B2Gold's (BTG) CEO Clive Johnson on Q1 2014 Results - Earnings Call Transcript

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 |  About: B2Gold Corp. (BTG)
by: SA Transcripts

B2Gold Corp. (NYSEMKT:BTG)

Q1 2014 Earnings Conference Call

May 14, 2014 1:00 PM ET

Executives

Clive T. Johnson – President and Chief Executive Officer

Mike Cinnamond – Senior Vice President of Administration

Dale Craig –Vice President-Operations

Bill Lytle –Vice President - Country Manager

Dennis Stansbury – Senior Vice President of Production and Development

Tom Garagan – Senior Vice President of Exploration

Analysts

Rahul Paul – Canaccord Genuity Corp.

Ovais Habib – Scotia Capital Markets

Andrew Quail – Goldman Sachs & Co.

Sam Crittenden – RBC Dominion Securities, Inc.

Jeff Killeen – CIBC World Markets, Inc.

Chris O. Thompson – Raymond James Ltd.

Joe Fazzini – Dundee Capital Markets

Ovais Habib – Scotia Capital Markets

Operator

Good morning, ladies and gentlemen, and welcome to the B2Gold First Quarter 2014 Result Conference Call. I’d now like to turn the meeting over to Mr. Clive Johnson, President and CEO. Please go ahead, Mr. Johnson.

Clive T. Johnson

Thanks operator. Good morning or good afternoon and welcome to B2Gold’s conference call to discuss the results of the first quarter of 2014. 2014 first quarter was another successful quarter for the Company with good operational performance from the three mines.

In addition to that, we advanced our development projects particularly Otjikoto, basically which is well onto construction. They company remains in a very strong cash position and in a very strong position given the weaker gold price that we’re seeing today. Our continued focus is to optimize production at our mines develop further our projects such as Otjikoto and always retain a strong cash balance in the company.

So with that, brief intro, I’m going to turn it over to Mike Cinnamond, the CFO of B2Gold to walks us through the financials, thanks Mike.

Mike Cinnamond

Thanks, Clive. So, I’ll start on the statement of operations. Gold ounces sold for the period were just under 99,000 ounces, which was a positive increase of 4,000 ounces over the prior periods in the prior year. The realized price for those sales was $1,303 which compares positively with the average price in the period of $1,293.

Overall revenues declined by $25 million from $154 million in 2013 to $129 million in 2014, which is primarily a function of the decrease in the gold prices. So, breaking down that decrease there was a 20% decrease in the average realized prices, which created a $21 million drop.

Also in 2013, revenues included $9 million non-cash adjustment of credit which related to the unwind of mark-to-market contracts that we’re acquired as part of the Masbate acquisition, which aren’t repeated this year all of that was amortized in 2013. Well offsetting those two declines was a positive $5 million increase based on an increase in the total ounces sold get us to in that decrease of $25 million.

On the production side, we produced just over 96,000 ounces which was just under the lower end of our projected guidance. There was a very positive quarter for cash operating costs. Overall consolidated cash operating costs were $634 an ounce for the quarter, which compares positively with our budget of $682,000 or $682 an ounce so, $48 per ounce improvement or by 7% over budget, and then $88 improvement over our actual cash operating cost in the prior year period.

Overall our guidance is unchanged at $667 to $695 per ounce for the year for cash operating costs. And those positive cash costs variances were actually we saw them in all operations.

So, Masbate first of all had a 4% reduction in its cash cost due to a lower strip ratio than budgeted. And then this resulted in more ore produced in the period than was budgeted and axiom ore stockpile buildup and that inventory adjustment related to the ore stockpile buildup produced a positive $5 million credit against our operating costs resulted in the lower cost that we saw from Masbate.

Masbate, did see lower grades than budgeted however and that was primarily due to differences in mining locations. And the intend was that 100% of the Masbate material in the quarter, would have come from the Colorado high-grade oxide material but as it transpires the mining in the period was from the HMBE and Main Vein Pits. And consisted of primary and transition material, so resulted in an overall lower grade being mined. The net result of that was that Masbate production for the grade was just over 42,500 ounces, approximately 9,300 ounces less than budget.

However, our mining team at Masbate have looked at this and there is the intent to go back and mine that higher grade Colorado material later in the year, so our team are confident that they will make up that deficit. And therefore the overall guidance from Masbate for the period for the year remains unchanged with a range of 190,000 to 200,000 ounces.

Libertad, it benefit from higher-grade primarily from mining at the Mojon and Crimea pits. With the resulted production overall of 30,500 ounces exceeded budget by approximately 2,400 ounces.

And at El Limon, grade is pretty much on budget, but it did benefit from lower site and contracted charges. So, overall production was approximately just over 15,000 ounces, supply of 600 ounces short of budget. When we combine all these factors, all these results the total production of the period was 96.3, those ounces were just about 7,000 ounces short of budget. Our budget production in any event, in the first half it was expected to be lower than the second half, due to various factors including the SAG mill change, that’s going to happen in early in June.

We’ve already mentioned, our Masbate team are confident that they can makeup the differences, the deficit of Masbate so far this quarter, so overall there is no change to our consolidated guidance for the year of 390,000 to 420,000 ounces.

In addition all-in-sustaining cost for the quarter, came out at $1,039 per ounce, 2.8, I think some of the CapEx that was budget for the quarter was pushed into little later in the year so, those all-in-sustaining costs aren’t quite what we were budgeting, but overall our all-in-sustaining costs are still forecast to be in the range of $1,025 to $1,125 for the year.

Just moving on to comment on a couple of others items in the P&L, depreciation per ounce has increased to $256 per ounce sold, that’s compared to the fiscal 2013 amount of $225 per ounce and that’s really due to a full period of amortization being charged in 2014 for some of the significant CapEx, that was booked in 2013 and 2013 we saw the half year role for additions. For this year, you are getting a full period amortization for some of that significant CapEx including things like the deferred stripping at Santa Maria and Mojon currently 2015.

On the G&A side, G&A is up a little bit and it’s really there are some new hire employees that we have on that side, and also we acquired both the Kiaka project late in 2015 and now we have the full quarter of G&A related to that operations.

The other main item, in the P&L that I’ve highlight is the loss on the fair value of convertible notes of $38.2 million. And our convertible notes that we issued last year are recorded for accounting purposes, of fair value. And that fair value fluctuates B2Gold’s share price, because of the conversion features that’s inherent in there, so in fact you really in some ways of backing your own success, the higher your share price, the greater the value of that they give us mark-to-market adjustments that flow through the P&L. on cash adjustment and at end of the day we’ve added back on our adjusted earnings per share which I’ll discuss in a moment.

Overall there was a loss of the period, $24 million including that mark-to-market on the converts, which equated to $0.04 per share loss, but if you add back the convertible, mark-to-market adjustment also other adjustments, most notably that share base non-cash stock-based comp charge, we actually come out of an adjusted earnings number of $17 million or $0.03 a share.

Just getting move over and talk briefly about the cash flow just comment a couple of things in there. So our cash provided by operating activities before changes in non-cash working capital was $43.3 million as compared to $47 million last year that equates of a $0.06 for share on a cash flow basis. And I think that is pretty notable we came pretty close to lots of these numbers even given the significant reduction in the gold price in the period.

So, if you look at we actually incurred reduction in total gold sales proceeds of $16 million, but that was offset, an improvement in cash operating cost of $8 million. This year we didn’t have the CGA transaction cost that we incurred last year, so when you knock those out that really explains $3 million difference year-on-year or period-on-period between this first quarter and last year’s first quarter.

And then if you look at, I’ll just comment, changes in non-cash working capital, it wasn’t negative impact of $22.5 million in the period. And that really reflects two main things, the first is, the buildup of the ore stockpile, I mentioned earlier, but that’s about approximately a $5 million working capital outflow and we’ll see the benefit of that in future periods.

And also another $10 million of that change relates to Namibia way back, and we are getting our way back in Namibia. It’s generally taken from falling of the returns actually getting the refund it’s generally taken with between six and nine months. So it’s slightly longer than we expected, but it is coming in and in fact after the period and we received a further $4 million refund. So I think we’re confident that we’ll see all of that comeback, but it did have a negative impact for the quarter.

Overall cash flow from operating activities were just $18 million compared to $50 million last year, but I would say that if you look at last year, we did get the benefit last year of just over $32 million in revenues from OEM that we acquired as part (indiscernible) acquisition. So if you invested and we occur this year so if you look on a like-for-like basis, we’re pretty consistent with the prior year. Overall, our cash flow items, maybe I’d comment on it, Otjikoto alone, we drilled on another $11.3 million in this quarter and we got about approximately $12 million left to draw.

We also paid interest this quarter of $6 million which is mainly the interest on the convert of just over $5 million plus interest in the ICF and other sort-term borrowings. And we also had an outflow of $2 million related to the DSO rate kind of the restricted cash, that’s just – that service again that we had to setup in relation to the GAAP financing.

Overall in the investing side, we had an outflow of $89 million and I would comment as well, that includes $26 million for Otjikoto payables for capitalizations that already occurred. And were recorded at December 31, 2013, but now we’re just picking up the outflow related to the payables. Overall, I remind everyone as well, the Otjikoto remains on-time and on-budget. So reflecting all of those items, at the end of the quarter we had $183 million of cash and we’re in a strong cash position and combined with our existing credit facilities, we think we’re well financed to complete all our current activities, including completion of Otjikoto (indiscernible) come online in Q4 of this year.

With that, I think that sort of summarizes the main items that I wanted to highlight.

Unidentified Company Representative

Okay, Mike and Clive, I’m wondering you said Otjikoto alone. You mentioned is that the loan facility you are talking about there or it’s that the …

Mike Cinnamon

The lease equipment…

Clive T. Johnson

Sorry, it’s a cat lease.

Unidentified Company Representative

Okay.

Clive T. Johnson

Yes.

Unidentified Company Representative

Predicting the four, yes. Ok great. Thanks, Mike. We’ll save all our questions to the end. Just a comment I guess from on the financial position of the company, obviously with the low gold prices you’ve seen a lot of breakdowns in your sector a lot of massive breakdowns because of the low gold price and also in fact because of I think so very poor acquisitions we – I think it’s important to know that B2Gold, we have no write-downs of any material projects over the last few years and we’ve done four significant acquisitions.

So I think that speaks a lot to where we approach our acquisition which is quality due diligence run done by our own people using our in-house theme and therefore it has accountability and also obviously quality operations themselves speak to the need for the write-downs. And of course, we’ve enjoyed exploration success and continued to with each of the acquisitions that we’ve done and expect the same at Kiaka, Volta acquisition as well. But also it tells you about our view of the gold price. So when the gold price was a lot higher we acquired CGA Mining.

Masbate project, we were using the current gold price then for long-term, we were using a much lower number very close to today’s gold price. So I think we take a conservative view on – I think that's one of the reasons why have not write-downs and if continued to do quality acquisitions.

With that, I’d like to pass it over to Dale Craig, Dale walk us through the operations and what you do.

Dale Craig

Thanks Clive, can you hear me all right?

Clive T. Johnson

Pretty well, yes.

Dale Craig

Good. Okay. For B2Gold, consolidated production is 96,303 ounces which represents 21% increase over the first quarter of 2013. All operations produced more growth than the same period last year. At $634 per ounce consolidated cash operating costs were 31% lower than the same period last year and 7% lower than budget.

For the Masbate Gold Mine, in the first quarter production was 42,476 ounces compared to budget of 51,892 ounces. The primary reason for this shortfall was that mining in the close of 2013 had not advanced as far as anticipated in Colorado Pit. So this is a Pit development issue. Our mill feed was there, mill feed therefore included lower yielding ores for Main Vein and HMBE pits because the plant material with the mine latter this year, we have maintained our guidance the order is still there to be processed.

Cash operating costs were 4% lower than budget that's $732 per ounce, less waste was mined and more high-grade ore was mined in the stockpile resulting in a positive stockpile adjustment. Overall for the quarter less material was processed resulting in lower overall process costs offset by increased maintenance cost in the crushing and grinding circuit, specifically the SAG mill Lupin pump systems. The transition to self mining from contract mining will continue through the year. We have assumed direct control over the subcontractor in the first quarter. And this is part of the staged, faced takeover will end at the end of 2014.

Preparation for the SAG mill change-out has well advanced and we are on track to complete the work in the second quarter along with the mill we have upsized orders and gearboxes which will be installed. Our existing crushing system will accommodate the extra-volume of material process as we add another 300,000 tonne per year throughput, total of $6.8 million tons per year rate. Finally, we continued to advance this study of the plant expansion and expect conclusions in the final quarter of this year.

For Nicaragua, La Libertad mine. La Libertad completed a successful quarter with production 38,596 ounces which was 2430 ounces better than budget, better great 2.36 grams per tonne versus 2.17 in the budget contributed to better performance and better cash operating costs of $541 per ounce, $42 per low budget. Jabali pit central is now delivering as per budget and for projects, La Esperanza tailings dam expansion is on track and near completion. So overall, we’re on track to meet our annual guidance of 143,000 ounces to 150,000 ounces, 545 ounce to 560 per ounce.

At El Limon Gold Mine, production from the Limon operation was 15,131 ounces which was slightly below the budget of 15,685 ounces. Cash operating costs were $42 below budget and $624 per ounce. Overall, a good quarter some of the challenges that we faced important work in the process mine as we recalled we completed a tailing tankage expansion at the end of last year.

So we went through some running experiences as we geared up in the first quarter of this year. Also, we changed our carbon re-gen of using a sphere that we have sourced from La Libertad mine. So overall, El Limon remains on track to produce within guidance 62,000 ounces, 70,000 ounces at $650 per ounce to $675 per ounce.

Finally, as previously reported in Nicaragua, B2Gold regrets to report the two facilities occurred at the El Limon mine in two unrelated events during the quarter. The company has thoroughly reviewed these accidents and as immediately incrementing collected measures. B2Gold remains completely committed to maintaining a safe, healthy environment for its workers and expressed its sincere condolences for the family friends and coworkers of these employees.

B2Gold has continuously improved its safety programs in Nicaragua and has demonstrated improved safety performance, to reduce the accident frequency from 4 in 2012 to 1.8 for B2Gold workers in 2013 at the EL Limon Mine. Safety programs were reviewed in 2013 and plans made to align safety management to the standards of the new corporate management system, which is a 2014 initiative. With the facilities in mind, we have already modified and delivered our training programs to focus and highlight preventive practices in our daily operations. Thank you.

Clive T. Johnson

Thanks, Dale. I’m now going to hand over to Bill Lytle who is our Vice President and Country Manager in Namibia, and Bill is going us through what’s going on at Otjikoto, very exciting time with construction changing on a daily basis as we move towards production later this year. Over to you, Bill.

Bill Lytle

Okay, Clive, how do you hear me?

Clive T. Johnson

Fine.

Bill Lytle

Okay. As Mike already said, the key takeaway is on time, on budget. We continue to move towards the goal of producing at the end of this year. Our HSE record for the quarter and actually perhaps it’s excellent, no loss time action during that period. On the permitting side, we have received our permit now to operate the power plant and the explosive storage area. We’ve opened up an EIA for the Wolfshag extension. We expect to have that completed and fully permitted by the end of this year.

In the open pit, despite heavy rains during the last part of the last year and first part of this year’s heavy rains we continue to remain on budget, moving 2.7 million cubic meters project to date. In the plant the concrete work continues to go exceptionally well with more than 70% of the overall concrete needed being poured. Steel, 33% of the steel is already on site, another 33% arriving within the next 10 days and the rest of it arriving within the next 30 days. So we have a very good start on the steel now.

In the tailings facility, as previously reported, we’re more than 90% complete. We’re actually in the process now of doing our final QA/QC for tailings facility and putting in the reclaim line, the tailings and reclaim line. Additionally due to the fact that the construction crew completed the liner at the end of the last year we captured a good portion of the rainy season in our storm water dam and that will be used to feed the mill. So we’re in very good shape there. In general that’s all I need to say I think.

Clive T. Johnson

Okay. Thanks, Bill. We’re very pleased with the progress, obviously at Otjikoto and the (indiscernible) on site led by George Johnson, who is our Senior Vice President, Operations and just to remind for those, many of you are aware, but just to underline the point. I think it was the reason why we are on schedule, on budget here and moving towards another successful start up. It’s not our first, have a new team on site, but the senior supervisors, engineers on site are team of B2Gold team that build the Libertad facilities, the mill in Nicaragua and many of them were involved for B2Gold and briefly Kinross, in building couple and some of them were actually involved doing a minor issue as well. So I think that’s one of our advantages today in the industry is having our own team.

We estimate phases perhaps 30%to 35% and capital cost would also reaching the 18 every time and that’s what I think one of the reason for the success. It’s a great team of people and we hope that we can keep them together and building mines for – future goal for a good long-term to come as many things we have for them to do at existing operations or other opportunities.

So thanks. Well, now we’re going to talk about the – over to the Kiaka property. I am going to pass on Dennis to you, but just a reminder this is an acquisition we did late last year, friendly takeover Walter Resources. Their management realized that they were going have a difficult moving forward to financing and build the mine in Burkina Faso. So they did the right thing for the shareholders and pursued another opportunity to realize shareholder value. And so we did a friendly deal with a healthy premium to the shareholders that had obviously been beaten up badly in the market. So we hope they’re happy with the deal. We think it’s a win-win deal as the other ones we have of this nature. And we like to project a lot as this one always stay in Indiana. This is an ore body that holds together very well and is eminently mineable as an open pit.

Kiaka by the name of reference, Volta on Kiaka did a prefeasibility study that was not bad. It was a pretty ambitious with 12 million tonnes a year and almost $700 million of capital, producing 340,000 ounce of gold for minimum 10-year mine life with I think the operating cost were somewhere in the mid-7s, but I’m obviously a pretty big (indiscernible) on the financing side. So we acquired Volta for perhaps one primary reason, I guess, or the way we actually view this is some optionality on gold, which is an unusual acquisition for us. But we felt the entry point for what we paid for, $65 million worth of our shares, 3.3% dilution it was a good asset to add to the portfolio.

Now there may be a silver lining in that as well in the sense that we are looking, working with Board detectable team who have now emerged into our team with our group, working with them to look at other cases and Dennis is going to talk to that. So the reason for the acquisition was a great entry point into a good jurisdiction, Burkina Faso. We like West Africa and it was a good opportunity to get involved in a significant project, perhaps in these optimal gold price, perhaps not as much as we may think, no more detail soon. So with that, over to you Dennis.

Dennis Stansbury

Thanks, Clive. Our main project this year for Kiaka, number one, it’s advancing the license on the property and it’s under an exploration license now. We completed the permit application, which is like a feasibility study type report and we submitted that in March. We’ll now move on to public consultations, things like that to try to get the industrial permit later this year.

In the mean time we’ve done drilling, started some drilling programs on site. The first priority there was metallurgical samples. We have a new metallurgical program underway for optimization of the plant. Confirmation of the old work and just to see if we can do this a little better way and from that data and we’re working on cost of stuff right now. We’re going to look at size optimization. How big should this thing really be? It’s between 6 million tonnes and 12 million tonnes a year.

So we’re going to try to define, which one really gives us the best economics. As part of that we’re doing a complete OpEx and CapEx review and we’re looking for some different systems and different ways of construction to try to keep cost down and all of this will then roll into trying to complete a final feasibility by early next year.

Clive T. Johnson

Thanks, Dennis. Next up is Gramalote. Dennis will talk a bit on what’s happening this year. We did come out with a Preliminary Economic Assessment in the quarter and the number slightly were a little better than I’d been anticipating and then ensure a positive project with the positive IRR at 13 – in that range. At this time we don’t feel that meets our criteria given the large capital, over $1 billion dollar. In this gold environment, we don’t see moving it forward in our partner. Our partner agreed on that, annual gold agreed on that. So we’re not pulling the project on hold and Dennis would say what we’re doing, but we like it.

We think it’s a good asset for B2Gold and we believe that part of our job is to unlock value for all of our assets. So we believe that one way or the other Gramalote is an asset going forward. If you believe that gold is still cyclical, but certain steps being made to optimize. We think the capital is high. It goes to bigger companies, we all know. So maybe there’s some areas there where that can come down, but we’re still doing some things to enhance the project now. And I’ll pass back to Dennis.

Dennis Stansbury

Well, thanks, Clive and just we did put out a 43-101 Preliminary Economic Assessment earlier this year. So that’s available to you guys. You look through the details of how we see the project today. Our main goals for this year are to complete the Environmental Impact Assessment and let’s called the (indiscernible) in another words the work plan that goes through that labor force, just schedules all those things are included in that. We’re upgrading a couple of areas of that right now. I wanted to do a social program, wanted to do water management.

So we’ve delayed this in middle of that a little later in the year. We’re also doing infill drilling. We’re focusing on the (indiscernible) and the Gramalote Ridge, in fact some of the resources move them up fast. And then where the other main focus is to advance and maintain our social programs and community relations, those communities very close to the project there and we think that’s a key area to the success, future success of the project. Tom?

Tom Garagan

Thanks, Dennis. Just a point perhaps on acquisitions. We obviously have had success with our acquisitions and we are always looking I think the silvering reality of that is when you look at many project around the world, we just don’t got many good projects, $1,500 goal, little around $1,300 goal to be frank, but we continue to look at acquisitions.

So I think today for us to do something, we’d have to find something that we thought was our main project and something that was accretive towards not on today, but as we move forward because I think the reason, what I mean by that is that, we see the company should be getting no matter re-rating as Otjikoto that’s in production improve itself. I don’t want to play mining analyst here, but if you go back and look what the mining analyst have done, and you look at the value that they put on Otjikoto, if you’d go for share versus the value they put on the Libertad. It’s interesting Libertad values much higher which makes some senses in production.

But I would say even with our success and our track record of what’s going on Otijikoto it’s obviously remains show me market probably from some of the mistakes of others, but show me market we understand that, so we do think that our shares are going to go simply rating as Otijikoto comes into production improves it self. Therefore looking into next year may be the more optimal time for us to consider significant acquisitions. Having said that the opportunity doesn’t always knock at the time you’re ready for it, so look we continue to look into pursue opportunities.

So just looking forward, we are in a great position, very strong cash position at the end of the quarter over $118 million, we have a $200 revolving credit facility which we drawn $50 million on, we are going to generate, Mike $140 million a share?

$140 million cash from operations projected for 2014 Mike is going to correct, if I put that wrong. What that does the combination of that access the cash and that generated cash gives us the ability to do everything we have in our plate in 2014, which of course the big spend is on Otijikoto.

Capital expenditures at the mines and all the various other things that we need to do G&A et cetera and still we estimate based on our assumptions finishing the year with over $100 million in cash, and our cash from operations will take a pretty dramatic spike next year, as Otijikoto comes on line and just remind everyone Otijikoto is expected to startup at 140,000 ounces a year, had a operating cost of around $525, all-in-sustaining should be less than 700, than in the first year we are going to expand Otjikoto $2.5 million tonnes a year to $3 million tonnes a year, expenditures about $20 million, and that will take us to about a 170,000 ounces a year there about.

So obviously very positive this year we’re building a new mine Cash is king, so we’ve continued our discipline in terms of sustaining capital things like that in the exploration, I’m going to get target factors about focus of exploration this year unfortunately, for the exploration department in some ways this year is a not where they love to be few more things were exploration is I think in-fill drilling and combination drilling but between quite bit have. So we are going to this year which is all value added stuff we are continuing to get exploration success around the mines, the Tom is going to talk about the focus, and then maybe next year we’ll release the house, in terms of exploration looking to get some grass root starters, because we still maintain the belief that (indiscernible) what you find and we have one the best exploration teams in the world, so, Tom over to you.

Tom Garagan

I feel like burking, right off the bat. As Clive says the exploration focus for 2014 is almost exclusively Brownfields exploration around the mine sites and around the development projects.

So El Limon we’re spending $4.3 million at El Limon focusing on infill drilling the area that mine called Santa Pancha 2 which was recent discovery around what we call Pozo 5. It’s an expansion of the underground Santa Pancha towards north. We continue to infill drill that and also expand that with this years program.

At Libertad we are spending also $4.3 million. It’s again on mine site stuff, it’s infill drilling potential future potential underground mining for Mojon, so we’re infilling one of the big Horseshoe it’s underneath the Mojon pit which is holding to get very well hopefully that into the mine plan by the end of the year early next year.

At Otijikoto it’s our largest expenditure, we’re spending $8 million almost exclusively on the infill drilling of Wolfshag and the extension of it. As Dennis mentioned I think you mentioned talk about Wolfshag we’re currently having doing to study whereby we’re looking at Wolfshag and then trying to determine what boundary do you go from open pit to underground, and the infill drilling that we’re working on right now is on a portion of the resource that we released, as Dan indicated it’s the portion that we think is suitable for open pit mining in today’s prices, the underground portion, the remaining portion of Wolfshag still remains open. It holds together very well and we feel there is very good potential to be not only have an open pit mine at Wolfshag, but to go underground.

So the bulk of the drawn is intel in the open pit portion we think what is the open pit portion. We are also extending the Wolfshag further to the south with the exploration step out drilling along way strike of it, we’re down plunge on it.

At Kiaka we are spending $3.6 million drilling for collecting metallurgical samples at Kiaka also doing infill on some of the inferred that falls within the Kiaka resource pit. The idea there being it currently under the models the inferred material is being treated as waste, and we are looking at infilling that to indicated help change that.

Also we are redoing the geological model there is some things we think are different than what we saw before and we feel what we are looking at now with the drilling will have a positive effect on the Kiaka ore body itself. In addition, we are doing RC drilling falling up strong other anomalies that are north of the Kiaka Pit.

At Masbate, we are spending $6.2 million largely on completing the infill join of the extension of the Montana discovery to the north and down of the deeper Montana we are also infill drilling the south end of Faso deposit expanding or remained open to the south end of the north and we are infilling the southern portion of that. We’ve had good success with (indiscernible) in that area and we are trying to infill with our drilling at this point. That’s it.

Clive T. Johnson

Okay, great. Thanks Tom. I think that’s it, most of what we want to tell and shoot us some questions out there, so I’ll turn it back over to the operator. So we can answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Rahul Paul from Canaccord Genuity. Please go ahead.

Rahul Paul – Canaccord Genuity Corp.

Hi, everyone at Masbate, the Montana zone added close to 200,000 ounces to reserve this year creating 1.98 trend. Any sense as to when you could incorporate Montana to the mine plan?

Clive T. Johnson

Dale, you have a sense for that?

Dennis Stansbury

Yes, this is Dennis. To have it to the inferred to where in the mine plan, we have some permitting have to do so we don’t see that coming in until later in 2015. 2015 is the target for bringing Montana to the schedule.

Rahul Paul – Canaccord Genuity Corp.

That’s a good answer, Dennis, mike works a lot better when the mute is off. I would see mid to late 2015 at the earliest. Okay and in terms of metallurgy, do you plan to do anymore metallurgical test per pair or has it been done for the most part?

Clive T. Johnson

We have a very intense metallurgical program going on, at site wide, or Masbate right now. We hope to finish all that up. We should be getting results back in August. We’re also doing some work at site on this. We don’t see actually Montana has a very good recoveries, very high recoveries. It does have a few sulfides in it, but those does seem to be a problem whatsoever, it’s one of the start for both grade and recovery.

Rahul Paul – Canaccord Genuity Corp.

Overall metallurgy.

Dale Craig

Overall metallurgy were, we’re going to take this – take that program into and we’re looking at various expansion opportunities for Masbate. We have the new SAG mill in here in June that will be running by the end of June. So what we’re looking of doing is taking advantage of that machine possibly, we are just looking at how we can best use the horsepower we just installed and the exploration success we had and the economics of the project.

Rahul Paul – Canaccord Genuity Corp.

Okay, thanks for that and then, Kiaka you indicated that a permitting study is being submitted based on the 6 million tonnes per annum operations, just curious do you plan to release a preliminary study to the market in the near future or would you rather wait till the first feasibility study is completed by end of this year or early next year?

Clive T. Johnson

Yes, we’re right into the metallurgy now, at least getting all the samples and getting it going and all the engineering so in fact, Dennis is heading back down there, to work with the guys there. So we’re going to release final feasibility study, same as we did that Otjikoto and we took the pre and it went to balance. So we won’t do a middle stage, it will be so half baked to produce, so want to do the final feasibility, with all the work looking at these different scales.

Rahul Paul – Canaccord Genuity Corp.

Okay, thank guys. That is all that I had.

Clive T. Johnson

Okay.

Operator

Our next question is from Ovais Habib from Scotia Capital. Please go ahead.

Ovais Habib – Scotia Capital Markets

Hello guys there. Thanks for taking my call. In terms of Otjikoto you had a pretty big spend in Q1. How much is remaining for the remainder of the year. And would it be lumped up in the first half or is it going to be kind of separated at during the remaining quarters.

Clive T. Johnson

Are you with there, Mike you able to know better?

Mike Cinnamond

Well, I think the total that we had in cash balance for bad recoveries, it’s about $196 million for the year. So it was about $196 million for the year, so if you pick up all the spend to-date, that will be the gross head flow and then we expect to get that the $30 million back?

Clive T. Johnson

Here is it, how breaks down over there.

Ovais Habib – Scotia Capital Markets

Rest of the year, do we have sense of that?

Mike Cinnamond

Yes. Well I think, I think which spans nearly $60 million in Q1. So we probably got another $130 million plus the spend this year, less that of about 30 so give or take $100 million.

Ovais Habib – Scotia Capital Markets

Okay, sounds good. And thanks Mike. And in terms of Libertad now the guidance the great guidance for Libertad is approximately $2.17 million. And in Q1 you guys hit around $2.36 million and that was due to the high grade material from Jabali and Santa Maria. Do we stick with the guidance or do you think that this grade could improve going forward into the remainder of the year?

Dale Craig

Yes, I would stick with guidance on this. We are in the bottom end of Crimea pit that will probably be exhausted in four month prime time. So that higher grade portion that the base will be exhausted.

Ovais Habib – Scotia Capital Markets

Okay, got it. And that is it from me, thanks a lot.

Clive T. Johnson

Thanks, Ovais.

Operator

Thank you. Our next question is from Andrew Quail from Goldman Sachs. Please go ahead.

Andrew Quail – Goldman Sachs & Co.

Hi, Clive and thank you very much for the update and congratulations on a very strong quarter. Just most of my questions have been asked. I’ve just one on Masbate, obviously the stagnant replacement of this quarter, do we expect obviously throughout or tonnage add in the second half to be more lopsided, the fourth quarter last year. And obviously drive is going to have to improve as well to keep that guidance. But can you give some sort of guidance on both improving or which one is going to improve more than based on two previous levels?

Clive T. Johnson

Dale?

Dale Craig

Yes, sure looking at the second quarter obviously, we continue to run while we do the site changer, we have engineered one list of them to minimize the interruption. We still go through reduced capacity through this second quarter. The increased grade helps us somewhat, but really what we see are the higher grades we had forecast from running primarily oxide from Colorado and extend through the third and fourth quarter. So there is a bolts for grade, peaking it towards the end of the third quarter in our mine plan right now.

Andrew Quail – Goldman Sachs & Co.

Would that continue through to 2015 or is that through more a couple of quarters, can we say that?

Dale Craig

Couple of quarters I would I have to run our long range plan, which will be probably in three months before we can work all of that in. I would characterize that as more of a peak than a gradual reduction though. Because what we know is we will pace Colorado pit with one excavator right.

Andrew Quail – Goldman Sachs & Co.

Okay, great. And now you quite often, just Otjikoto, when you talk about that expansion. I mean that sort of sounds like decision that is going to be made sort of pretty much half way through 2015?

Dale Craig

Otjikoto expansion?

Andrew Quail – Goldman Sachs & Co.

Yes.

Dale Craig

Yes, the decision has been made now and I think in fact, I know George will assess that properly and say. But maybe the idea is that a pebble crusher and a couple of additional tanks and that takes you from 2.5 million to a little more equivalent from 2.5 million to 3 million tonnes and so that we made the decision. Our Board has made that decision to just to go ahead and do another cash flow.

Andrew Quail – Goldman Sachs & Co.

Okay.

Dale Craig

So during 15, we’ll tighten to tell you that. Just so, everyone is clear of that is not 170,000 ounces a year starting with 16,000 contemplate anything from Wolfshag that is simply mining the Otjikoto main ore body faster. Because of the Wolfshag exploration success we made that decision. We moved the engineers and said we are building the right size plant and they said, well, frankly we should have built three and make sure we can do that. But we’ll have to stretch construction schedule and we said no we want to keep our schedule, let us do it after, we start after startup, so it might happen very quickly after startup, we’ll wait and see.

Andrew Quail – Goldman Sachs & Co.

And the CapEx, sort of first half you are talking maybe.

Clive T. Johnson

Yes, we expect so and it’s well some of the sort have been ordered so it’s just $20 million because the spend in that was very small.

Andrew Quail – Goldman Sachs & Co.

Thanks very much guys.

Clive T. Johnson

Cheers.

Operator

Thank you. Our next question is from Sam Crittenden from RBC Capital Markets. Please go ahead.

Sam Crittenden – RBC Dominion Securities, Inc.

Thanks. Hi everyone, I appreciate the update today, couple questions on those, but you are talking about adding 300,000 tonnes per day to the mill capacity there, but I thought the tanks were a bit limited on the back-end, I’m just curious how you’re going to work around that and if you loose a little bit of recovery with that incremental throughput?

Mike Cinnamond

The increment is per year 300,000 tonnes per year. To be frank tankage would be the next thing that we would look at in a plant expansion there. We want to complete the run on the study for the total plant expansion before we do anything else because the tanks would have to go in the right spot, but that’s what we’d like to do. At that rate 300,000 tonnes per year that increment I don’t think we’ll see much impact.

Sam Crittenden – RBC Dominion Securities, Inc.

Okay.

Clive T. Johnson

Dennis, I’ll just jump on in this. The other we have going through basically the rest of this year in 2015 is because we’re in Colorado and really focusing there and it’s basically all oxide in transition ores and we do not need the same retention time for those ores. They recover much better. So a lot less of a problem for us on the short-term and I guess it’s time to look at this expansion study and see what things we really want to add on the back-end long-term. So in terms of the ore type, we feel we’re in good shape on that.

Sam Crittenden – RBC Dominion Securities, Inc.

Okay. That’s helpful.

Dale Craig

In addition Sam, we have an oxygenation project that will be implementing this year and that should help us a little bit.

Sam Crittenden – RBC Dominion Securities, Inc.

And then I know it seems like there is a trend of getting more ore in Las Vegas, I guess it’s maybe it’s a little bit lower grade that what you like to put through the mill but just curious if you consider slowing down the mine rate in the near-term just save some cash a little bit.

Clive T. Johnson

Yes. For Colorado Pit it was a little bit different situation and what we have is high-grade stockpile but closer to mid-to-low high-grade. We’ll use that through the year. If everything else being equal we still want to make our targets and manage our costs and we’ll make the best call as we know.

Sam Crittenden – RBC Dominion Securities, Inc.

Okay. And then question on Kiaka is 6 million tonnes per year kind of a minimum scale or if you looked at smaller scenarios than that is that on the table?

Clive T. Johnson

Yes, this Dennis that's pretty well the bottom. We look at – we can focus on the high-grade core with that and still have the 14 year life so, it’s kind of the bottom of the range.

Sam Crittenden – RBC Dominion Securities, Inc.

Okay. Thanks guys.

Operator

Thank you. Our next question is from Jeff Killeen from CIBC. Please go ahead.

Jeff Killeen – CIBC World Markets, Inc.

Yes. Good afternoon, and then thanks for the time today. Just to go on with Kiaka, you had mentioned Clive, that you’ll probably hold and just go strategy to more of a full feasibility, but wondering in terms of what we’ll see? Will there be results from the metallurgical testing released or will at some point before the studies complete you announce to the market, finalized scale in terms of the mining rate and these kind of particular items.

Clive T. Johnson

Well, it possibly does but I think the last item is metallurgy and because we got some samples. So there was that right so we’re not going to – the metallurgical results will be the last thing we’ll plug-in to the study which is going to be really next year so, that – frankly that metallurgy is the driving force right.

Mike Cinnamond

Yes. The metallurgy is for optimization. We will have all the final results that until very close to year-end and then within a couple of months after having that we’ll have the full feasibility wrapped together.

Jeff Killeen – CIBC World Markets, Inc.

Well, there will be some drilling results. Tom you’ve talk – I think you talked about in your summary about drilling grounds field again for now that John just touch on that.

Clive T. Johnson

Well, the drill results for the network those assays will come out of the metallurgy. But the other results, yeah he will start that drilling probably in another month’s time. So those results would be available later in the year. So that will be next news both from Kiaka.

Jeff Killeen – CIBC World Markets, Inc.

Okay. Great thanks and then continuing with exploration, I think it was mentioned that Mojon has shown some decent continuity below the pits with the drilling and that some of that material could come into the mine plan maybe next year. Would you be thinking of potentially extending the open pit of depths are you thinking more in terms of attacking this with an underground?

Clive T. Johnson

I don’t know that it would make sense to extend the open pit larger because you’d have to do push backs and I think it’s you’re at the bottom of the pit. It’s very easy to just go in on it that way. I don’t think it will make economics sense to push the pit back to get at the toughest stone deeper, it’s only got a vertical range of about 100 meters at best.

Mike Cinnamond

So underground it would be, it’s basically different around that at this point.

Jeff Killeen – CIBC World Markets, Inc.

Okay. Great and then just finally, it what mentioned that you had lower site contractor and service costs at Limon in the first quarter. Is that something we would expect to continue or is it more just some cost moving around quarter-on-quarter?

Clive T. Johnson

Well, we’ve seen the trend over the last couple of quarters for a lower costs and that gives a new budget, this time around but I think with the developments that we just paid ongoing both of the underground operations you’ll see us, you will see that cost come down into play, so I would treat it as single quarter then.

Jeff Killeen – CIBC World Markets, Inc.

Okay. Great thanks very much that’s all for me guys.

Clive T. Johnson

Okay. Thanks Jeff.

Operator

Thank you. (Operator Instructions) Our next question is from Chris Thompson from Raymond James. Please go ahead.

Chris O. Thompson – Raymond James Ltd.

Hi guys congratulations on a good quarter. Just like to dig in a little bit on some detail relating to mill feed, so if your limited. I think you mentioned early on that you are going to be extinguishing or rather the Crimea pit is going to be extinguishing about four months. Why should we been modeling as far as the split from Mojon, Santa Maria and Jabali on an ongoing near-term basis.

Dale Craig

Little bit through my forecast, Chris, I can get back to online. I’ll work up an email and send it to you as soon as I can here.

Chris O. Thompson – Raymond James Ltd.

Okay, great. And thanks for that, Dale. Just another quick question on that. Jabali Antenna, what’s the status there? I mean do you see that entering the mine plan in the not too distant future?

Dale Craig

Yes, earliest would be back end of next year. That would be the earliest. Right now the closest to bid on the horizon is this Mojon underground development and we’re looking at closely.

Chris O. Thompson – Raymond James Ltd.

Okay, great. And then moving on to Masbate, just looking at our model right now as far as mill feed, what’s the percentage you see being pulled from Colorado as steady state at the moment?

Clive T. Johnson

Typically we like to run about 50% oxide, seems to work best words.

Chris O. Thompson – Raymond James Ltd.

Okay. And the remainder being made up from the Main Vein and the HMBEs?

Dale Craig

That’s correct.

Chris O. Thompson – Raymond James Ltd.

All right. What sort of stockpile are you alluring into mill feed, if any at the moment?

Dale Craig

We’re not running anything from our stockpile into mill feed at the moment.

Chris O. Thompson – Raymond James Ltd.

Right, okay. Guys, congratulations again on a good quarter. Thank you.

Clive T. Johnson

Thanks, Chris.

Operator

Thank you. Our next question is from Joe Fazzini from Dundee Capital Markets. Please go ahead.

Joe Fazzini – Dundee Capital Markets

Hey, guys. Thanks for taking the time to take my call. Just two quick questions. The first one is, can you just remind us how big your low grade and high grade stockpiles are in this body?

Clive T. Johnson

Not off the top of my head, but I can certainly get those numbers for you.

Dennis Stansbury

It’s Dennis. At the end of April our high grade stockpile was in the neighborhood of 600,000 tonnes and our low grade stockpile was in the order of 20 million tonnes.

Joe Fazzini – Dundee Capital Markets

20 million, what’s the average grade of those stockpiles?

Dennis Stansbury

The low grade pile is 0.54, I believe, Dale, being if that’s not right and the high grade pile is just closer to 1 gram.

Dale Craig

Perfect.

Dennis Stansbury

Yes, it sounds about right.

Joe Fazzini – Dundee Capital Markets

Okay. And just the other question, with respect to the change over in terms of the mining contract you guys are bring that in house. Can you just kind of clarify for us how the equipment leasing is going to be treated?

It seems that previously you guys have leased the equipment and then it was set up as a lease, but going forward, you guys mentioned that you are looking to buyout that equipment. Is that going to equate into $17 million cash out flow in the second or third quarter. Is that going to happen fully overtime or is there still going to be lease term is on that equipment going forward.

Clive T. Johnson

That will be converted into a lease term almost immediately.

Joe Fazzini – Dundee Capital Markets

Okay.

Mike Cinnamond

It’s Mike. We are looking at that right now. We think we can probably pass it over conterminously with the buyout we’ll replace it with the new financially for the third party.

Joe Fazzini – Dundee Capital Markets

Okay. And any sense of terms is there going to be like five years or three years or.

Mike Cinnamond

We are still looking at the expected license. It’s more likely to grant three to four years and see roughly 4% to 5%.

Joe Fazzini – Dundee Capital Markets

Perfect. Okay, that’s it for me guys. Thank you so much.

Clive T. Johnson

3%, still negotiating. Okay, thanks.

Operator

(Operator Instructions) Our next question is a follow-up from Ovais Habib from Scotia Capital. Please go ahead.

Ovais Habib – Scotia Capital Markets

Hi guys, just one more quick question on Otjikoto, in terms of the Wolfshag. Now you said, you guys are going to be spending about $8 million this year on exploration mostly infill drilling on Wolfshag. Are we going to be seeing any results throughout the year? Or we going to get straight resource update and just incorporate in that?

Clive T. Johnson

Yes. I think we’ll put out some results, you just bear in mind largely infill, we have some step up holes down. I think we might wait for some of those step out holes to come in, so that, we have more than just infill to put out there.

Ovais Habib – Scotia Capital Markets

Okay, sounds good. That’s it from me, thanks.

Operator

Thank you. Mr. Johnson, we have no further questions at this time.

Clive T. Johnson

Okay. Thanks for your time everyone. To our shareholders thank you for your support, to the analyst, I know you are doing some mine micro managing analyst part of the job, but that’s okay. But don’t forget to start sharpening your pencils or warming up your laptops for the riveting, but you all going to give as Otjikoto prove itself. So, you want to get head start on that. All right, thanks, everyone. Thanks operator.

Operator

Thank you. The conference call has now ended. Please disconnect your lines at this time. And we thank all who participated.

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