mine them economically. Today, in the past we’ve been quite economic over 3.5 or 4 grams. So, we intentionally changed our mine plan and access those stokes because they are profitable.

Chris Campbell - National Investor

Translate this to the Seabee (indiscernible).

Neil McMillan

And the other one as Brian Skanderbeg pointed out our Santoy 8 ore body is inherently lower grade than Seabee was, Seabee average 7.4 grams life of mine. Santoy 8 is about 4.5 grams although much wider, so it’s key for mine, so the economics were great. But we are now our feedstock is split nearly 50-50 between Santoy 8 and some Seabee. So that’s the probably been the biggest contributor to the great reduction.

Chris Campbell - National Investor

Okay, alright. I am glad for that clarification because I was a little bit confused on that. One more question if I might as far as Madsen is concerned. I don’t remember you would have to refresh my memory when it was, but I know it’s been several years now. But last year you had spend some money and done some drilling and was it third decision that they were to stretch they’re getting ready to put themselves up for sale. What was the official reason in the end why they didn’t follow through several years back?

Rick Johnson

They have an option agreement that was about to expire they wanted to extend it and we could not reach mutually agreed upon terms to the extension. So, in effect we force them out of that transaction.

Chris Campbell - National Investor

Okay, I couldn’t remember. And so I’m seaming the here is that given the environment right now for both the gold marketing and financing that Madsen perhaps more than Amisk is considered expendable?

Neil McMillan

Well, it’s much an issue of where the demand is. The reality is we have a positive scoping study on Madsen and putting it in production and etcetera. There is a significant amount of capital that would be required to do that and it’s unrealistic for us to considered doing it ourselves.

Chris Campbell - National Investor

Sure.

Neil McMillan

Well, what we said to people is we are interested in partners to try and unlock the value in that asset. We don’t know what form that might take whether it would be a joint venture to earnings somebody to spend, somebody to buy an outright interest in it, or somebody to offer to buy the entire asset, or combination of cash and shares. Those are all options that are in front of us now. And that’s the reason we are doing it. Amisk is an open pit project in relatively low grade. It’s about 0.85 grams per ton at $1750 gold. There was a lot of interest around the world in projects like that. And Amisk is a legitimate contender in that gold environment. And that these prices there it doesn’t seem to be much interest in projects like that aside from what new gold is purchased at Rainy River. So, our expectation is if we wanted to entertain opportunities to monetize one of those two assets, Madsen is the one that we are going to have the opportunity up.

Chris Campbell - National Investor

Right, okay. Thanks Neil.

Operator

Your next question comes from (Joseph Snider), Investor. Your line is now open.

Joseph Snider - Investor

Hi, guys. I was just wondering what factors led to your 10.8 million impairment charge and what assets were impaired?

Neil McMillan

Only the Seabee asset, and we did an impairment review on Madsen and Amisk and both of them are comfortably passed. Anytime, our market price drops below the book value in the company, it’s an accounting indication of impairment and we are forced to go through that reassessment. We did that at Seabee and the reasons for the impairment were combination of costs going forward, production going forward and gold price going forward. And so we look at that as a whole and say well, based particularly on these gold prices, that we will write the value of the asset down by $10.8 million. And I think it came down from about 100 some million in value. And it wasn’t a shattering change, it’s just a function of those three issues, your cost going forward, your revenue going forward, and your production.

Rick Johnson

Yes, I think Neil too it’s from December 31, 2012 our average gold price long-term didn’t change, but the short-term price changed by over $100 an ounce.

Neil McMillan

And that’s exactly what happened. When we are building in the – we do a mine plan in net present value audit, the early years with the big change in gold price brought the value of the overall asset down. But again, we are talking about $100 million plus asset in this gold environment. I think market cap of the company is $40 million or $50 million. I mean, it’s discouraging, but that was the change. There was nothing shattering there. If you look at the asset, you would say well, Seabee is 1200 meters deep, now we are mining there, our costs are higher there, and while the grade might be slightly higher is that where the adjustment takes place. We look at it as one cash generating unit and overall it required modest change to the dealership value.

Joseph Snider - Investor

Alright. And how much did you invest in expanding your operations this quarter, yes for like the Santoy Gap, I guess those expenses?

Neil McMillan

The only money we spent on Santoy Gap is to continue driving the ramp very well the ore body firstly. Second, we setup a drill chamber at when we first talk parallel to it and we started to drill off the front end of that Santoy Gap ore body that we are drilling costs there. And then we contracted Stantec engineering to come in. We did that in the first quarter to come in and start to work with us on developing the mine plan. So, there were some costs there, in total fee $1 million in the first two quarters of the year.

Joseph Snider - Investor

So, when do you expect that those expansions will be ready to run?

Neil McMillan

Well, again at the moment the final report from Stantec, our mine plan in the next few weeks. We are continuing to drive the ramp. Our expectation now is that we will be cross-cutting off that ramp through the Santoy Gap ore body, certainly in the fourth quarter possibly as early as the third quarter. I don’t know once we have crosscut that ore body, we have the potential to turn and start to still mock down that structure. And we could have been doing that earlier, but we run the risk of sterilizing some of the ore body if we put that still in the wrong place. So, we were very careful about making sure that the planning on Santoy Gap was done in the best fashion, but we could be milling ore from a Santoy Gap sill by the end of the year if everything goes well, it doesn’t mean whole production, we need two sales and then we need to develop start to mine that. We don’t expect we think the development of those two sales will take us through 2014. We actually get lot of help from the sill muck that can come out of that, a scenario like that. It’s we are developing in ore. And we can get reasonable feedback from that, but we don’t expect to have it ready for full production in muck until the end of 2014.

Joseph Snider - Investor

Alright, thank you.

Operator

There are no further questions at this time. Mr. McMillan, I turn the call back over to you.

Neil McMillan - President and Chief Executive Officer

Well, thank you everybody for taking the time to sit in the call. We appreciate the interest that you have shown in our second quarter results and our company on an ongoing basis. We hope you continue to be interested. We are excited about – while we are challenged about the market we are in we are excited about what we have developing and we will keep you posted. Thanks again and we look forward to visiting for third quarter.

Operator

Thank you for your participation. This concludes today’s conference call. You may now disconnect.

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