Primero Mining Corp (PPP) CEO Joseph Conway on Q1 2014 Results - Earnings Call Transcript

May.12.14 | About: Primero Mining (PPP)

Primero Mining Corp (NYSE:PPP)

Q1 2014 Earnings Conference Call

May 8, 2014 09:00 AM ET

Executives

Joseph Conway - CEO

Renaud Adams - COO

Analysts

Rahul Paul - Canaccord Genuity

Ovais Habib - Scotia Capital

John Tumazos - John Tumazos Very Independent Research

Michael Gray - Macquarie Capital

Jeff Killeen - CIBC World Markets Inc.

Operator

Hello, and welcome to the Primero First Quarter Conference Call. We have just a few announcements before we begin. (Operator Instructions) I will now turn the call over to Joseph Conway, President and CEO of Primero. Please go ahead, Joseph.

Joseph Conway

Thank you, operator, and good morning, everyone, and welcome to Primero’s Q first quarter for 2014. First quarter of this year is really a very in fact a very important quarter for us in fact and I think when we look at the history, our corporate history, it may be one of the most important ones. Why? because we are it is a transitional quarter for us in terms of the most latest acquisition but it a transformative for us in terms of our production our scale of operations our number of people and what we do in terms of our future.

From here I’d like you to go through our results for the quarter the management team is all here and available for questions and at the end of the call and we’ll it up shortly. First of all really speaking to it on the basis on a transitional quarter as you we’ve closed the Brigus transaction here in March and we’re very pleased with that we see that as a real opportunity to go forward in a very dramatic way potentially. Our earnings were impacted by the transaction cost associated with the Brigus transaction and certainly the stock-based comp was also an impact in terms of our earnings.

As you can appreciate with our share price going up almost 71% in the first quarter alone there has to be an impact on that front. A lot of it unfortunately was non-cash item. Our balance sheet remain strong and yet we still have significant amount of flexibility from a financial point of view despite a number of debt repayments that would come forward during did come forward during the quarter and will come forward during this quarter particularly. Our San Dimas operation continues to show good results and production continued to be record on a record for that quarter. The San Dimas on the Phase 1 extension from the two 225,000 tonnes a day is largely complete. The crushing component is done all that remains is the tankage that needs to be done during this month. But I think it’s important to recognize the real issue is that the mine is producing at 2,500 tonnes a day or better every day and that’s an important part of it.

In terms of our spot sales as you know that is relative to our Silver Wheaton arrangement this is the first time in our corporate history we’ve actually been able to achieve spot sales in the first quarter and that translates into a 1 million to 1.5 million ounces of production that is sold at spot for 2014. Our reserves and resources, we put those out during the quarter as well and over 30% increase in both so very pleased with that. And probably another very significant transitional item for us was their dual core block sale. There has been speculation for probably almost a couple of years in terms of the timing on this and as you recognize they were a major shareholder and we bought the San Dimas asset from them in 2010 but ultimately as part of the consideration they took shares and we’re looking to obviously liquefy that position at some point which they did during this quarter. The benefit for us is of course is the removal of an overhang but if you look at our trading liquidity over the last since that occurred in early March it’s gone up dramatically and that obviously attracts a greater investment base and it overall is good for our existing shareholders.

Let’s look at San Dimas for a moment, certain off certainly with production on a year-over-year basis up 30%, so there is a two drivers there as one is mill throughput of 20% and then grade, grade was up 10% and when you combine the two you’ll almost go up to 30% change over year-on-year basis and that’s an ongoing process where we’re working forward going in the future we’ll still looking at further optimization and extension opportunities which I’ll touch on in a moment. If you look at our cost and particularly at our cash cost the trend is pretty clear, continues to drop. And if you look at our sustaining cost again the same thing. We do -- the drop is not as significant but we still have a very healthy margin on and all and all in sustaining cost basis and that reflects our continued commitment for reinvestment into this asset.

When we look at the Black Fox production we’ve only owned it for about 26 days of the month it was low production but we do anticipate a significant contribution coming forward particularly in the third and fourth quarter as we turn the operations around and get to development back up to where we think it should be and but however if we look at the cost structure whether on a cash basis or a sustaining basis clearly the impact there was a negative impact in terms of our operating loss through the contribution to our financial results for the quarter. But that’s not going to be something that will continue, we’re very comfortable where we are with the asset and we’re very comfortable that we can turn it around, it’s your order.

Looking at our overall financial results, revenues were essentially flat when we look at our earnings per share obviously significant change when we look at our adjusted earnings we really -- we want to highlight the fact that while there was a change basically a big part of it is really related to as I mentioned the modest operating loss about $3.5 million at Black Fox. But more importantly is really looking at the stock based comp. As I mentioned earlier we’re up about over 70% on a quarter alone, and that requires us to adjust our stock-based comp calculation if you like, which was about $8.1 million for the quarter or about $0.06 a share. So a big swing, not all cash I would say but actually very small modest portion of that was actually cash item and this is something that we adjust quarter, every quarter as we go forward.

When we look at our cash flow per share that was obviously impacted somewhat by the PSU payments of about $2 million in cash but really the transaction cost of about $6.7 million associated with the Brigus acquisition was probably the biggest swing that we see going forward in addition to obviously as the operating loss that mentioned a moment ago.

Looking at our balance sheet and liquidity, that’s an important part of our business. At the end of March we have roughly $86 million in cash and about $112 million in debt. I think again both of those are in terms of debt level perfectly fine and obviously a lot of that is associated with the transaction with Brigus. Where we are now on an estimated basis is really roughly $38 million in cash. We will -- that reflects the fact that we repaid $21 million of the Brigus notes that were in April 4, and also the fact that relative to our line of credit which we were negotiating, there will be an obligation to repay the Goldcorp note associated with that.

The other component that we’re also looking at though is, there is a convertible debenture outstanding with respect to the Brigus acquisition. And we have made a tender offer for that interestingly enough, no one has tendered to it at this point and I think we can see why it’s got an attractive coupon. And so that debt repayment is likely not going to occur during this year and likely will occur in 2016. But it’s also important to remember the liquidity that you see here is just a static snapshot if you like. But bear in mind the combined asset base that we have is generating well over $100 million of cash flow and we’re going to be -- even though we’re spending $115 million in capital into the business this year, we’re still going to be generating positive cash flows. So that’s an important part where we stand today.

In terms of our focus really has been relatively consistent. I would like to touch a little bit on the growth side of our picture. And first of all let’s look at Black Fox. You see this year our guidance is roughly 75,000 ounces for the year. And jumping dramatically to 120 next year, and that reflects again what we see will happen with our commitment to exploration and underground development in particular. What this slide doesn’t show you is the potential of what could happen with San Dimas, should we like to go forward to the 3,000 tonnes a day scenario and that would take San Dimas from 165,000 ounces to probably closer to almost 200,000 ounces. So that would be something we’ll be coming out within the third quarter.

In terms of our focus though remains consistent, we want to make sure that we have sufficient liquidity, we want to make sure that we can grow the business on a measured basis, utilizing the capital that we have with little dilution. Costs are continuing to be a focus for us as in everybody in the industry, I would say our focus is somewhat unique and that will focus a lot more on productivity improvements as opposed to short-term cash costs cutting.

When we look at growing forward from here, where are we going to focus our opportunities or looking for opportunities to serve you in low risk jurisdictions such as Mexico and Canada. And certainly last but not least, is demonstrating responsible mining that’s our social license to operate and that’s an important feature wherever we are Canada or in Mexico for that matter.

In terms of our outlook, basically remains consistent with what we announced earlier on in the year. I think the takeaway that I want you to recognize though in terms of our exploration activity whether it’s had San Dimas or a Black Fox, I think we’ve demonstrated that we’ve added a lot of value through a fairly aggressive exploration program at San Dimas and we’re very confident that the same will happen here at Black Fox. I mean it’s important to note that Black Fox over the last two years roughly $2 million have been spent on exploration, we’re going to spend almost $17 million in the next nine months. And we’re expecting very interesting results from that going forward.

I’ll take you very briefly through the asset base that we have. When we look at where we stand today basically when we talk about the transformation if truly has been. We’ve gone from a single asset company two years ago to one now, two assets in production, two development projects plus an exploration project in Ventanas. And we’re spending money and investing in all of those assets during this year and we expect to see some good results coming from eventually everywhere we operate.

Looking at San Dimas, this mine has been around for a long time, it’s over literally centuries, it’s a very conventional operation, we’ve just got the capacity up to 2,500 tonnes a day. But what we see really here is what are the next steps that go forward.

Quick look at our history if you like, even before we operate looking back over the last 15 years or so and it’s really a story and one we expect that I see one of commitment to invest and if I look back in the Silver Wheaton day Wheaton River days in 2003 and ’04 and onward that was a time where it was getting in investment there were certainly some exploration activity that was very important to them certainly the Central Block discovery. But as we go into our history what’s been important for us is certainly the key discovery that we’ve seen is the Sinaloa Graben which is very broad area of mineralization. And what we’ve been able to do is if you look at our reserves for example it’ starting to see an increase in reserves and resources particularly at the grade level which is the important for us.

And when we look at that side of it and then over the possibility for an expansion that’s where we are today, so looking back a little bit. We were operating at less capacity the nameplate capacity of the mine was 2,150 tonnes a day we’ve expanded that to 2,500 tonnes a day during this quarter and were largely complete as I mentioned earlier. So what’s the next step? Well, there really is looking to this opportunity is 3,000 tonnes a day. And we can get to 3,000 tonnes a day from underground mining perspective. The question is can we sustain it. So that’s a big part of our decision making that we’re looking right now is ensuring that we can have the capacity to go forward from underground mining perspective. In fact the reality of it is that the mine in terms of its crushing capacity is already at 3,000 tonnes a day in terms of tailing processing capacity again the same it’s already at 3,000 tonnes a day. So, the work is going on now when we look at our reserves coming out of last year to see where we’re going to go from here and can we achieve that perhaps going up to that 3,000 tonne a day level, and more about that during the third quarter.

In terms of our exploration success in general, I think we’ve been quite pleased with that. We’ve got $16 million investment this year. And -- but when we look back, I think it’s important to recognize as you see in the top line of that slide the Victoria vane. Victoria was a mineralization that we didn’t even know existed two years ago and now we’re at almost 200,000 ounces of very high grade material and we’re going to start to access that material later on this year and more fully in 2015. We also have very large land package 2,500, 2,200 -- 22,000 hectors plus and we’re going to be this year alone doing about 80,000 meters of drilling. And again long term commitment to this part of the business and we’re starting to see results. For example, if we look at in the middle of the slide the San Jose vendors (ph) there is some new mineralization that again we did we weren’t aware of even as early as late last year but it’s starting and quite exciting we’ve got some early holes into it. It’s still very early days but we are making the commitment to drift out there we’ll allow ourselves that to do more exploration more detailed exploration and be in a position to shift the mineralization hole together put it into the mine plan as quickly as possible.

And now I’d like to talk a bit more about Black Fox. The first slide really here is really looking at where we are in terms of the camp. This is a probably one of those perspective camps in the world and there is almost I believe over 200 million ounces have been produced here historically. And we’re right in the middle of it with a fairly attractive land package. When we look at it there is a more detail really what we see here is really an opportunity unlock value. You’ve got -- it's a great asset but is has been under invested and we’re going to change that and we are already making good efforts on that even in the short time that we’ve owned it. It s a mine that has some underground and open pit the open pit grade is roughly 3 grams and the underground is roughly 6 grams. At this point based on what we know today from the reserves that we see the open pit will last three years and the underground is about seven. But -- and we’re very confident that as we put dollars into exploration and development there is opportunity to definitely expand the underground and quite possibly open pit as well.

In terms of our short term focus really that top priority here is to get the underground back to where it was in during early part of 2013 and that means getting the underground throughput up to 1,000 tonnes a day. You can see in Q1 we’re well below that but with the budget that we’ve got forward we’re going to be spending about $48 million over the next 10 months here and focus on that key item for underground throughput. Why? Obviously, because the more tonnes that we can get from the underground into the mill because of its high grade nature we’re going to be able to produce more ounces it’s just quite frankly as simple as that. But to do that what are we need to do is certainly increase our delineation definition drilling. We’ve got some drifting that we need to catch up on and then really get the overall add some new equipment into increase underground productivity in general.

In terms of the open pit, the third phase pre-surfing is done and we do expect grades to increase as we get deeper into the pit. And from an underground perspective we are driving an exploration drift at the 500 level which is going to very important to us and I’ll show you why in a moment. But first of all when we look at one of the reasons that really intrigued us about this particular asset is really the fact that not only is it a camp that’s produced over 200 million ounces but virtually all of those at mine that have been a major contributors to that production level have had significant depth potential. And yet when we look at Black Fox we’re only down 500 meters in a camp that typically was down to 1,600 meters on average and some actually go well below that.

So the question really is of course is there evidence that there is mineralization at depth at Black Fox, well yes there is. In fact limited in terms of the data points but we do have two holes that were drilled last year, one had grams over 37 meters the other one had 40 grams over 26 meters. We don’t know the orientation of that but certainly I can tell you that by the time we get to our second quarter results we should have at least five or six holes down in there, and if that mineralization continues to hold that could be a game changer for us going forward. So certainly a lot of explorations potential at depth. And then when we look at on a lateral basis we’ve outlined the block that you see there with a number of drill holes have been intercepted, that’s going to be on the eastern plank if you like, that’s a key priority.

But I did mention the concept of that tunnel, the green line going across the very bottom. And why that’s important to us is one is that we can drill set up base to drill a depth but also check the east and west length of the project in terms of -- for exploration activity. And we’re going to be, that will take us into 2015 to complete that tunnel but as we go forward we’ll be able to really get more effective exploration and we’re going forward particularly through this year and next year.

Looking at Grey Fox which was also part of the portfolio that we acquired. We’re going to spend a minimum of $9 million here. The important feature here really is, it’s very close to Black Fox, it’s less than four kilometers away, it’s got open pit potential as well as underground. We’ve got three rigs on sight now, we’re contemplating brining in another rig onsite largely because of some of the work that we just come out with. As part of our press release today in terms of our results, which also put out a separate press release with respect to Grey Fox and its exploration results from a limited amount of drilling that was done since we acquired the assets.

We’ve drilled about 34 holes over the last two months let’s say, about 9,000 meters which is a very modest part of our overall budget plan for this year. But if you look at the results particularly from full 831 and 838 the important thing here is obviously the fitness but great as you’re always king in any of these assets and the resource grade at Black Fox -- Grey Fox currently is about 3.7 to 4, those grades are 25% to 30% plus on top of that with pretty outstanding fitness.

So again commitment exploration on this asset, it’s still in exploration stage but there is a real possibility that by the time we end this year this could go transition from an exploration project to a true development project. Looking at Cerro Del Gallo, that’s an acquisition we made in 2013 or closed in 2013. Near-term production potentially here, what we’re focused on this year is really the land acquisition in baseline engineering. And that’s all on behalf of basically reaching a construction decision or not during this year that is going to be contingent basically achieving a 15% IRR at $1,100 gold price and we’re very focused on making sure that that capital management if you like is done profitably.

So at this point we’re not at 15% but whether it’s through reduction of capital or reduction of operating costs or improvements in metallurgy or exploration success, this is a project that we’re committed to and we’re going to continue to focus, spending about $13 million this year on the project. But again we’re very focused on making sure we get a certain return that’s acceptable to us, particularly in this kind of volatile commodity price environment.

When we look at news and catalysts you’ll see, we’ve come out with the first quarter results, we will have new Black Fox reserves update coming out on July 5, we’ll be looking during Q3 to make a decision on the 3,000 tonne a day, as well as potentially a decision with where we go with respect to Cerro del Gallo. But during that time I think I would encourage people to watch for a certain exploration, whether it’s at San Dimas or Black Fox or Grey Fox, a number of the activities that we’ve got going forward. And again I talked about this year being transformational, it may well be transformational for us from an exploration point of view and our long-term development.

So to wrap up bottom line, we see Primero as a company as a great investment opportunity, it is a transformational year for us as we go from a single asset company to a mid-tier producer. We’ve now got a portfolio and we will continue to work in safe jurisdictions as we look forward for other opportunities in the future. And again, we have a strong cash flow on balance sheet and we have a significant, obviously a significant capital into our projects, roughly $115 million as I said and also roughly 100 of debt that we will be repaying likely over the next 12 months. But with our cash flow that we have in hand and our balance sheet we feel very comfortable where we’re. And that is also the fact, by the fact our below cost, our cost structures is below at industry average at this point.

And obviously what we see here during the first quarter was we had some very high short term costs at Black Fox but that’s going to change over the next couple of quarters as we get it back to, get it turn around and get it back to where we think it should be.

And with that I’ll open it up for questions, and thank you for your attention.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Rahul Paul from Canaccord Genuity. Please go ahead.

Rahul Paul - Canaccord Genuity

Hi everyone. If I compare the results that Black Fox so your period of ownership versus the fourth quarter it looks like production in March was similar to the run rates for the first quarter, but cash cost declined quite substantially from Jan and Feb. Just wondering if you could talk about some of the reasons for that improvement? I understand that the grades were higher but was there anything else?

Joseph Conway

Rahul, thank you for question, I’m just going to turn it over to Renaud he’d give you a quick response.

Renaud Adams

Yeah. Well, when we say that the production was very similar in fact we see quite an improvement in our quarter over year-over-year. We have the threshold actually much faster at San Dimas in the Q1 -- sorry about that, sorry about that I missed the question.

Rahul Paul - Canaccord Genuity

I was asking -- I was talking about Black Fox.

Renaud Adams

So the Q1 you will understand that the Q1 at Black Fox is quite a transition now the case for us whether it was very important is that in March for say I think it’s fair to say that we’ve met all the parameters that we set in terms of productions in terms of cost what you see in terms of cost at the Black Fox there is a lot of room to decrease that in multiple ways. I wouldn’t say that it’s been any specific reason in the Black Fox in the first quarter obviously the lower production of the underground combined with lower grade overall which was mainly due to the -- to more to approach from the open pit the mill had softer as well some lower throughputs in the Q1.

Moving forward I am confident to say that the mill is now full throughput and the underground is picking up. We’re seeing the tendency following our trend as an expo (ph) that the earlier this year the Analyst Day. So what you should expect moving forward. Again, we were very specific at the Analyst Day we truly liked what we’ve accomplished in last year at Black Fox. This mine was operating extremely efficiently underground at the very low cost and the overall mine was operating. So, the success of this place in terms of cost moving forward is to bring the underground at the 1,000 tonnes per day and meet our underground top below the 100 mark per tonne in mine, and the cash cost will follow. Truly the opportunity there is to get back the underground on track and I guarantee that the cost will follow.

Rahul Paul - Canaccord Genuity

Okay, thanks. And let me clarify this -- let me clarify my question a little bit. So, if I look at your cash cost for the three months of the year including the period where you did not own the mine, it was 1,409 and then I guess in March of the off period of ownership it came down to 1,154. So I mean it looks to me there was quite a bit of improvement going from Jan and Feb into March. And so in that regard would it be too aggressive from me to assume that your cost could go below $1,000 an ounce in Q2?

Renaud Adams

Well, as you know, if you look at our guidance for the year, our guidance were not at $1,400 an ounce, okay, but Black Fox again we need to understand it was a transition and once we close from March 5th a lot of things were actually push back on track and giving the resources to the team including increasing the personnel and increasing the capacity for drifting. So definitely we’ve seen in March a reduction. And as we move forward and get back the underground we’ll get back to our guidance. So are we targeting better than 1,400 and into second quarter, yes, absolutely, absolutely.

Joseph Conway

And just as we’ve said Rahul we’re looking at our cost structure being in the 850 to 900 for the year. So, you’ll see a gradual movement out there.

Rahul Paul - Canaccord Genuity

Okay, thanks. And just moving on to Gray Fox, Gray Fox south you reported a few high grade holes near surface. I mean is it too early to say or do you see any open pit potential there?

Joseph Conway

That’s good question. I think originally we didn’t to be honest with you with that more of it is in underground operation but certainly those results are encouraging. We obviously to get lot more holes into it but I would say it’s certainly back more on the radar screen in terms of an open pit side of it and it was when we did the acquisition or when we originally did the acquisition.

Operator

Thank you. Our next question comes from Ovais Habib from Scotia Capital. Please go ahead.

Ovais Habib - Scotia Capital

Just a quick question first of all on the Goldcorp note. Now you’re talking about repaying the note as soon as you get the credit line the $27.2 million. I thought that note was due in 2015 is there a covenant that you have to repay this note or do you have the flexibility to pay it later on as well?

Joseph Conway

It’s really, if assuming we draw down the note the line of credit or established line of credit which we will in the next week or so, part of the condition is they want to be first secured, i.e. the bank and that condition requires us to repay that note early. The reality of it is in fact if you look at the cost of the coupon on the note would be substantially below the interest cost that we have on the note to Goldcorp. So it’s in our interest to repay it. In any case, but it is part of the condition of the deal.

Ovais Habib - Scotia Capital

Got it. Are we still on track to receive the credit line than in May is that what you’re targeting?

Joseph Conway

Yeah, absolutely.

Operator

Thank you. Our next question comes from John Tumazos from John Tumazos Very Independent Research Group. Please go ahead.

John Tumazos - John Tumazos Very Independent Research

Congratulations on all the progress. Joe you laid out some very specific timetables and there is a huge amount of information new information you’ll get from this year’s drilling and development. Are you concern that maybe the plans are too specific and then maybe the new information could tear up the engineering designs and lend toward a new plan? I am just thinking out loud and maybe I’m totally stupid. But your neighbor is drilling up this tailor project which is very near your mill western Matheson. And if you’re really successful at Hislop, it might make sense for you to have a mill at Hislop and let your neighbor ship the tail over to your mill and not make the trucking people as rich on highway 101.

Joseph Conway

John I think we’ve been very transparent and we have been very specific in terms of what we’re expecting out of Black Box in particular over the next nine months. And the reason we were very specific is really one, is to be transparent but also two, to make sure that we see this as a transition and we want people to actively measure us. How we do in terms of our production on a quarter-over-quarter basis and we’re very confident that we can deliver on that plan.

With respect to your comment about tailor et cetera, to be honest John we’re very focused on the short-term of making sure that we deliver on our plan in execute appropriately, because we have made some very specific commitments. So that’s really -- that’s our focus for the next six to nine months.

John Tumazos - John Tumazos Very Independent Research

We’re just hoping you find a lot of gold in all your plans change for the better.

Joseph Conway

Me too, thanks for your question.

Operator

Thank you. Our next question comes from Michael Gray from Macquarie Capital. Please go ahead.

Michael Gray - Macquarie Capital

Just a question, San Dimas accessing the higher graded Victoria later in the year plus 11 grams presumably. Can you give us an idea what that’s going to do in terms of the gold grade profile Q2 to Q4?

Joseph Conway

I don’t think it’s going to have a dramatic impact a lot of -- in terms of underground access if you like is really going to start to show up in 2015 particularly. Renaud, any comments you would like to make to that?

Renaud Adams

No, you’re absolutely right Joe and you know if you look at our reserve grade last year I think it’s fair to say that we’re targeting to operate our reserve grade as we were showing last year. That’s true that our grade increased significantly this year and it’s also true to say that due to Victoria but as we inform I believe the last quarter unfortunately we cannot access this ore of the high grade before next year. So we will be targeting the average reserve grades really from maybe probably mid to late next year.

Michael Gray - Macquarie Capital

Okay. And can you comment on slight dip in recoveries on the gold for San Dimas down to 93%?

Renaud Adams

Yeah, sorry about that. Really there is no long-term issue there as reported the mill is capable as we speak in February and March we were totally successful in processing more than the 2,500 tonnes per day, this is working. Unfortunately we couldn’t finish on time, we had a slight delay in completing the extra tankage for leaching and some new tech as well which as impacted the recovery. We are on track in line to complete all in the second quarter and the recovery will be back.

Joseph Conway

We’re anticipating that should be done late May early June Michael, so…

Michael Gray - Macquarie Capital

Okay.

Joseph Conway

It’s out, we’ll be back to the 96 range is you like here the period to short…

Michael Gray - Macquarie Capital

Okay. Yeah, okay, that’s good. And final question just on Black Fox I know it’s only been a month you guys had your hands on it but any sense for how the grades reconciling from the mine plan for open pit and the underground?

Joseph Conway

Renaud?

Renaud Adams

Yeah, I mean if you look at the reserve as Joe mentioned in the slide there an open pit of the 3 grams and average in the underground around 5.5-6 gram, close up to 6 gram. We’re seeing that, we’re seeing that unfortunately it is because the underground component was not at the volume we needed to make up the difference with the lower grade from the pit but we’re not concerning about if we can hit the average grade of the reserve as show it’s just that we need to volume and component from underground to meet the average grade of 4.5 to 5, but it reconcile very well with the reserves in terms of grade, it’s just the matter of volume from the underground for the overall grade.

Operator

Our next question comes from Jeff Killeen from CIBC. Please go ahead.

Jeff Killeen - CIBC World Markets Inc.

Hi. Good morning, and thank for your today. Maybe just an extension to Mike’s question, looking at the ramp up at Black Fox from Q1 into Q4, that’s been indicated. Would we expect to see sort of a stepped increase in that production in Q2 and Q3, or is it more, a lot of development has to be done in Q2, and that would see the increase more back weighted this year?

Joseph Conway

No, I am very comfortable to say that you will see an increase in Q2. There are some longer component of positioning our self and accessing a new so perhaps in the next two quarters. But, in the short terms we also have opportunity. So, definitely as we presented earlier in our Analyst Day, you will see a step, and we’re confident that the Q2 will be much better than Q1. And we’ll be showing -- and I would say -- I wouldn’t call we’re going to be there in the Q2, but what you will see is definitely the step towards the 1,000 and we’ll probably targeting around the 17,000, we’ll show averages ounces into Q2.

Jeff Killeen - CIBC World Markets Inc.

Okay, great. And then now that you’ve been onsite a little bit longer. Have there been any changes in terms of how you view the work force potentially the operating equipment onsite getting a better feeling of there is any changes to be made there?

Joseph Conway

Management at site has already started to increase a slight the amount of employee underground to get back to the conditions of the last year. We have ordered new equipments scoop and truck so the scoop is at site the trucks are coming as well. So, we will start seeing some benefit as we move forward. The idea is every single aspect has been addressed as we speak to bring the underground component back on track.

Operator

Thank you. Our next question comes from Ovais Habib from Scotiabank. Please go ahead.

Ovais Habib - Scotiabank

Hi guys. Just a follow-up question on San Dimas, in terms of the tunnel that was connecting the Central Block to the Sinaloa Graben. Is that work still ongoing, is there any progress on that front?

Renaud Adams

On that one, as we presented as well earlier, there was a change of strategy, if you will, that we are connecting the both, where we are connecting from the north corridor. If you recall there is an north an exploration drill that was connecting between the block, the Central Block, and the -- so we’re currently ready to do that connection and complete the loop if you from Graben to Central Block. Two to, no it’s maybe three to four months we should be completed there. And also we’ve started to drift up north, if you recall. We were showing the potential in up north so we’ve started also to drift toward drift toward the north. So rather than connecting on the south side from Graben to Central Block, we’re doing in the shorter term in connecting from the north tunnel.

Joseph Conway

Ovais of the -- that San Jose area is becoming quite interesting for us so we’ve tactically said lets puts some development heading south into that so that we can one drill it off and if we’re obviously we’re hopeful that we would successful there and from not only Victoria or Alexa bring it in to the full if you like in of it, production speed as quickly as possible.

Operator

Thank you. We have no further questions at this time. I would like to turn the floor back to Joseph Conway. Please go ahead with closing remarks.

Joseph Conway

Thank you operator and again everybody who is on the line I certainly appreciate your attention and again we see this as a very important year for this company as we transform from a single asset producer to a multi asset producer with some pretty critical development projects in the pipeline at the same time. So, I look forward to updating you again in August on our second quarter results. Thank you again.

Operator

Thank you. And thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating you may now disconnect.

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