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

Alamos Gold (NYSE:AGI)

Q3 2013 Earnings Call

October 31, 2013 12:00 pm ET

Executives

James R. Porter - Chief Financial Officer

John A. McCluskey - Chief Executive Officer, President, Director and Member of Technical & Sustainability Committee

Manley R. Guarducci - Chief Operating Officer and Vice President

Jason King Dunning - Vice President of Exploration

Analysts

Anita Soni - Crédit Suisse AG, Research Division

Jeff Killeen - CIBC World Markets Inc., Research Division

David Forster - BofA Merrill Lynch, Research Division

Rahul Paul - Canaccord Genuity, Research Division

Kerry Smith - Haywood Securities Inc., Research Division

Michael J. Gray - Macquarie Research

Operator

Good afternoon, I'll now turn the meeting over to Mr. Jamie Porter, Chief Financial Officer. Please go ahead.

James R. Porter

Thank you, operator. And thanks, everyone, for attending Alamos' Third Quarter 2013 Conference Call. In addition to myself, our presenters today are John McCluskey, President and Chief Executive Officer; Manley Guarducci, Vice President and Chief Operating Officer; and Jason Dunning, Vice President of Exploration. I would like to remind everyone that our presentation will be followed by a Q&A session.

Before we begin, please note this disclaimer concerning forward-looking statements. We refer all participants to our forward-looking statements and resources disclosure in our press release and MD&A and caution that mining and exploration is subject to a number of risks and uncertainties, particularly with respect to the mining and processing of ore, recovery rates, operating plans and the conversion of mineral resources, proven and probable reserves, to name a few.

There can be no assurance that forward-looking statements made in the press release and conference call, based on information on hand today, will prove to be accurate. Future results and events could differ materially from those anticipated in such statements and should not be relied upon. Also, please bear in mind that all the dollar amounts mentioned in this conference call are in United States dollars, unless otherwise noted.

Now John will provide you with an overview.

John A. McCluskey

Thank you, Jamie, and good afternoon, everyone. Hopefully, most of you have had a chance to review our third quarter results, which we issued this morning. We had another strong quarter at Mulatos. Production of 43,000 ounces of gold was consistent with our expectations, and total cash costs and all-in sustaining costs were in line with our full year guidance and remain among the lowest in the industry.

The significance of our low cost structure was once again evident as we continued to generate strong margins and operating cash flow in the quarter, despite a further decline in gold price. Our performance in the quarter again demonstrated that the best protection against a volatile and lower gold price environment is a low cost structure.

Our focus on productivity continues to pay dividends, as we set a new operational benchmark with record crusher throughput of 18,000 tonnes per day. This was above our annual guidance and a tremendous feat considering it occurred during the rainy season, which is traditionally our weakest quarter.

With year-to-date production of 151,000 ounces at total cash costs of $461 per ounce, we are well-positioned to meet our full year guidance of between 180,000 and 200,000 ounces at total cash costs of $500 to $520 per ounce. We made tremendous strides with respect to our development pipeline in the quarter, a pipeline I would point out that is made up of projects with similar low-cost characteristics to Mulatos. We completed the acquisitions of Esperanza Resources and Orsa Ventures, significantly enhancing our growth profile. Both projects are low capital intensity, low operation -- operating costs and low technical risk projects, that are aligned with our strategy of adding accretive low-cost ounces in politically safe jurisdictions.

In addition, we received EIA approval for our Kirazli project in Turkey, as well as the EIA approval for development of the San Carlos and El Victor deposits at Mulatos.

We finished the quarter with approximately $434 million in cash and short-term investments. And no debt, despite the outlay of over 400 -- $48 million in cash for the Esperanza and Orsa acquisitions.

We continue to generate strong operating cash flow and have leveraged our financial strength to build a leading growth profile. This puts us in an enviable position in the industry and gives us the ability to continue to pursue growth opportunities.

I would be remiss if I didn't discuss the tax changes recently approved by the Mexican government. The tax reform will have a negative impact on the mining industry in Mexico, and we are currently evaluating the specific impacts on our operations. In the weeks prior to the passing of the reform, the mining industry made a concerted effort to convince the government of the negative impacts that this would have on industry. Despite these efforts, it appears the reform will be approved as is, which is both disappointing and shortsighted.

Having said that, I will now turn the call over to Jamie Porter, our CFO, to comment on third quarter financial performance and to address the tax reform in Mexico in further detail. Jamie?

James R. Porter

Thank you, John. As John mentioned, Q3 gold production of 43,000 ounces was in line with our expectations. We sold 5,000 ounces more than we produced in the quarter and the 48,000 ounces of gold sales combined with continued low cash operating cost of $434 per ounce, translate into another quarter of strong operating cash flow. We managed to beat the average London PM Fix gold price by $3 an ounce in the quarter, with an average realized price of $1,329 per ounce for revenues of $64 million.

Year-to-date to the end of Q3, we've sold 156,000 ounces at an average realized gold price of $1,464 per ounce for revenues of $228.4 million.

From a cost perspective, we continue to meet our guidance. Cash operating costs of $434 per ounce, total cash costs of $491 per ounce and all-in sustaining costs of $810 per ounce, all met guidance. On a year-to-date basis, we're beating our cost guidance on all fronts.

Gold continued to trend lower in the third quarter, however, our cash flow remained strong with cash flow from operations before changes in non-cash working capital of $26.4 million or $0.21 per share.

If we exclude the cash we spent to acquire Esperanza and Orsa, our free cash flow would have been approximately $15 million, an excellent result for what is typically a seasonally weak quarter.

Earnings from the third quarter were $9.2 million or $0.07 per share. Earnings were impacted by a lower gold price, higher depreciation, as well as higher stock-based compensation expense.

Our balance sheet remains the strongest ever. Despite paying net cash of $48 million to complete the 2 acquisitions, we finished the quarter with $434 million in cash and we remain debt-free. Our current cash position, combined with cash flows from operations, provide us with the financial flexibility to fund our development pipeline internally.

Our financial strength is also reflected in our commitment to paying a dividend. Today, we paid our seventh consecutive semi-annual dividend for $12.7 million, bringing the total cash that we've returned to shareholders in the form of dividends to over $71 million, which coincidentally represents the amount the company raised to initially construct and build Mulatos.

I'd like to briefly discuss the Mexican Tax Reform which we understand was voted on and approved by Senate yesterday. By way of background, the President of Mexico presented his tax reform bill to Congress back on September 8, 2013. In mid-October, the Lower House of Congress passed the bill with certain modifications and the bill has now effectively received tentative approval and is expected to become law with an effective date of January 1, 2014.

The aspect of the tax reform that will have the highest impact on the mining industry is the 7.5% mining royalty calculated on earnings before interest, taxes, depreciation and amortization.

The 7.5% mining royalty is deductible for tax purposes. After tax and at current gold prices we estimate that this is equivalent to a 2.5% NSR, or royalty calculated on revenues. In addition to the 7.5% royalty, a 0.5% environmental fee calculated based on revenues will be charged. Again, this is tax deductible, resulting in a net 0.35% revenue royalty.

The changes to the tax reform are sweeping and virtually all taxpayers in Mexico will be affected. Planned corporate tax rate reductions have been repealed, additional withholding tax is imposed on dividend distributions and the flat tax system has been eliminated. Other specific changes that will impact the mining industry include the elimination of accelerated depreciation and the requirement to capitalize and amortize exploration costs.

We are reviewing the legislation as approved and evaluating a number of strategies to minimize the impact on our operations. With our recent acquisition of Esperanza and the elimination of the flat tax system, we have a number of tax planning opportunities newly available to us that we expect will be successful in minimizing the net cost of the tax reform.

At this point, I'll turn the call back to John.

John A. McCluskey

Thank you, Jamie. Alamos' COO, Manley Guarducci, will now discuss quarterly operating results. Manley?

Manley R. Guarducci

Thanks, John. Good afternoon, everybody. Overall, the Mulatos mine performed extremely well in the third quarter, with production consistent with our expectations. The total pressure throughput averaged a record 18,000 tonnes per day, marking the fourth consecutive quarter in which throughput exceeded the annual budget of 17,500 tonnes per day, and this occurred in what is traditionally our weakest quarter due to the onset of the rainy season.

The grade of the crushed ore and unreleased guidance in the third quarter of 0.99 grams a tonne was consistent with our full year guided grade of 0.98 grams a tonne. Grades milled from the Escondida high-grade zone of 6.73 grams per tonne were below the full year average budgeted grade of 11 grams a tonne. We adjusted the mine plan in order to access and collar the Escondida Deep portal earlier than previously planned. This required mining in a lower grade area and was just a mine sequencing issue. We have seen some grade variability from the Escondida high-grade zone in 2013. However, as we enter the final floors of production from the open pit, it is important to note that, since we commenced mining Escondida, the ore grade and -- the ore grade mined and milled of 10.5 grams per tonne has been close to the reserve grade.

The recovery ratio of 70% in the quarter, as we were impacted by rainfall which is typical at this time of year. On year-to-date basis, the recovery ratio of 74%, tracking in line with our full year budget of 75%. Overall, it has been a strong performance year-to-date, with production of 151,000 ounces, well above the 132,200 ounces of production at this point last year. As a result, we are well-positioned to meet our full year productions and cost guidance.

We are pleased to report that we received -- we recently received the EIA approval from Semarnat, allowing us to begin development of the San Carlos and El Victor deposits. As a result, activities in the quarter were focused on developing -- development of the ramps in these deposits.

Activities in Mexico will also focus on underground developments to access Escondida Deep ore. Development activities at the Escondida Deep portal were delayed during the quarter, as a result of the slope stability issue above the portal. However, with end of the rainy season, development work has resumed and we remain on schedule with the Escondida Deep zone expected to provide additional high-grade mill feed in the second quarter of 2014.

We expect to have sufficient high-grade open pit ore from Escondida to continue processing until the end of Q1 2014, at which point Escondida Deep will provide high-grade mill feed for an additional quarter based on current reserves until San Carlos has been developed.

In Turkey, having received the Kirazli EIA approval, our focus in the quarter was on additional permitting activities to obtain forestry and operating permits. Provided we obtain these permits by the end of the year, we expect initial production from Kirazli in the first half of 2015. Similarly, our Agi Dagi project continues to advance with the EIA now in the final stage of the approval process.

With the close of the Esperanza acquisition, our focus is now on compiling a more robust EIA report for resubmission, followed by construction decisions sometime in 2015.

During the quarter, I also had the opportunity to visit our newly acquired Quartz Mountain property in Oregon. In addition to the many positive attributes of the project, including excellent constructibility and infrastructure, good metallurgy and strong relations with the local community, I had the opportunity to meet government officials and came away even more convinced of the support for the project at the government level.

With that, I'll turn the call back to John.

John A. McCluskey

Thanks, Manley. Now we'll hear from Jason Dunning, Vice President of Exploration. Jason?

Jason King Dunning

Thank you, John. Good afternoon, everyone. Explorational spending in the third quarter totaled $4 million. This included $2.9 million in Mexico, which focused on completing infill and step-hole drilling at San Carlos, East Estrella, El Realito, and Puerto del Aire.

At our newly acquired Esperanza project, we spent approximately $0.7 million, primarily related to the collection of baseline study data in support of compiling a more robust EIA for resubmission. During this past quarter, our exploration team undertook a preliminary field evaluation of our newly acquired properties in southeastern Oregon, which has underscored the mineral potential of the host rocks for the Quartz Mountain deposit. Our technical team believes this project is a unique greenfield exploration project with district scale opportunities that does require additional work in the coming months and years.

To put this into context, our properties in southeastern Oregon are hosted in the same basin and range province that is host to the fifth largest gold province in the world, centered in Nevada. Given the predominant historical focus on Nevada, the favorable geological framework in Oregon has truly not seen modern exploration techniques, and our team is excited to start exploration in the near future. Truly, we believe Oregon to be terra incognita, undiscovered country. The initial steps for exploration in Oregon are confirmatory drilling in advance of a broader exploration program planned for 2014.

We are also in the process of compiling a recent drilling update and will be providing a more complete update on exploration activities in both Mexico and Turkey in the coming weeks.

With that, I'll turn the call back to John.

John A. McCluskey

Thank you, Jason. That concludes the formal presentation. I'll now turn the call over to the operator and we'll open the call for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Anita Soni from Crédit Suisse.

Anita Soni - Crédit Suisse AG, Research Division

Manley, could you just go over again the sequencing of the ore at Mulatos? So Escondida, deep zone will start in which quarter and run through, to the end of Q1, is it?

Manley R. Guarducci

Hi Anita, I'm going to give some more clarity on this. Originally, the Escondida underground was to be mined with a portal location at the bottom of the pit, okay? That means you'd to mine the whole -- all the ore in the pit. What we did is we drilled down a few benches in one end of the pit, so we could establish the collar now instead of later. Now that's the whole reason for the out of sequence that we're talking about. That allows us to have it developed and ready to produce in Q1.

John A. McCluskey

But just to -- just to address your question there more specifically, Anita, I think I know what you're getting at. Currently, the open pit ore from Escondida will take us through to the end of Q1. And based on the known reserves at what we call Escondida Deep, in other words, what we have to access through the portal, that will take us to the end of Q2 based on what we know at the moment. What we're hoping and expecting is that we'll extend that as late as Q3, by the time we get underground and get proper setup so that we can drill into areas where we suspect that deeper ore extends into. And what gives us some confidence that we're going to have some success there is that we have managed to hit into some high-grade, from drill setups that we put in from the so-called gap zone that drilled down and hit high-grade. And that would reflect further extensions of the higher grade material into that gap zone. It's just that we don't have enough drilling data to hang our hat on it just now, but it looks pretty good. And once we get underground and get a better angle on which to set up and do the drilling, we think we're going to be able to extend that underground operation for at least 1 more quarter and probably 2.

Anita Soni - Crédit Suisse AG, Research Division

Okay. And then I guess, just a couple more questions on that. The beginning of the Escondida Deep, will that start at the end -- within, I guess, early in 2014? Or is it just Q2 and potentially into Q3?

John A. McCluskey

It's scheduled to start up at the beginning of Q2. So...

Anita Soni - Crédit Suisse AG, Research Division

[indiscernible] quarter assumption.

John A. McCluskey

Yes. So we'll have one more quarter of open pit mining. And then we'll just seamlessly transition into sourcing the ore from the underground.

Anita Soni - Crédit Suisse AG, Research Division

Okay. And then could you just please remind me again, what the Escondida Deep grades were, as part of the reserve calculation?

Manley R. Guarducci

About 8 grams a tonne, Anita.

John A. McCluskey

Yes. It's worth noting that there's really no difference between the material we've been mining open pit and what we're going to be mining from underground inside the portal, except to say that the area that's being mined in the open pit was much better drilled. As you get further into the hill -- as the topography went against us as you get further into the hill, it was much more difficult to drill that area. And so I would say, as much as anything else, the lack of drill density probably has an influence on that grade profile.

Anita Soni - Crédit Suisse AG, Research Division

Okay. Actually one more question. As in modeling the -- in underground, could you give us an idea of what underground mining costs per tonne would cost? And does that 8 gram per tonne material include dilution, mining dilution?

Manley R. Guarducci

The 8 grams a tonne does not include the mining dilution, Anita. And we're in the process of doing the budgets, so we don't have an actuary cost structure right now.

Anita Soni - Crédit Suisse AG, Research Division

All right. Do you have a plan on the mining method that you're going to use?

James R. Porter

Yes. It'll be long-holed scoping, Anita. It'll be mechanized.

Operator

And the following question is from Jeff Killeen from CIBC.

Jeff Killeen - CIBC World Markets Inc., Research Division

Just to start off with Escondida specifically, just wondering what your feeling is for the grade response in Q4, given what we've seen here in Q3? Would we expect to see that come back up towards the reserve grade?

John A. McCluskey

We have no reason to believe that the reserve grade won't be achieved. As I mentioned in my discussion, we're averaging -- like, what we've mined today reconciles very well with the model so far. So we believe that to continue.

Jeff Killeen - CIBC World Markets Inc., Research Division

Okay. And then on the transition as Escondida Deep and Escondida deplete going down to San Carlos, do you think that, that's going to be fairly seamless in terms of production rate and grades? Or do you think there's going to be a ramp up period there, as San Carlos comes online?

John A. McCluskey

I think it should be fairly seamless, because we do have quite a bit of time to get into San Carlos, and Escondida Deep is a nice, small little project to get everybody trained up and familiar with underground.

Jeff Killeen - CIBC World Markets Inc., Research Division

Okay great. And now with looking towards Turkey, obviously still early. But do you think you have an idea for what capital spending might look like in country for next year?

John A. McCluskey

We're just working on the budgets right now. We usually release that right at the end of the year, or January of next year. We're in the process of working on all of that. Of course, it's been disclosed, it's -- what the cost of the Kirazli development will be, and I think that number is roughly $160 million. And that's all part of our current disclosure. Just how much of that we get to spend next year is completely dependent upon when we receive the permits to go ahead and start breaking ground. Even if we were to get them late December, early new year, it's our intention now to start breaking ground in the spring when we can take advantage of the best weather.

Jeff Killeen - CIBC World Markets Inc., Research Division

Okay, great. And sorry, one last question, coming back to Mulatos. Just looking at potential grades from San Carlos, is there any expectation there for what the actual mine grades might look like?

James R. Porter

Right now, it's reported at about 5 grams. And we have 3 years of reserves there from the underground.

Operator

The following question is from Dave Forster from Merrill Lynch.

David Forster - BofA Merrill Lynch, Research Division

I was just looking at the mining costs per tonne of ore seem to have dropped over the past couple of quarters to around $340 to $350 per tonne. And previous to that, it seemed like it was more in the $400 to $450 range. Can you talk about what the drivers have been and if you expect that to continue?

Manley R. Guarducci

A little bit of it is the strip ratio and then the additional tonnes, like moving a lot of tonnes, meeting our crusher throughput and everything has an effect because your direct -- your fixed costs, obviously lower the denominator, right? So I mean, we've been tracking very good with the mining costs. I don't see any reason to see any increases or significant decreases for that back [ph].

David Forster - BofA Merrill Lynch, Research Division

Okay. And on -- so for the quarter, it dropped a bit to the 6.76 for the higher grade ore. What are you seeing so far in October?

Manley R. Guarducci

Sorry, what? I didn't catch that.

David Forster - BofA Merrill Lynch, Research Division

The higher grade ore had dropped to 6.76 grams per tonne, or 6.73 for the quarter. And I was just wondering what kind of grades you've seen for the higher grade ores, so far, in October?

Manley R. Guarducci

So far in October, we're still mining the stockpile. What we did to establish the Escondida Deep portal, as I mentioned before, we mined out of sequence, so we were out of plan. We mined a lower grade material and we stockpiled all of that material in order to get down and be able to collar the portal. We're still going through those stockpiles right now. So we're not mining where we expected to mine at this point in time. Nor, can we reconcile, because in order to reconcile the actual grade mined and milled, we have to use back calculated head out of the mill, and until we finish the stockpiles, we won't have that number.

John A. McCluskey

Here's another thing I would say, just as a word of caution. The best number we give you is the reference Manley makes to the way the grade mined reconciles with the model over time. So for example, between the time we started mining and now, it's averaged 10.4 grams. That's a much more meaningful -- that's a much more meaningful number than say, what we did over a couple of weeks or a month. Because at 500 tonnes a day in a nuggety deposit with a lot of grade variation, you can -- I can give you a very misleading answer there. But it happened to be very high over the last couple of weeks, and I said, well, it's 19 grams, that just wouldn't be fair; anymore than if I said it was 5 grams, that wouldn't be fair either. The best way to look at it is over enough quarters of production to make it a relevant number.

Operator

The following question from Rahul Paul from Canaccord Genuity.

Rahul Paul - Canaccord Genuity, Research Division

What were the reasons for the strong crusher throughput in Q3? Going forward, should we still expect weakness given the rainy reason? Or have you done something to prevent that from happening?

Manley R. Guarducci

Rahul, it's Manley. The rainy season was a very average rainy season. I think that was one factor. That, and all the changes that we did last year. If you recall, we've upgraded a lot of screens and set the system up so we can feed the 3 tertiaries in parallel. I think that was the biggest difference. We've been able to hold it through a rainy season, and I don't see any reason why we can't do that again. Granted, if you end up with one of those extreme, extreme rainy seasons, who knows what can happen, but it looks pretty good.

Rahul Paul - Canaccord Genuity, Research Division

Okay, great. And then just moving on to Turkey. At this stage, are you seeing any indications of capital cost inflation? And is there anything you can or are doing to mitigate that risk?

Manley R. Guarducci

No, right now everything looks in line with what we forecasted in the PFS. We got some of the quotes back for the EPCM or the EP portion of it and they're actually very much in line with what we expected. No surprises there.

Rahul Paul - Canaccord Genuity, Research Division

Okay. And can -- and is there anything that you plan to do to mitigate that risk, I mean to prevent that from happening during the construction phase?

Manley R. Guarducci

Well, there's -- I don't really see a risk, but I see improvements to be had, and that's bringing the Turkish content, doing a lot more work in Turkey with the local people and the engineers there instead of doing it in Americas, let's say. I think that's where there's opportunity.

Rahul Paul - Canaccord Genuity, Research Division

Okay. And then last question back with Mulatos. We've seen the fluctuation that's created from Escondida. I'm just wondering to what extent should we expect some of the same issues when you move to San Carlos?

Manley R. Guarducci

With respect to San Carlos, we know that the ores are all variable. Estrella is a good example of that. It varies, we have 5 different ore types. It's variable. We know San Carlos is going to be variable. Escondida has been variable. We have our good months and we have our not-so-good months. The key thing here is that after you average everything out, we get what we want. And our historical reconciliations well shows. I mean now over the life of the project, we got 10% more ounces than modeled. And for the quarter, I think it was 5% more ounces for the quarter. So, as long as you keep getting those positive reconciliations, I think we can deal with the variability issue.

Operator

[Operator Instructions] The following question is from Kerry Smith from Haywood Securities.

Kerry Smith - Haywood Securities Inc., Research Division

Jamie, the sustaining CapEx for the 9 months is slightly north of $13 million so far this year. But there's a bunch of component changes and stuff in there. I'm just wondering what would be a good sustaining CapEx number to use on a go-forward basis as kind of an average.

James R. Porter

$10 million to $15 million, Kerry, is a good range to use.

Kerry Smith - Haywood Securities Inc., Research Division

Okay, okay. And you've spent so far $3.5 million on San Carlos. Can you just remind me what the total cost is to develop that San Carlos and Victor area?

Manley R. Guarducci

I can't remember off the top of my head, Kerry, the development costs for San Carlos.

John A. McCluskey

Yes, I think -- I believe the total budget is $14 million, but it's split over this year and next. So we've spent, in total between San Carlos and El Victor, just over $5 million here to-date. We'll get up to over $13 million by the time we're all said and done, middle of next year.

Kerry Smith - Haywood Securities Inc., Research Division

So -- sorry, you cut off a bit. But it's $13 million over 2013 and '14, is that right?

John A. McCluskey

Correct. We'll provide an update of the remaining development capital when we release our budget in early January, Kerry, so that's the best bet. But it'll likely be $6 million to $8 million left over.

Kerry Smith - Haywood Securities Inc., Research Division

Yes, for next year, like, in 2014. Okay. And then how confident are you in -- you made the comment about if you get the forestry and the operating permits in Turkey by year-end, that you would be in production in the first half of 2015. So given that it's November 1, let's say, and I'm assuming the government doesn't do that much once you get into December, are you fairly confident that in 30 days, you could have those permits in hand?

John A. McCluskey

Well, it's first worth noting that they do not have a Christmas season in Turkey, of course, it's a Muslim country. So they've just come through their big holiday season, in fact. It's called by Bairam and they just -- they finished that last month. And there's a difficulty on our side to respond to a question like that because we just don't get any feedback from Turkey. About the only feedback we've been able to obtain through the Turkish Embassy here in Ottawa is that the delays that we're experiencing are pretty normal for Turkey. And that's about all they can say. I mean, all the rest of it is not that helpful. So there's nothing specific about our project that's holding it up. I mean, the EIA approval was really the significant breakthrough. And if you can imagine, Forestry participated in the EIA process. I mean, the whole forest disturbance is all covered out under the EIA. So the review is effectively done. What we're dealing with is bureaucracy. And despite our efforts in trying to get more accurate guidance as to when we can expect the permit, we really haven't received it.

Manley R. Guarducci

Kerry, just to add to that. As John mentioned during his discussion previously, because it's wintertime there and it's going to be raining and snowing, we even have January, February, a little bit of leeway there, because construction wouldn't start til likely March or April, and under perfect scenario. Okay?

Kerry Smith - Haywood Securities Inc., Research Division

Right, okay, okay. And then, Manley, will there be a gap between the end of the Escondida Deeps and when San Carlos starts? Or is the intention that one would dovetail into the other?

Manley R. Guarducci

The intention is that one would dovetail right into the other, Kerry.

Kerry Smith - Haywood Securities Inc., Research Division

Okay, so you just carry on. And then the great ...

Manley R. Guarducci

It's very, very small development requirements. It's not a big, big, long tunnel, okay?

Kerry Smith - Haywood Securities Inc., Research Division

Right, right. And the leach grade in Q3 was lower, was it actually a lower grade area within the blocked model? Because like I think in Q1 it was like 1.2 grams or something. And then it was sort of 1 gram this quarter. I'm just wondering what Q4 might look like.

Manley R. Guarducci

Kerry, Q3 was budgeted with a slightly lower grade, it was in a lower grade area of the pits. And like we mentioned in the reconciliation, we ended up with more tonnes at a slightly lower grade for a net positive ounce variation. Okay? So, I can't recall -- I can't remember, we -- I don't think we break it out by the quarter. But I don't expect any big differences going into Q4.

Kerry Smith - Haywood Securities Inc., Research Division

From Q3, like, okay. And then just maybe lastly, Manley, what is the status on the permitting for La Yaqui and Cerro Pelon these days?

Manley R. Guarducci

I can finally say that now, we're well underway through the legal route, Kerry, which is a forced temporary occupation. And that's been filed and that's in process. They tell us between 6 and 12 months to get that finalized. So now that that's filed and formalized, we are going to reach out to the landowners and try negotiating one more time. But that legal process isn't going to stop. It's going to continue.

Kerry Smith - Haywood Securities Inc., Research Division

So did that start this quarter then? And if you assume the worst case, 12 months from now, you would have gone through that expropriation process then? [indiscernible]

Manley R. Guarducci

Yes, it did start this quarter. We got all that paperwork filed this quarter, Kerry.

Kerry Smith - Haywood Securities Inc., Research Division

Okay. Great. And then just lastly, I don't know, John or maybe Jason, can somebody give me some flavor and some color on how the permitting system works in Oregon?

John A. McCluskey

Go ahead, Jason.

Jason King Dunning

The permitting system in Oregon is a little bit different than most of your positions, but it's actually well scripted. Prior to even exploration work being done, there is a requirement for some environmental work to be in place and sort of allows the company to put its best foot forward in mitigative measures. So depending upon the level of disturbance of that program, basically backtracking through the amount of work, that's guiding us on how much environmental work has to be done. Once that environmental work has been done and submitted to the State regulatory bodies, you then enter a permitting timeline that is set forward in the legislation. And it is attainable. So we are actually in the middle of doing that now, for a small program. And the Oregon State officials are very supportive and are working with us closely to ensure that we move through the system.

John A. McCluskey

I'd say, what sets Oregon apart, Kerry, is that they set up a kind of an umbrella body, they refer to it by an acronym called DOGAMI. And effectively what they've tried to do is harmonize the requests that a company would get from the various government jurisdictions. So for example, federal, state, local, those regulations have all been essentially pulled together so that it -- rather than go through the 3 different bodies and have 3 different processes in place, you just go to DOGAMI and they essentially handle everything from the one, say, wicket. And that makes it much more efficient from our side. And frankly, I think it makes it easier from their side as well, to monitor and regulate what we're doing. So I think Oregon has made a pretty interesting and effective step forward in terms of how to permit and regulate our activity and make life easier for us.

Operator

The following question is from Michael Gray from Macquarie Capital.

Michael J. Gray - Macquarie Research

Three. First of all, year-to-date total cash costs are $461 million, and guidance is $500 million to $520 million. Can we -- are we expecting something negative in fourth quarter? Or can we expect you guys to beat guidance?

John A. McCluskey

No, I think looking into Q4, it's obviously all dependent on grade. And as Manley mentioned, the grades came down a bit in the third quarter. But you're right on, though, provided costs are similar in Q4 as they were in Q3, we should be able to beat our annual guidance.

Michael J. Gray - Macquarie Research

Okay. And maybe Jason, on Quartz Mountain, this is being portrayed as a bit of a sleeper in the portfolio, vis-à-vis that district scale opportunity there. Can you elaborate on the Nevada-type geology in terms of the deposit environment? So are they volcanic-hosted, sediment-hosted?

Jason King Dunning

Mike, good question. The deposits at Quartz Mountain and in that district are volcanic-hosted, associated with rhyolite zones. They appear to be stacked as part of a caldera belt. Typically, the mineralization is more akin to that which you'd normally see in a hot spring -- hot spring-related type thermal environment. But again, there are other examples within Oregon, as well as within Nevada. And again, these trends go right from northwest -- northwestern Nevada right into southeastern Oregon. And again, we've seen a number of examples on our property where literally, there's lots of opportunities that unfortunately, just has never been fully assessed.

Michael J. Gray - Macquarie Research

Okay. And John, final question on M&A acquisition criteria, which you personally laid out at the beginning of the call. Any change in criteria with the Mexico tax reforms? Or state of the market for the juniors?

John A. McCluskey

Well, I think you've seen Alamos diversify away from Mexico over quite a period of time. It goes back to late 2009, early 2010, when we started to look at Turkey and when we finally closed our first acquisition in Turkey. We've also acquired something in the U.S. now. We did pick up a project in Mexico. But when we were going through that whole process of evaluation on Esperanza, we factored in the royalty. We knew the royalty was coming. Frankly, it was worse than what we expected. But you've got to introduce that into your valuation because that's a risk. I think we picked up Esperanza on very good terms. It's the type of project that, because of its low capital cost and low operating cost, I think it's going to still be a viable project. But the way the tax has been introduced, it's one of the few that probably will still make the grade. So we thought about all those issues before we acquired it. In terms of ongoing activity, review of projects in Mexico, we're not closed to the idea, but just many -- it's a big reduced field now, depending on what we were looking at relative to what we're looking at now. Fewer projects will meet our hurdle rates now. So the likelihood of finding something further in Mexico I think has been significantly reduced, since the tax has been brought in. So I've always said, it's not like we're a Mexican mining company, although some people have tried to define us that way. We never saw ourselves that way. We believe in being in safe political jurisdictions. We believe -- you saw us take a run at Aurizon at one point. We think Canada is a great jurisdiction. But the reality is we want safe political jurisdictions, plus we also want to acquire projects that meet our hurdle rates. In other words, we're looking for strong internal rates of return on our investment. And I think that's what you can see us do in the future.

Operator

The following question is from Anita Soni from Crédit Suisse.

Anita Soni - Crédit Suisse AG, Research Division

I was just looking up -- looking for an update on your share repurchase program.

James R. Porter

Anita, it's Jamie. We implemented the share buyback program when our stock was trading south of $12 a share. We didn't make any purchases during Q3. We were actively putting our balance sheet to use in acquiring Esperanza and Orsa. We've spent $48 million on those transactions. As part of our capital allocation choices, what we're always evaluating, where we can get the best return and that was the decision we made for the third quarter. We'll continue to watch our share price performance and buy back under the program if we think that's our best alternative.

Operator

The next question is from Jeff Killeen from CIBC.

Jeff Killeen - CIBC World Markets Inc., Research Division

Just one follow-up question on San Carlos. You note that there is some metallurgical work pending. Just wanted to know if you could give us a sense, now you did mention there is some variable ore types, but that's also similar to Escondida. Do you expect that, in general, the recovery of San Carlos will look similar to Escondida? Or where would be the variance there, if there is one?

John A. McCluskey

Right now, the test work shows that recovery, putting us through the gravity and leaching the tail is going to be about 70% to 78%. That's the test work that we have right now. We're doing confirmation metallurgy work that will be done in November, just to confirm that. And we'll take it from there.

Operator

As there are no further questions for the moment, I would like to return the meeting back over to Mr. McCluskey.

John A. McCluskey

Thank you, operator. Well, that concludes our call for the day. We certainly appreciate all of your questions. We appreciate you tuning in and taking part in our quarterly update. I guess I should remark this is my 40th quarterly call as CEO of Alamos. In this particular market, I think that's somewhat of a record for a gold company CEO. It has been a great pleasure for me to work with you all over the years that Alamos has gone from a development company into becoming a producer, and now trying to stretch our horizons a little bit and become a multi-mine producer. It's been a great pleasure for me to work with my executive team here who over the years, I've seen grow and take on responsibility for running this company and do just a tremendous job. And most of the gentlemen in this room are in their CEO -- pardon me, their Vice President roles for the first time. And they have essentially started fairly green 5, 7 years ago, but now they're really turning into seasoned executives and they're just doing a tremendous job. And I think as they grow, so grows the company. The management is getting stronger over time and the company's goals are continuing to increase. And our objectives going forward are increasing along with our confidence and our own sort of ambitions as a management team. So again, thank you, all, and we look forward to updating you again after the end of the fourth quarter.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.

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: Alamos Gold Management Discusses Q3 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts