Allied Nevada Gold Management Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 6.13 | About: Allied Nevada (ANV)

Allied Nevada Gold (NYSEMKT:ANV)

Q3 2013 Earnings Call

November 06, 2013 11:00 am ET

Executives

Theresa M. Thom - Vice President of Investor Relations and Corporate Communication

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

Kevin J. Cohen - Imperial Capital, LLC, Research Division

Sam Crittenden - RBC Capital Markets, LLC, Research Division

Daniel McConvey

Zachary Zolnierz

Jeff Jackson - CIBC World Markets Inc., Research Division

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

David Einhorn

Craig Johnston

Brent Palmer

Bryan Grad

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Allied Nevada Third Quarter Conference Call. [Operator Instructions]

I would like to remind you that this conference is being recorded today, Wednesday, November 6, 2013.

And I would now like to turn the conference over to Tracey Thom, Vice President, Investor Relations. Please go ahead.

Theresa M. Thom

Thanks. Good morning, thanks everyone for joining us again this morning. We issued Q3 results last night after market close. You can access the 10-Q and the associated press release on our website. On the call today: Randy Buffington, President and CEO; and Steve Jones, Executive Vice President and CFO, will discuss these results.

Before we begin, please note that certain statements we will make during this call may contain forward-looking information. For additional information, I refer listeners to read the 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 today. I'm very pleased with the operating results for this quarter. We accomplished a number of goals in a very short time period and as I stated in our press release in early October, that I had every confidence that our operating team would turn things around.

I'm very impressed with their accomplishments and in a major construction effort, reduction in workforce and other distractions that come from an expanding operation. While the results are satisfactory, we're not resting and understand that 1 quarter does not make a turnaround, we still have a lot of work to do, and this work needs to continue. Everyone is very focused on continuing to hit our targets and objectives.

During the quarter, we produced 52,198 ounces of gold and 184,070 ounces of silver, our highest production quarter for gold in Allied's history of operating the Hycroft Mine. I'm also very pleased to say that we are on track to meet previously stated guidance of 175,000 to 200,000 ounces of gold production and sales for 2013. Key to achieving production guidance is the smooth operation of the new Merrill-Crowe facility. We produced the first metal on October 17 from the new Merrill-Crowe. We started up at a rate of 7,000 gallons per minute and have steadily increased capacity over the last couple of weeks. We have reached a consistent throughput level of over 14,000 gallons a minute and have the capacity to run at 21,000 gallons per minute, which is the main plate for the new plant. The old Merrill-Crowe is still running at minimal capacity, and this will continue for a few more weeks as final commissioning and testing is complete. With the increased Merrill-Crowe capacity, the carbon columns have now been shut down.

We expect to see a dramatic improvement in silver production in Q4. Average silver to gold ratios in Q3 were approximately 3.5:1, with a significant amount of production coming from the carbon columns, which are not very efficient in recovering silver from solution. Just to be clear, we don't lose the silver, it simply circulates back to the leach pad until it can be removed by Merrill-Crowe processing. The Merrill-Crowe plant will recover the silver that was not captured through the carbon columns. We expect this -- the ratios to increase to about 6:1 throughout the quarter, with the new plant online and the carbon columns being shut down.

So far, with the new Merrill-Crowe, we have nearly doubled daily silver production to over 4,000 ounces per day.

In terms of mining and processing cost, we had 3 very productive months in the third quarter. Averaging below $1.75 per ton mined, we continue to build on those productivities and with the training plans and the new dispatch fully functional, we will continue to see opportunities to further reduce these costs. Processing cost continued to be high for the quarter, primarily due to costs associated with offsite processing of carbon. Offsite processing during the quarter accounted for approximately 60% of the production. We should start to see these costs improve with the more efficient plant and the elimination of the carbon circuit.

As we previously discussed, the Lewis and Brimstone pad were subject to a multitude of issues that were centered around poor solution to ore ratio, core leach pad management and poor planning and execution. These issues resulted in ore being mined and placed on the leach pad but not leached. This is, as an update to our remediation plans that we discussed in the second quarter, we've completed the drilling and well installation for Lewis and Brimstone remediation project, completed geophysics, as well as metallurgical studies on the drill core. All permits were received in August and solution was first introduced into the pad in late September, initial results have shown good saturation rates for the solution. The metallurgical studies confirm that much of the ore did not see leach solution during the primary leach. Geophysics also confirm large areas of low moisture content. We see nothing in these studies that would indicate that these ounces are not recoverable.

We are now continuously introducing around 1,000 gallons per minute to Lewis pad through these wells, and plan to install additional pumping to increase to 1,500 gallons per minute shortly.

We estimate, based on the drilling and work that's been done previously, that there could be as much as 70,000 recoverable ounces on the Lewis pad that are dry, and have not been wetted by process solution.

We do not expect depreciable ounces to be released for Lewis in 2013, but we are collecting data on gold and silver coming from the wells and we use this data to model anticipated ounces into our 2014 production profile.

We also issued an update on the oxidation work in August. We continue to work very diligently on this important step for the development of the Hycroft mill. We expect to have a decision for the final oxidation process for the Hycroft concentrate in a preliminary operating and capital cost estimate for the oxidation circuit in early 2014. This will lead directly into an updated feasibility study, incorporating the oxidation circuit with the mill engineering that has already been completed. We anticipate completion of the feasibility by the end of Q3 2014.

I'll now ask Steve to cover the financial matters.

Stephen M. Jones

Thank you, Randy. Good morning, everyone. I'll just hit some of the financial highlights. We ended the quarter with a cash balance of $154.5 million, that's actually higher than what our internal forecast was, but that's due solely to a slower spend rate on our capital projects. We didn't reduce the total spend, we're just spending it a little bit slower than what we had expected.

During the quarter, we had inflows of $6.5 million from operations, so we did generate cash flow from ops, even though we build inventory during the quarter of $24.7 million. So we are starting to see some cash flow generated from operations, and we would expect that to continue going forward.

We had cash outflows of $88.2 million of capital expenditures, plus an additional $26.9 million of capital expenditures financed with capital leases, primarily for the shovels, a couple of 'dozers and a drill.

Of the amounts spent, we spent $27.8 million on the crusher, $23.9 million on the Merrill-Crowe plant, $20.6 million on the mill, primarily from mills and motors, a little bit of engineering and some final excavation payments, and $9.4 million on the north pad. Most of that work was actually completed in Q2, but the actual payments were made in Q3.

We did convert during the quarter, 2 of the 3 shovels from a short-term facility to a term loan, for 100% of the cost of those shovels. The first one was converted August 1, second one, September 30. The third shovel remains for sale. You may recall from the last time we spoke, we do have a third shovel for sale. It is currently shown on the asset side under Prepaid and Other as Assets Held for Sale. And that's broken out in Note 5, in our 10-Q. We've got $18.1 million borrowed against that shovel. That shovel's got a fair market value of $24 million. And the debt is showed as all current, because we expect to sell that shovel within the year and repay the debt.

If we look at the ore on the leach pads, we had $236 million in both current and long-term inventory of ore on the pads at the end of the quarter. Just under 200,000 ounces of gold, at about $1,181 an ounce. That $1,181 does ignore silver.

We increased during the quarter, 22,900 ounces in third quarter. Compare that to the second quarter of an increase of about 18,800 ounces. We do expect a much smaller, if any, increase in inventory on the pad during the fourth quarter, as during the fourth quarter, we expect to be producing and selling similar amounts to that, to the recoverable ounces that we're putting on the pads.

Overall, the $1,181 per ounce on the pads compares to $1,137 per ounce at 6/30. That's somewhat misleading, in the sense that a big portion of that is noncash. And the increase, $100 -- roughly $100 an ounce can be attributable to noncash portion. For every ounce that we're placing on the pads, we're now at a level of about $350 an ounce of noncash cost or depreciation. Probably the number that I focus on the most is our cash cost per recoverable ounce placed, that was $922 an ounce during the quarter, lower than what we had forecast. And that again, that ignores silver.

So if you look at silver, we'd be well under $800 an ounce place during the quarter. As Randy indicated, we did not produce from the Lewis pad during the third quarter. However, we do expect to see production in 2014 out of the pad, in I'll say, a minor or modest production in the fourth quarter. We continue to use a 70-30 ratio, current to noncurrent, for the inventory on the pads. This accounts for the dry areas in Lewis. In the North pad, we continue to see the leach -- the leaching kinetics as we expected. And we appear to be getting 75%, or in excess of that, in the first year out of the North pad, so 70-30 is reflective of the fact that we're still not certain, not quite how quickly, the ounces will come out of the dry areas in Lewis.

We've talked about our debt, specifically, our capital leases for the moment. Those are broken out in Note 8 in the 10-Q. They did increase during the quarter by $16.4 million, that's net of $10.4 million in repayments.

Our total capital lease balance at 9/30 was $232 million. That does include the 1 shovel that's for sale. That balance will begin to decline from this level. We do expect to add 2 more drills in the fourth quarter, but that's it, that's about $4 million. And our repayments will be greater than that, so you'll start to see the capital lease balance decline henceforth.

Speaking of our debt, and as outlined again in Note 8, we did amend our revolver covenants for 9/30. We've got 2 covenants that needed amending, our debt-to-EBITDA, which is, the covenant is less than 3x, we had it amended to less than 6, and with the actual number was just right at 5.

Our interest coverage ratio was amended -- is based at greater than 3x, we had it amended to greater than 1.8x and it's, it was 2.1x for the quarter.

In the short term, probably and importantly, we modified the term calculation date. And fundamentally, we need to be in compliance with the original ratios on a pro forma basis, if we're going to draw down on the revolver. It doesn't put us out of compliance, but if we were to make a drawdown, we need to be in compliance in order to affect that drawdown. And that effectively means, we're not able to draw on for the revolver starting October 1.

We had pretty much been operating under that assumption for the last several months. So this is really just, I'm going to say, the legal work, catching up with the practicality of where we were. We are working diligently with the lenders to amend the revolver. We're looking to reduce the size to $75 million, and eliminate these financial ratio covenants, which are precluding us from drawing under the revolver. The revolver will be styled as, what I would call, a borrowing base facility. More effectively, we're drawing against the ounces in the leach pads. This is outlined in MD&A, specifically under liquidity and capital resources.

Focusing for a minute on capital expenditures for the expansion. We spent about $392 million year-to-date. We're forecasting full year expenditures of $483.8 million, and we would expect to spend an additional $19.6 million in the first quarter of 2014. So total commitments that are remaining to be spent on the expansion is $111 million, that does include the $4 million that we're going to finance with the capital leases, and that number is specified in Note 19, Commitments and Contingencies.

We do expect additional capital in 2014 of about $15 million. So we should have no more than $35 million for 2014 capital expenditures. We have talked previously about the need to add some leach pad space in 2014. Upon further review, we will not need to add leach pad space in 2014. Thus, we're very comfortable that we can keep the capital expenditure level to a minimum, and that it should be no greater than $35 million. Based on all those factors and based on I'll say, current prices or maybe even $100 less than current prices, we would expect to end the year somewhere around $50 million in cash.

Moving on to the income statement. We break out revenues in Footnote 10. Our total revenues for the quarter were $76.7 million, that's an increase of $17.7 million from the second quarter, and an increase of $11.9 million from Q3 2012. We did have a good, very good operational quarter, as Randy mentioned.

Gold sales of 52,700 ounces, at an average price of $1,378 an ounce. Randy talked a lot about the fact that our silver to gold ratio is lower, due to the fact that we sold 60% of the ounces on carbon during the quarter at a 3.5:1 ratio. Our silver sales were just north of 184,000 ounces.

Specifically on the carbon, our recoveries of silver to gold typically are about 2:1, and our overall recoveries on carbon for gold are also much lower, at about 80%, compared to the new Merrill-Crowe plant in the high-90s.

We were able, during the quarter, to lock in most of the gold sales at a fixed price. In the prior quarter, we had a fair amount of gold that was provisionally priced. We've locked those sales in and at 9/30, we've only got 2,600 ounces as outlined in Footnote 17, that's provisionally priced.

If we look at our adjusted cash cost per ounce for the quarter, they were $905. Internally, we had a number of about $870. It sounds like we were way off but in actual fact, we weren't. I mean, the primary difference, or all the difference, and then some, is as a result of a lower silver credit, which is about $24 in higher selling cost because of the additional sales on carbon versus Doray for the quarter. That amount was over $50 greater than what we had expected.

So moving on into the fourth quarter, we did sell a fair amount of metal on carbon in October. But we would expect to have very little in November, and none by the month of December. And thus, we should see a silver credit much, much higher, as well as selling cost coming down much greater. Again, I mentioned the actual cost of placing the tons was lower than the what we had forecast at $922 per recoverable ounce. Specifically, it was lower because we had a lower mining and processing cost. Our mining cost per ton were $1.73. When we had this call at the end of the second quarter, I had commented we expect it to get to $1.75 per ton in the fourth quarter. We were actually able to do much better than that and get to $1.73 per ton in the third quarter. We did see the efficiencies that we were expecting with the new shovels. We put dispatch into place in June and we're seeing a lot of benefit from that, and being able to control the movement much better, the assets in the pit.

There's still some upside in the fourth quarter. We had some high maintenance costs during the quarter. Some of that was on the hydraulics, as well as we had a lot of ground engagement tool expenses or GETs. And that costs you both in terms of actually having to switch the teeth on the shovels, as well as the downtime. We've now switched manufacturers and we're seeing a longer life on our GETs.

We also had some blasting issues during the quarter. We've changed the drill bit sizing and focused in -- gotten more efficient with our drills. And again, we should see some upside in the fourth quarter, shooting for mining cost per ton of $1.70 or less.

Our processing costs per ton for the quarter were $2.33 per ore ton. On the call, last quarter, we had talked about the fact that we were looking to get to $2.50 a ton in the fourth quarter, so again, we were able to get there quicker than what we had anticipated. We get reduced line consumption, but not until the month of September. We reduced it from 12 pounds a ton to 8. However, that was -- some -- a good portion of that was offset by some other catch-up work that we were doing, specifically contract work, leach pad plumbing, as well as maintenance costs during the quarter for the old Merrill-Crowe plant.

Again, we think we've got some upside in the fourth quarter. We've minimized our contractor presence on the process side. Looking at the face of the income statement. You'll see a category called Separation and Severance Costs, a $3 million cost. The detail is broken out in Note 11. That has to do with the reduction in force that we discussed at the prior quarter. You may recall at the end of July, we reduced our workforce out at Hycroft by 100 employees. And also reduced our corporate and exploration personnel. All told, there was a $3 million cost to that during the quarter.

Looking at taxes during the quarter. Taxes during the quarter are actually a tax benefit. We did have pre-tax book income of about $1 million, but we recorded a $4 million tax benefit during the third quarter. Our tax situation is very sensitive to production, as well as the gold and silver prices. The bottom line is we expect our depletion deduction for 2013 to be greater than our 2013 pre-taxable income. And we expect to be at about a negative 10% or a 10% benefit for taxes, hence, the reason we recorded the benefit in the third quarter. On the basis of all that, we ended up with net income of $5 million, or about $0.05 a share versus Q3 2012 of $13.4 million, or about $0.15 a share.

We do continue to project our cash costs, as Randy mentioned, between $800 and $825 an ounce. Year-to-date, we're at $794. So you can expect the Q4 numbers to be an excess of $800 an ounce. Well, we are continuing to work through some of the high cost ounces held in inventory that we put in place in the first half of 2013.

But as I have outlined, we saw the benefit of much more efficient operations and all the hard work that the operating guys put in, in Q3. And we expect to see that in Q4 and beyond.

Today, we're running 24 trucks of the 33 trucks we have in our haul fleet. Our shovel productivity do -- does continue to improve, and the more mud we can sling with the wire ropes, the less we have to rely on hydraulics. We are doing better blasting, as I mentioned, and we've reduced our lower line consumption.

And probably, the biggest thing we've got going for us in the fourth quarter is the new Merrill-Crowe plant. It's much more efficient, much more efficient than carbon columns, and much more efficient than the old plant, makes a much better precip and is much more efficient in terms of utilization of the retorts in the furnace.

So we feel like we made a big stride forward in the third quarter, as Randy indicated, 1 quarter is not a trend, but we think we've set ourselves up in the right direction, to be able to continue to deliver a higher production of gold and silver and start to see our costs coming down instead of rising as they have been in the last few quarters.

So with that, let me turn it back over to the operator, and open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question today will come from the line of Kevin Cohen of Imperial Capital.

Kevin J. Cohen - Imperial Capital, LLC, Research Division

I guess a couple of things on the, sort of a liquidity front. When you think about liquidity at the end of the year, I appreciate the guidance in terms of cash. I guess, do you view that cash number at the end of the year as adequate, in the context of potentially assuming a $75 million type of revolver, being outstanding and undrawn at that point in time?

Stephen M. Jones

Yes, we do, Kevin. As you point out, assuming we have an undrawn revolver, we do view that as adequate. We look forward in 2014, and if you're looking at current prices, while we're still finalizing our budget and still working to optimize the mine plan, we would expect to see minimal cash drain in 2014. And that's assuming the capital numbers that I outlined, as well as the repayment obligations under capital leases.

Kevin J. Cohen - Imperial Capital, LLC, Research Division

And I guess, in general, when you think about, sort of the potential net cash movements during 2014, do you guys generally tend to use the futures curve as your indicator for price? Or do you generally take a more conservative posture, relative to the future's curves?

Stephen M. Jones

Yes, no, we're kind of running the numbers at 1,220. So that's really the -- I mean, and then we kind of look at the sensitivities around those numbers.

Kevin J. Cohen - Imperial Capital, LLC, Research Division

And then the last question, I guess. What's the sort of high-level view in terms of the potential streaming arrangement as potentially 1 source of capital to the extent that company does presumably move forward with the Hycroft expansion?

Stephen M. Jones

Yes, I mean, I think that's a viable alternative as to how we would fund that expansion. And we think there's appetite out there for that. We're -- it's premature on our part at this stage, to be talking to any streamers, because we need to finish the oxidation work and be able to lay out exactly what things are going to look like. But given some conversations we had, as long as a year ago, some less than that, we think that's certainly a viable alternative.

Operator

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

Sam Crittenden - RBC Capital Markets, LLC, Research Division

Just a couple of questions to clarify in the CapEx. So the $90 million in Q4, would that approximate what the cash outflow would be? Or would that be something a little bit different?

Stephen M. Jones

Yes, that's -- it's similar. I mean, we only have $4 million of debt for 2 drills that we're financing with capital leases, Sam. So yes, that would approximate the cash outflow.

Sam Crittenden - RBC Capital Markets, LLC, Research Division

And then that factors in sustaining as well?

Stephen M. Jones

It does, yes.

Sam Crittenden - RBC Capital Markets, LLC, Research Division

Okay. And then, for 2014, I think you mentioned, was it $35 million and again, would that include sustaining CapEx?

Stephen M. Jones

It does. Yes.

Sam Crittenden - RBC Capital Markets, LLC, Research Division

Okay, so your total CapEx for 2014, you're looking at something like $35 million?

Stephen M. Jones

That's correct.

Sam Crittenden - RBC Capital Markets, LLC, Research Division

And then, a question on gold recoveries. It looks -- it sounds like you think there's going to be a big uptick in Q4. Is that from getting the gold out of solution as the Merrill-Crowe comes online? Is it going to be a step change in recoveries? Or is it going to trend higher over the next couple of quarters?

Stephen M. Jones

Yes. Well, I think a lot of it is just -- we expect production to increase, and we're continuing to put on similar amounts of ore. I mean, the main reason is now we can run all the solution through the process plants and in particular, through Merrill-Crowe. So we're going to see, I mean yes, fundamentally, we're going to see a higher recovery, but we're seeing it because we're able to process off a solution in an efficient manner.

Sam Crittenden - RBC Capital Markets, LLC, Research Division

Is there still a fair amount of ounces stuck in the solution itself? I guess, the solution grade, it's still pretty elevated?

Randy Buffington

Sam, this is Randy. The solution grade is high, but the biggest increase, it's not a recovery increase, it's the amount of inventory that we can draw out of the pad with the increased processing capacity. We went from 5,000 gallons a minute to now, 21,000 gallons a minute. We've increased the solution going to the pad. So just on a volume basis, you can process a lot more tons of solution. It's like doubling the capacity of your mill in a short period of time. So recoveries of the ore will not get higher, but we can process a lower tenor solution at a higher tonnage, which allows us to bring more ounces into production into Doray.

Sam Crittenden - RBC Capital Markets, LLC, Research Division

Okay, and then, a quick question on accounts payable, looks like that came up a little bit, which gave you a bit of cash release this quarter. Would that be expected to reverse over the next couple of quarters?

Stephen M. Jones

Yes. A lot of that -- that's in accounts payable is construction-related. And that, I mean, the way we do the cash flow statement, that the ins and outs that relate to construction, relate to capital expenditures. So you shouldn't -- from an operating standpoint, we shouldn't see a significant change in payables one way or another, moving forward.

Operator

Your next question will come from the line of Daniel McConvey of Rossport.

Daniel McConvey

Two questions. First one, just to make sure, in the $50 million that you mentioned earlier, Steve, that was -- was it the cash at the end of 2014, or the cash during 2013?

Stephen M. Jones

'13.

Daniel McConvey

Okay, okay. And Randy, on the -- just so I understand it better, the -- just thinking about this, the recoveries on silver have been low. And but it's -- if it's all getting into solution or at least, whatever, I guess, whatever the recovery is into solution, and now that Merrill-Crowe is running, what is the number of recoverable ounces of silver that are in the system now? And will we see kind of a one-time surge of that silver coming out, with the new Merrill-Crowe system?

Randy Buffington

Well, there's a lot of ounces tied up in there. Silver has a tendency to come at a slower pace than the gold does. And as we get more and more, the inventory and/or leach, I don't think we'll see -- we'll see a short-term surge, but long-term, we now have the capacity to maintain our guidance on the silver. It's not the silver recovery, it's the silver is being put into solution, it's being leached well, the kinetics are as we predicted. It's just our ability to put it to Doray as the carbon has a tendency to load quickly and defer that, so we've had a lot of it going out. We will see a short-term spike, as we bring some of that short-term inventory, that's in the ponds out. But long-term, we should be able to sustain the silver that we have in the guidance earlier this year.

Daniel McConvey

Okay. So the recovery, generally into solution of the silver is, we talked about this, but it was around say, 20%, 25%, and then the recovery of the -- this question, and then, the recovery from the solution into Doray over time should be in a very high number? Is that right?

Randy Buffington

Yes, correct. I mean, just as a reference, through the carbon circuit, you're recovering about 60% of the silver on a good day, through the Merrill-Crowe capacity. Right now, with the new Merrill-Crowe, we're at 98% plus of the silver that comes in solution is captured in the processing.

Operator

Your next question will come from the line of Zach Zolnierz of GMP Securities.

Zachary Zolnierz

I guess before jumping to the existing operations, I just want to touch on the sulfides plan. I think you mentioned the prefeas now is maybe expected early 2014. I'm just wondering what specific items should we be expecting in that release.

Randy Buffington

Yes. The main focus right now between M3 and Hazen lab is to optimize the oxidation work that's being done right now on the concentrate. We've had good success all the way through the preliminary Phase 1 and, initially, in Phase II. So what we should see is we should see early next year, we should see recoveries, we should see oxidation rates, we should see a simplified flowsheet, and we should see CapEx and OpEx associated with that portion of the processing.

Zachary Zolnierz

Okay. So with that portion, so I mean, are we going to get maybe an updated total CapEx figure? Like everything except for, say, NPV IRR type numbers?

Randy Buffington

Yes. We'd like to get that. M3 is actually starting early on reviewing the existing feasibility right now. So they've kicked that project off and they're working -- the team is working pretty hard on it. The missing piece is what do you do with the concentrate, and that's the oxidation work to be able to plug into that. So in order to get a full CapEx and OpEx, they're going to need that work to be completed. So we should have prefeasibility numbers on the complete circuit late in the first quarter, is what we're hoping for. And then feasibility level, engineering numbers by third quarter.

Zachary Zolnierz

Got it. That's helpful. So now, I guess, jumping back to the current operation. I guess, the crusher, you talked about commissioning it in fourth quarter. Seems like it might be taking a little bit longer than expected, I mean, what's left to complete with the crushing system? And if you can maybe give us any indication of the start of commissioning? I mean, you're expecting that soon or is it late this quarter? I mean, where does that stand?

Randy Buffington

Yes. We've -- there was a slight delay in it as we had to move the contractor over onto the Merrill-Crowe, which was really important. We moved them over on there to complete the work on the Merrill-Crowe. They're back working on the crusher right now. The crusher commissioning starts in 3 phases. It's from the secondary and tertiary to the stacker, and then from the surge pile and then the last piece that's commissioned is the primary. Commissioning is ongoing right now. As we get a control up, we'll start commissioning the plant as we go to big system. It takes a lot of commissioning. The final stages, there's some infrastructure left to install, which is the primary crusher. There were some engineering issues with that crusher from the manufacturer that are being resolved right now. And that's probably the biggest delay on the primary. It appears that those were getting through those, and we'll get that back on track quickly. But I guess to simplify it, the crusher is being commissioned as those components are being built. It's a tight schedule. We knew that when we moved the people over, but we should still be able to make the December deadline and be crushing ore.

Zachary Zolnierz

Okay. And heading into 2014, because you mentioned an improvement in the silver to gold ratio to 6, 6.5x, but when you look at the 6-year oxides plan, obviously, there's even more improvement beyond that. I'm guessing the crusher is the largest driver of getting to this sort of 2.25 gold, 2.7 silver?

Randy Buffington

Yes. The crusher definitely helps that. The Merrill-Crowe capacity is probably having that driver to be able to process more tons of solution, as well as having permits to be able to process more tons of solution. We also have the old Merrill-Crowe capacity and we have the opportunity to increase above that. The crusher complements that and complements the crusher and -- or the silver profile, and allows us to move silver ounces forward into the production profile. Highest grade material goes to the crusher, lowest grade goes straight run to mine. So it's really mine planning. And with the crusher, it kind of gives you the flexibility, the crusher and the Merrill-Crowe capacity to actually do really detailed mine planning and move material with some very high silver grades forward into the protocol.

Zachary Zolnierz

Understood. So going from Merrill-Crowe, 14,000 gallons per minute, to the full capacity of over 21,000 plus the crushers gets you from a 6 to 6.5x silver to gold to over 10x, right? That's the right way to think about it?

Randy Buffington

Yes. You'll get there. I mean, it's going to depend on mine timing, but there's times in the profile, but you'll be at that silver to gold ratio for sure.

Zachary Zolnierz

All right. Then my last question, and I'll jump back in queue, just has to be on the CapEx side. There are some CapEx, I guess, it's carrying over into next year, about $20 million. But you also increased, I think, the number for 2013. So there's a little bit of inflation there. I mean is that driven by the crusher? Or is there anything else going on?

Stephen M. Jones

No. That's just completing the projects, both in Merrill-Crowe and the crusher. There's nothing else, nothing else going on, Zach.

Zachary Zolnierz

I think the inflation at this point is fairly limited?

Stephen M. Jones

It is. Yes, yes. I mean, you likely point out there's a little bit of creep, but it's not a big amount. And I mean we're far enough along in the process. I think we've got our arms around where we are pretty well.

Operator

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

Jeff Jackson - CIBC World Markets Inc., Research Division

First question would be back to the stockpile inventory. Given it's sitting on the balance sheet at around $1,100 an ounce, will we see, I guess, an upward bias to your cash cost going forward? And how long do you expect this to persist?

Stephen M. Jones

Yes, no. I think -- I mean, in my comments that I made earlier, Jeff, I was, I guess, trying to convey that we should not see an upward bias in the amounts. We had a lower -- the cost we put on this -- the cash costs we put on in this quarter were lower, and we would expect that to continue to be the case going forward. I did mention that we're at a level now where we have higher noncash cost, depreciation specifically. And that's just reflective of the fact that now we have all the equipment in place. We've got the new Merrill-Crowe plant on. We've got the full use of the North Pad. So from a noncash perspective, that'll continue. But from a cash perspective, you should see the cost of actually coming back, getting lower.

Jeff Jackson - CIBC World Markets Inc., Research Division

Okay, great. So I guess when we think of the $905 reported this period, that'd be a blend of the higher cost ounces of $1,100 plus sitting in inventory and then, I guess, the lower cost you're starting to see from the operational improvement?

Stephen M. Jones

Yes. I mean, just the way the accounting works, I mean, it's a rolling weighted average. So the $905 is penalized by some really high cost ounces that we put out there in the first and second quarter. And we're still working our way through. And that's why it's rolled up to as high as it is. As we now start to be able to put out some lower cost ounces, we should be able to start to see that blended or that weighted average cost starting to come down.

Jeff Jackson - CIBC World Markets Inc., Research Division

Okay, great. And then in terms of the actual $1,100 an ounce, I guess once you factor in your cost of actually pulling those ounces out of the stockpile, then there's no, I guess, write-down concerns?

Stephen M. Jones

No, there's not. And remember, it ignores silver.

Jeff Jackson - CIBC World Markets Inc., Research Division

Okay.

Stephen M. Jones

So this is all really simplistic, but the silver pays for any additional processing cost to actually pull it out.

Jeff Jackson - CIBC World Markets Inc., Research Division

Okay, great. And I guess my next question would be with October largely behind us, do you see the operational improvement continuing into Q4, in terms of your mining and processing cost?

Randy Buffington

Yes, Jeff, we'll continue to see those. I mean, we're early stages. We're still a few months into an operation that's transitioned from a small mine with small trucks and loaders into world-class equipment, large equipment, wire rope shovels, and now we have a processing facility that allows us to continue improve our cost structure and improve our productivities. It will be an ongoing process, but we should continue to see these improvements as the operating team settles in and the leadership focuses -- gets more focused on the day-to-day.

Jeff Jackson - CIBC World Markets Inc., Research Division

That's great. And then I know we've already talked a lot about 2014 capital, but just, I guess, to run through the liquidity. So if $50 million is your estimate for cash at the end of 2013, and then from there, we'd see about $35 million in CapEx plus I think there's about, maybe you can confirm, $61 million in lease payments in 2014?

Stephen M. Jones

That's right, Jeff.

Jeff Jackson - CIBC World Markets Inc., Research Division

So I guess, you're not concerned, I guess, of running out of capital. And in terms of liquidity, do your budgets require, I guess, the $75 million to be available to you from the line of credit?

Stephen M. Jones

They do not.

Jeff Jackson - CIBC World Markets Inc., Research Division

Okay. So that's just off of your operating cash flow estimates eventually?

Stephen M. Jones

Correct, correct.

Operator

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

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

Just had a question about the leach expansion and how you said you weren't going to be spending anything in 2014 on that. I was wondering if you could give a bit more color on why that is.

Randy Buffington

Yes, Trevor, this is Randy. Initially, we thought that we would move towards the south and begin to build the south tailings impoundment. But we hadn't done the budget at that time, and we hadn't really looked at the square footage that was available to us. With the new engineering group out on site, they did the detail. And with the leach pad primarily driven by available square footage in order to maintain that production, what we looked at is 3 scenarios, 60-, 90-, 120-day leach cycle. And what it basically told us is we have enough area and capacity on the existing pads to last us through '14, and it's probably mid-'15 before we need a pad expansion. We've also looked at some opportunities to build some lower capital expansions close to the Brimstone and Lewis pad. Engineering firms are looking at those right now, and it looks like on a square footage and a capital basis, the next expansion could be significantly less expensive if we do that. But we have the area, which will keep our tons of solution up, and we have the volume available on the existing pads, so there's no need for it with our current production profile.

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

And when you do get around to the south, is that stuff permitted for you?

Randy Buffington

Yes. The south area is permitted. We could start building it right now. There's 2 footprints that's permitted. One of the other reasons that we elected to not build down there is we're doing, with M3, we're doing some tradeoff studies right now to determine the exact locations, some of the -- where do we put the tails impoundment and some other tradeoff studies, so allowing them to complete that process prior to putting something permanent like a leach facility and a piping corridor.

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

Okay. And then, just on some of the unit costs that you've been talking about. I understand how the mining costs have been coming down bit. It sounds like processing costs are down a little bit as well from, if I heard this right, a little bit less lime use, fewer contractors maybe helping on that front as well. As you stop using the carbon columns, is there a kind of a unit cost savings there, too?

Stephen M. Jones

Yes, yes, there definitely is. It's probably about $50 an ounce, I mean, if you look at where -- if you look at Q3 and you look at the incremental cost to sell that carbon. Just talking about, really, selling cost. And it's obviously -- it's also more efficient from a process standpoint. But just the handling, the movement and the carbon, and carbon gets sold out of the country, and just the cost to make all that happen is $50 an ounce or more.

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

Okay. And you won't have to contend with the carbon a little bit in Q4, but nothing starting in 2014?

Randy Buffington

That's correct, Trevor.

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

Okay. Did you say, kind of, what you're expecting process costs to be or what they were in Q3, and kind of how much better they're going to be getting on a, say, per ton basis?

Randy Buffington

I think we're $2.33 in this quarter. And I think if you look at our leach facilities that are the size -- with the Merrill-Crowe, it's less labor. I would just say that we should be at $2 a ton processing, heap leach processing operation.

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

I know that you've made some reductions on site and so forth. Is there any appreciable change in G&A on site? Or is your kind of quarterly burn rate there on that front materially different than it has been?

Stephen M. Jones

Yes. I think, I mean, given that we excluded the separation and severance costs out of -- we separated those out on the income statement, we're at a G&A level at site that should -- we should continue at that level. No significant change.

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

Yes. So going forward, it'll be -- if you factor those numbers out, it will be similar numbers kind of going forward?

Stephen M. Jones

Correct. Yes.

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

And 2 other quick questions. I guess, one more on the cost side. When we look at the -- we talked about how you get ounces out for sale and you have to apply some historic cost because of the leach curve. Can you give us a sense, kind of, what percent of costs are reflective of the current period? In other words, say, in Q4, what percentage of those per ounce costs are going to be kind of reflective of the inputs in Q4? And what percent might be prior periods?

Stephen M. Jones

It's heavily weighted to our prior periods. But the simplest way to think of it is, I mean, we're starting at that $1,181 an ounce and so -- I mean, that's the starting point, so if you're putting on anything -- that's October, $1,181 an ounce. I mean, that's the simplest way to say it. Now that's cash and non-cash, but that's October. And then whatever you put on in October, it'll -- it should reduce that number. But it's only going to reduce it for November. So it's a month by month change. So it's a bit of a slow change in the current -- if you look at what we did in Q3 at -- even though we -- from a cash cost standpoint at $922 an ounce, ignoring silver, that actually sets us up for Q4 to be less than what Q3 was. But it is a bit of a slow run out, if you will.

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

Yes, okay. I guess the last question. With the crusher coming online or being ready to process material next year, have you started to segregate material at all? Or create a stockpile of higher grade material? Or is it going to be more just what you encounter as you encounter it?

Randy Buffington

Trevor, we did move the mine plan around in Q3 to make sure that we weren't mining that material. We have the opportunity to not stockpile, which we prefer not to. We prefer to take it straight out. So areas that had -- that we really want to put through the crusher, we just deferred mining in those areas. And we'll go into those as soon as the crusher is available.

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

So as soon as the crusher is available, you'll be able to get that proper feed at the -- yes, without having to rehandle.

Operator

Your next question will come from the line of David Einhorn of Third Point Capital.

David Einhorn

Yes. I'm just calling my question in regards to -- regarding the share price and the 20% flow that is being shorted. Is management doing anything in regarding to this issue?

Stephen M. Jones

David, I think -- this is Steve. Yes. I mean, we're well aware that there's a big short position on. The main thing we're doing, David, is everything we've been talking about this morning, which is trying to make sure that we're generating cash flow from operations, that we're getting more efficient in everything that we do, so that we can show that there's not a liquidity issue here. And as well as all the work that Randy has been talking about with M3, relative to the oxidation, to get us to the point of being able to know exactly what the mill is going to look like, and then go out and raise the money and begin construction on the mill. So, I mean, our focus is fundamentally, if you will, is to be able to prove the short is wrong. I know it's frustrating to have that big of a short position out there. It's frustrating for us to do that. But the biggest thing that we can do is just deliver from an operational and cash flow perspective.

David Einhorn

Okay. And the other short question that I have was being that during our company's research, we've noted that there's over $100 billion in private equity funds that are out there looking to buy mining assets. So in the near future, would you consider teaming up or selling out to a bigger mining company that would have already the equipment and the expertise to develop this, the Hycroft Mine?

Stephen M. Jones

Well, we consider -- we're happy to consider all alternatives. And certainly, we'll do what's best for all of our shareholders. So we would consider something like that, but we would only consider it if it's best for all of our shareholders. I mean, we think there's still a major opportunity here with the sulfides, and that's not being -- that's not currently reflected in our share price. And it's management's goal to change that and to get that reflected in the share price. And so that's really the focus. I mean the day-to-day focus is to generate cash from the oxide operations, but the longer-term focus is to be able to prove that value to the sulfides. And when we can do that, stock price will increase and will give us a lot of additional opportunities, including opportunities to develop assets like Hasbrouck that we have.

Operator

Your next question will come from the line of Craig Johnston of Scotiabank.

Craig Johnston

Just trying to fine-tune our model for 2013. Just trying to get to the $50 million you noted as your cash balance. I note in beginning of the call, you said that you had, this quarter, you had positive cash flow from operations, and you see that going forward. With that being said, I find it -- I guess, and I think I'm missing something to get to $50 million at the end of the quarter, I would think it would actually be higher if you're spending $90 million in CapEx and then your principal payments on capital leases. Is there something...

Stephen M. Jones

I don't know, Craig. I don't know if you're factoring in, but we have a bond payment due December 1, a 6-month payment. And I don't know if that's factored into your model, but that's the other -- just that it comes to mind, that's the other big cash outlay during this quarter.

Craig Johnston

Okay. And how much is that?

Stephen M. Jones

It is $17 million round numbers, not quite, $16.7 million, I think.

Operator

Your next question will come from the line of Brent Palmer of Sierra Lime Company.

Brent Palmer

In your earlier press release that come out in October, you indicated that your lime and cyanide cost were quite high and rising. Sierra Lime Company has a deposit that's just south of Battle Mountain, Nevada. We feel that we could lower your lime cost substantially. Would this be something that you would want to take a look at?

Randy Buffington

Yes, Brent. We were looking -- we're always looking for opportunities. And if you look at the sulfide project down the road, we'll consume a lot of lime and other reagents as we go through that. That's part of the work of the feasibility team with M3, is to look at all our alternatives to maintain a low cost and low operating costs throughout the 20-year mine life that the Hycroft deposit has. So yes, it's an opportunity. We've looked at it several times. We have a lot of files in there, and as any operation, lime is a major consumable that we have.

Brent Palmer

It seems like right now, there's been a lot of money paid on the freight cost. I'm getting the lime out there, and we feel like we could substantially reduce that cost for you if we was -- I think it might be something that we could take a look at and perhaps help you lower your cost, if you would allow us to.

Randy Buffington

Brent, why don't you give me a call, and I'll get our geology and our technical services department. We'll have a good discussion on the topic.

Brent Palmer

Okay. And what number could I reach you, Randy?

Theresa M. Thom

Brent, this is Tracey Thom. If you want to give me a call, I can be reached at (775) 789-0119.

Operator

Your next question will come from the line of Bryan Grad of DLS.

Bryan Grad

I want -- can you clarify something for me on this CapEx for 2014? It looks like it's a two-part query. The first was that you have $19.6 million spillover from this year in the first quarter of 2014 that's attached to the $110 million in addition to the $90 million. Then you say you have a total of $35 million. Is that $35 million in addition to the $19.6 million that's the spillover or is that inclusive of the $19.6 million?

Stephen M. Jones

Yes. The $35 million is inclusive, so it's $19.6 million or, call it, $20 million plus $15 million to get you to $35 million.

Bryan Grad

Okay, good. And that includes sustaining. What is your exploration budget for next year?

Stephen M. Jones

We don't have -- we'll be doing no outside exploration next year. Basically, we've got about $2 million of, what I'm going to call, carrying cost just to carry all the assets that we have. And so that would be our budget.

Bryan Grad

One last thing. I noticed this when I was reading through the queue. It looks like you have your land, your housing development up for sale as well, which indicated that you're looking to monetize that within the next 12 months. Can you give us some clarity on that? Or maybe a little more color?

Stephen M. Jones

Yes. That's actually the houses. So we have 34, I think, houses that we've built that are for sale. We've sold and we would expect to sell all those in the next 12 months. We've sold 7. I think, we've closed on 4. We expect to close on another 3 or 4 between now and the end of the year. We'd expect to sell all those between now and 12 months from now. So there are specific houses that are built. We also have that's not shown in that 12 months or not shown as assets held for sale. We also have some townhomes out there, similar amount in terms of investment, about $6 million -- $5.8 million, I think. But we -- I mean, they're for sale, but they haven't been moving as quickly, and so we're trying to figure out whether we should sell those or rent those.

Bryan Grad

Okay. And what was the total amount that you're trying to monetize there again? Was it $32 million?

Stephen M. Jones

No, no, no, not the housing. It's just about -- it's about $6 million, the houses themselves. So the total is $6 million on the houses themselves.

Bryan Grad

So the balance of that, the $32 million includes the shovel then?

Stephen M. Jones

Exactly. It's the shovel, a drill and the houses, that's what's in the $32 million.

Bryan Grad

And in excess, when the drill is sold -- I'm sorry, when the shovel is sold, whatever is in excess of the $24 million that is held as the lease is going to be -- that will be paid off, the remainder is going to general cash?

Stephen M. Jones

Yes, actually. And on that shovel, we have $18.1 million financed against that shovel. And $24 million is an estimate, a third-party estimate of the fair market value. And there is roughly $6 million of -- if we were to sell that shovel tomorrow, if you will, there's about $6 million that we've put in the bank and then we've reduced capital leases by $18 million.

Bryan Grad

Okay. So potential, another $12 million on liquidity coming out in the next year just from that?

Stephen M. Jones

That's correct. Yes.

Bryan Grad

Okay. And then, what is the process for selling the shovel? How long does it take to get that done?

Stephen M. Jones

Well, the shovel is for sale. I guess, my comment would be the next CAT 7495 shovel that's sold hopefully be that one. So the CAT, we're working with the CAT dealers, as well as the Caterpillar people themselves. They're trying to help us move that shovel. The shovels -- we have the shovel. It's in Las Vegas in storage. It's not put together, so it's ready to go.

Bryan Grad

So it's a brand-new piece of equipment?

Stephen M. Jones

Yes. Brand-spanking-new, never-put-together.

Operator

Your next question is a follow-up from the line of Zach Zolnierz of the GMP Securities.

Zachary Zolnierz

Just a couple of quick follow-ups. First, I thought there was a cash contribution for reclamation that was supposed to be in the fourth quarter. Is that still expected?

Stephen M. Jones

A contribution or -- well, I don't think there should be any significant change cash-wise on reclamation in the fourth quarter, Zach. And that's not in any of the numbers that we've talked about. There is a possibility, and this is maybe what you're referring to. There is a possibility -- I mean, currently, we have -- some of our bonds are 100% cash collateralized, and there is a possibility to be able to reduce that down to 50% and then pull some cash away from that, but that's not something really that -- I mean, that is something what we're looking at, but not something that we factored into any of our numbers.

Zachary Zolnierz

Okay. Yes, I think what I was thinking was more with the expansion. I thought there was another, maybe, $10 million to $15 million of cash that would become restricted.

Stephen M. Jones

No, there's not. No, there's not. And because we're deferring the mill, there's -- if you will, we have some excess restricted cash at the moment. And we're actually working with the state for that to be credited against some additional disturbance, specifically around the water wells. So there should not be any additional restricted cash required.

Zachary Zolnierz

That's good. And then my final one is just for next year, do you expect to pay cash taxes?

Stephen M. Jones

Next year, we would probably pay a minimal amount of fundamentally, AMT cash taxes. I'll say no more than 10%.

Operator

And, ladies and gentlemen, this does conclude the question-and-answer session for today. And I'll now turn the conference back to Mr. Buffington for any closing.

Randy Buffington

Thank you. I just want to say that over the past quarter, we've taken all the necessary steps to right the operation. We've got a good team in place. The team is very committed to hitting their goals. And we understand we need to improve on this quarter and continue the good work that we did in this quarter forward into the future quarters. I want to thank everybody for being patient with us, as we work through the studies, the updated feasibility study and the oxidation, and we'll get to it as fast as we can and get the results out to you as soon as possible. It's the future. We're going to continue to grow this company and this is the basis for the work we've done over the past quarter, getting the right team, getting the right processes in place, hitting our goals and then delivering a very good feasibility study with the right cost in it. So thank you for the call. Thank you for your patience, and looking forward to talking to you in the future.

Operator

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

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