Giles Blackham - IR, Manager
Brad Gordon - CEO
Andrew Wray - CFO
Brock Salier - GMP Securities
African Barrick Gold Limited (OTC:ABGLF) Q2 2014 Earnings Conference Call July 25, 2014 6:30 AM ET
Good morning, everybody. Thanks very much for coming along or dialing in to the ABG 2014 Interim Results Conference Call. I hope you’ve all seen the results this morning and the numbers we have put out there. As per normal what we will do is, we will give a short presentation then go to questions in the room and then move to questions on the line afterwards so you will have the opportunity to have your say.
Following the presentation we have got some refreshments afterwards. So, the team from ABG that is just sitting in the front row here of the presentation, you’ve got the senior leadership team here, so an opportunity to ask some questions and get to know the guys who actually do the work on the ground rather than just me.
With that I will pass it over to Brad Gordon, our CEO to took through the results and illustrate what we are doing.
Thanks, Giles and good morning everyone. The quarter was probably better, we have led with presentations in the past with a photograph of Bulyanhulu, but given North Mara’s performance in the first half I think it ranks as our best performer and should get that recognition. So that’s an image of North Mara for those of you who have never been there. The second quarter was better than we expected, some of the interruptions we had at Bulyanhulu and Buzwagi were not what we had predicted but the second quarter came in even with those trials ahead of where we expected to be.
Importantly, the last month June all three mines for the first time in a couple of years were significantly above budget and on production and lower -- and with correspondently lower costs. So that gives us a lot of momentum going forward into the second half of the year which we’ve always said would be better than the first half. That was borne out by the free cash flow that was generated 14 million of the 15 million in free cash flow generated during the second quarter was generated in June. And so we have hit the third quarter or the second half running hard.
If you look at the highlights for the first half, production was 347,000 ounces, which is continuing the improvement we are getting on revenue from gold, all-in costs at 1,118 and importantly Q2 costs were down at 1,105 which is around the bottom of our guidance range on all-in costs. EBITDA are at 132 and the earnings at 41 million were about I think where the market expected us to be.
What we have done though with a solid first half like we have had is upped our guidance on production. Previously the guidance was 640,000 to 690,000 ounces, that has now increased to in excess of 700,000 ounces of gold and it makes sense when you consider that the CIL project at Bulyanhulu has just been commissioned so that will start adding production from next week and Upper East which was only approved during Q1 and wasn’t part of our initial plans for 2014, will also add ounces in Q4.
We declared interim dividend of $1.04 per share and that’s now based on a new cash flow metric, so it’s up 40% on where we were correspondingly last year. I guess as I said the highlight of the year was of the half year was the return to cash generations, we have had people watching us, appreciating the improvement that we are getting in the business but waiting until we start generating cash. Well, we said it would happen in the second half we have come in earlier than predicted with the cash generation in Q2. You can see where that’s being driven from, from this graph on the next slide the continued and consistent reduction in costs. So, it’s come down from over $1,700 per ounce down to $1,105 in Q2 with the improved performance again in the second half and through to 2015, we expect that trend to continue.
In terms of delivering on what we say we will do, we have ticked off several milestones during the first half, obviously the cost keep coming down, the grade of improving at Bulyanhulu. Bulyanhulu has been criticized in the past for not mining at average reserve grades. Last year Buly was running at 7 grams this year we’ve got it into the 8 grams next year we expect it to be in the 9 grams which is at reserve growth. CIL has now almost up to full speed and will be next week, Board approval of Upper East the VAT numbers outstanding tax receivables from Tanzanian government continue to come down so that’s pleasing. And as I’ve said the major milestone for us is that we’re now a cash generating business.
Now the outlook going forward production has as I said will go to over 700,000 ounces this year and then with the full year from the CIL and Upper East and underground at Gokona next year, we expect that number to be higher for 2015. Capital costs we have managed to drop significantly from previous years and that stays at about where we have guided for in the last few months and cash and all-in cost continue to reduce.
As far as the operating review goes you can see on almost all of these metrics that the business is improving and we’re with the decisions we’ve made at the operations particularly Buzwagi and North Mara we’re moving a lot less of Tanzania to get to the gold. We’re mining more tons those tons those tons are at higher grades, the recoveries are higher so all those metrics are moving in the right direction.
If I deal with each asset in turn now, Bulyanhulu is the one asset where we haven’t seen the significant improvement yet. We had a couple of interruptions as I said in Q2 which were unplanned but now is where you see Bulyanhulu improving and starting to improve which is in the second half. We have the contractor now developing towards the higher grades which we will access in the fourth quarter development rates have increased. When I joined we were getting about 50 meters per month out of a jumbo underground. As of last week we were getting 150 meters per month from a jumbo underground and we’re planning on closer to 200 going forward. We’ve done that by reducing the amount of equipment underground and we’re parking up machinery to achieve much better performance. And the CIL expansion has produced its first gold in Q2 and from next week will be at the 20,000 ounces for the second six months’ rate.
So, the focus for the second half is Bulyanhulu. Buzwagi is running reasonably well, North Mara continues to outperform. Buly still has to deliver on its potential and even though we’ve had a good first half the leadership group know that this next six months for us at Buly is critical and our whole focus is to make sure we get the potential we need from this asset before the end of this calendar year and publicly we’ve been saying that by the end of 2015 we’ll be at 350,000 ounce production at 900 all-in costs at Buly and that obviously has a significant impact on the amount of cash we generate in the business. But now is the time for Buly to perform and it will.
As far as North Mara is concerned it continues to perform well, the grades coming out of Gokona continue to be above expectations. Gokona will be with us until first quarter next year the Gokona open pit and will be underground at about the same time with higher grades from Gokona. So we’ve completed the original study on the Gokona underground we’re now into the feasibility study for Gokona underground and we expect to make a decision on that at the end of this year. The decision we did make late last year was not to proceed with the third cutback which is commercially made a lot of sense but also as I’ve said before taken the heat out of some of the social issues that we faced at North Mara. So it was the right decision.
International employees or expatriate numbers have come down significantly at North Mara and just last week at Bulyanhulu we reduced expatriates by another 60, so that number has halved from before I have joined the Company. And the potential for more cost savings at North Mara is all around reducing maintenance costs and improving our availabilities, so even though it’s performing well there is always room for more improvement.
At Buzwagi, we had a difficult start to the year. We had a pit wall failure. We had some pit dewatering issues. We lost our SAG mill gearbox in the second quarter. The gearbox now is fully operational again as of yesterday. So, that’s been replaced so that has de-risked that side of the business and the focus now is to start pushing the mill throughput because there are plenty of tons coming out of Buzwagi which need to go through the plant. Inventory has always been high at Buzwagi. You saw in the financials that we’ve reduced that by $6 million but we have got a long way to go and now that we are through the SAG mill gearbox failure, we can go back to grid power which will reduce our costs by about a $1 million per month at Buzwagi, but quite happy with where Buzwagi ended up at the end of the second quarter.
Just on social issues if I -- just before I pass over to Andrew to talk about the financials, one of the initiatives that we were very-very happy to be part of was during the FIFA World Cup we had huge screens not as huge as this room, but nearly as big, deployed at villages around each of the mines. So, we screened in partnership with Clouds FM which is the premier FM radio channel in Tanzania, two games a night of the FIFA World Cup and it was something that -- it was quite innovative and we are into doing innovative things in the community. And the response we got was amazing, very-very positive.
In fact at North Mara, our intruder numbers went down to zero for the duration of the World Cup. So, it’s -- maybe we will talk to FIFA about extending it in the future but you can see there just some of the images. This is a night that I attended at Kokola which is the village just outside of Bulyanhulu. We watched the England, Uruguay game won’t talk about that result. And we had dance contests and presentations of other prizes during the evening, but just gives you a flavor of some of the things we are doing to take a much more active role in Tanzania than we have taken in the past.
Now I will hand it over to Andrew, to go through the financials and then happy to answer some questions at the end
Thanks Brad. Actually what Brad doesn’t know is we’ve agreed to continue the screening until England next win a world cup game, so probably be doing it for another decade yet. On to the financials as Brad said this is a strong quarter, there is no two ways about that we slightly outperformed our own expectations I think we certainly delivered what the market was looking for and you can see that in the numbers so I’m not going to go through line-by-line maybe just a few salient points now on the highlights Slide 14.
In terms of revenue, the only thing to note there is as you would have seen our sales were lagging production so we are about 16,000 ounces behind on sales, so that is production for the first half of the year. That’s largely concentrate delays at Buzwagi where we had a bit of variability in some of the trade of the concentrate and we had availability of shipments. We also smelted right at the end of the quarter so we didn’t get sign off that smelt in time for it to come into sales but we would expect to make that up largely in Q3 certainly by the end of the year. So, that gives us a little bit of upside in terms of sales coming through and obviously the cash.
On the EBITDA number there, that also you should note that includes a couple of elements that we haven’t necessarily seen the benefit for yet. Principally, the spend that we are putting into the Lower West area at Bulyanhulu mine and the spend that we are putting in the Upper East area. There is in there probably about $5 million for the quarter in those two we also capitalize about another 10 million and we will begin to see some of the benefits in the Lower West and in fact the Upper East as we get to the end of Q3 but particularly in Q4. So, when we look at Bulyanhulu starting to really ramp up its production it’s the investment now in those areas.
The other element I guess that switched from last year is the share price performance has meant that we have accounted for around $5 million in RSU restricted share unit costs with the outperformance of the market and the outward performance in absolute terms. So they are both sitting in that number and again I think we will begin to see some of the benefits certainly on the costs we are putting in as we go through the year.
On the bottom line net earnings number there we have got an effective tax rate of about 36% in the first half of the year that’s driven by disallowable costs in our exploration unit and in London as we go through we would expect that number to be around about 32% full year so most of that affect again you will see reverse in half two. And the dividend Brad mentioned so what we have done on the dividend we did consult with a number of our investors as well and have moved to effectively operating cash flow less any sustaining capital, and in sustaining capital I am including the strip as well. So, it’s effectively the net cash added for the balance sheet before growth capital and financing. So that the confidence setting in our investor base that we’re going to be committed to continuing paying dividends. And in fact as the earnings in this business ramp up we’ve got the ability even at the 15% pay out to pay pretty significant returns to shareholders.
The only other one there is capital, we’ve still been tracking on the low side on sustaining capital particularly in the first half of the year that will reverse as we go through Q3 and Q4 as we’ve got some bigger ticket CapEx items particularly TSFs at each of the sites where we’ll be spending component change-outs specifically at Buzwagi to a lesser degree at North Mara. And we’re overhauling the bulk air cooling at Bulyanhulu putting the next stage of that end. So that will drive a bit of an increase as we go through the year there will be slightly lower strip at the open mines, bit of an uptick in terms of the capitalized development at Bulyanhulu. And so you’ve seen the range we put out at 2.55 to 2.75, so the middle of that range is where we would expect to be so on $120 million first half if you include lands there is a bit of a step up on capital coming in the second half.
The all-in costs you saw the chart before of how this has evolved overtime and I think here you see the leverage that we’ve had to both the production uptick in the cash costs element and also the discipline with the ongoing focus on the operational review in the business. We just on the operational review we set out a target of 185 million which we on our current forecast will exceed at the end of the year. And in fact if you annualize where we are at the halfway point we’re not far from that 185 million target and you can see the impact of that and also the benefit of moving that tons obviously this year versus last year.
And capital and capitalized developed I’ve spoken to the second half of the year as I said you will see on the capital that’s going to tick up a little bit on the overall strip and capitalized development that probably would be slightly lower half two versus half one. But we’re sitting at 1,118 for the first half. We are very much focused at the bottom of that range for the full year, so by definition sub-1,100 in half two across the business. And that would drive continued cash generation as well.
On the growth spend level well that’s been a trend over the last year and a half where we’ve seen that continuously come down as production has gone in the opposite direction so that’s quite a nice dynamic to have in the business. I have said we on our operating spend across the board have been continuing to see the benefits of the plan we set out at this time last year. I think on this one as you go into the second half we’re likely to see that tick up as we’ve got some greater volume movements coming through we’ll have a little bit more on the sustaining capital as I mentioned and offsetting that we’ve got the continued cost benefits from our plans but in growth terms you will see the number move up. But we’ve got the benefit of the additional ounces at the same time. So we’ll still see that trend of increasing ounces with a slightly higher growth spend but unit costs will continue to improve.
On the cash which as Brad said this was ahead of where we expected we didn’t think we’d be in generation until next quarter, so to be there at quarter ahead of time is pretty good. We’ve obviously had the production tailwind helping us and June was a very good month. The lower capital spend has assisted us and the VAT refunds we’ve made much better progress than we would have expected on VAT and if you look around geographies in Africa you look more broadly and it’s pretty tough to get VAT back on a net basis out of the government. So, to get $17 million, $18 million of cash added to the balance sheet from VAT over the quarter is a good performance.
Q3 maybe a little lower if I had to guess given the generally at the start of the government’s financial year which is 1st of July. It takes a little while until funds started getting released from treasury through the various different departments. So I’d expect July probably to be less but then we hope to pick up and then some again and certainly keep something like that progress going whilst if we reach a permanent solution on VAT. But that’s going to benefit to us. As we take this forward we’re coming to the end that the spend on the CIL project so that will finalize over the second half of the year. And it looks like it will probably come in slightly less than we initially anticipated it’s around about 160 million versus 167 million which is a good result for us. And then the other expansion spend we’ve got as you know is around $10 million developing the underground Gokona at North Mara.
So we’ll keep the discipline on cost base and the message is getting through our business pretty well now as to the discipline around capital so it is not a given anymore it’s got to be justified. And whilst we know we need to spend more that’s essential capital and as I said we still won’t let it erode our unit costs which we’re going to continue to see full. And that’s it in terms of formal presentation of the financials we will probably come back to it in questions but I think I’ll hand back to Brad.
Thanks Andrew. So, where does that leave us? And where we stand today is the business has been stabilized it’s now generating cash but we still see significant improvements in the business. The production guidance has been increased to 700,000 ounces as we said, cash and all-in costs continue to reduce and we see that trend continuing. And as Andrew alluded to earlier with the refreshed dividend policy we’ll be returning capital to shareholders based on free cash flow or net cash flow.
Where do we go from here? We still haven’t finished reengineering the mines. Now the operating review to save $185 million is coming to the end but beyond that there is still significant opportunities in reengineering the mines particularly at Bulyanhulu. We see opportunities still with the overall workforce numbers. We see opportunities in maintenance costs across the business not just at Bulyanhulu. And we also will take -- it will take a while for the decision to change the mining method at Bulyanhulu to wash through completely and to our cost base. It won’t be until towards the end of 2015 before we get the high costs handheld mining methods out of our plan. So, it won’t be until then until we can say that our serving has changed completely to the mechanized long haul system. But we’re doing it as quickly as we can.
We’re also redesigning structures and roles and we’re implementing a new organizational structure with individuals being held accountable for their part in that overall plan. A part of the reason for the reduction of 60 experts at Buly last week was that we had 14 levels of management and that’s still reducing to four so that process is just starting in the last few weeks. So that’s changing the whole Company not just the mine sites but Dar es Salaam and Johannesburg as well.
And underpinning all that is a cultural transformation now we have a formal cultural transformation program which we’re putting our leaders through right down to superintendent level. By the end of this year we would have put several 100 of our leaders through that course and that’s driving accountability and performance. So, there is a formal program to do that.
So yes we’ve come a long way we’ve created a strong base to leverage our future operational transformations but the business still has a long way to go. Bulyanhulu obviously we still need to improve performance out of that and that will be where our attention is for the second half of this year. Certainly most of my time will be at Bulyanhulu making sure that it happens and our people understand that. Happy to take questions. Yes.
Dmitry Kalachev - Canaccord Genuity
Dmitry Kalachev, Canaccord. Thank you very much for the presentation. My first question is regarding Buzwagi. If I heard it correctly, you're planning to move to use more grid power in second half of the year. Could you just give us a bit more color in terms of reliability of power, has it improved any comments on this?
On a -- an interruptions sense in terms of trip outs it makes sense for us to generate our own power which is what we’ve been doing while we had the SAG mill under pressure. But on a commercial sense it costs us a $1 million a month to do that. So when you do the analysis that still is the first price is to go onto to the grid power. Yes we get interruptions yes it makes it operationally difficult occasionally that we have to grin and bear it because it's saving us a $1 million a month.
Now on the other side of that equation, we have had meetings recently. And I personally have had meetings recently with the CEO of TANESCO who is the State electricity provider in the country. Now we are their largest customer, certainly their largest paying customer. And therefore we’ve got some class. So there are some initiatives that we have been putting in place with them longer term and short-term to improve their performance. And they’re starting to work with us on that. So we have a quarterly technical meeting with them now that we didn’t have before.
Dmitry Kalachev - Canaccord Genuity
Thanks. And also regarding North Mara, what grades do you expect in the second half? And do you think there is a potential for grade to surprise us?
Look Gokona has consistently outperformed on grade, but Gokona is coming to an end in Q1 next year. Potentially there will still be some outperformance on Gokona as we move through the second half, but we are now also starting to get into the top of the Rama ore body which will be lower grade than Gokona. So on average you could expect three grams per ton for the second half at North Mara, that’s an open cut mine in Africa that’s still good grade.
Dmitry Kalachev - Canaccord Genuity
And also, could you remind us what stockpiles you have left at North Mara and at what grades?
As far as high grades go we tend to put those through immediately. There are some lower grade stockpiles although I did visit North Mara recently and saw a small mountain of high-grades that the GM hadn't informed me about, but I was pretty happy to see it. And so generally we don’t stockpile higher-grades, but he had a bit up his sleeve.
Allen Gabriel - Morgan Stanley
Brad, this is Allen Gabriel from Morgan Stanley. My question is on the second half looking at the free cash flow generation which will improve from the second half onwards, where do you see yourselves spending the incremental dollars? Is it more for shareholder returns or growth projects, internal operation improvements or M&A?
Yes Allen, when I joined ABG, and I’ve said that, look we don’t have a corporate strategy. The strategy is fixed with the three mines that we own, and that that would take a period of 18 months before we started to have expansive thoughts. And that still holds. We are one year into that, 18 month process. The next half is very important to us. The next year we start to generate a lot of cash and at the end of this year, early next year, is when we start to look at how we apply that cash. Now a proportion of that will go back to shareholders. We need to decide how much we spend on Buly. Potentially, Buly is bigger again than what we’re factoring into our plans. And I believe that there will be opportunities in Africa for us as well. And we’ll be well placed next year to participate in any M&A activity because the business will be so strong.
Allen Gabriel - Morgan Stanley
My I have the second question as well. Have you had any recent conversations with Barrick Gold and what's their vision or what’s their goals for ABG in the next 6 to 12 months, if you were to look on a much shorter time horizon?
Not really. We don’t talk to Barrick on a day-to-day basis at all. We do act as an independent London listed company. And that wasn’t the case 18 months ago. We obviously have discussions with them at Board level because they have representatives on their Board. But as to their intensions you would have to speak to Barrick. Recently we hosted the new Barrick Chairman John Thornton, to our operations, and from all accounts he was very impressed. The best thing we can do is continue to turn the business around to give them more options in terms of what their plans are.
Dan Major - UBS
Dan Major from UBS, a couple of questions, firstly, at Buzwagi you mentioned changing the gearbox in the SAG mill. Can you give us a sense of the sort of lost throughput you expect quarter-on-quarter into Q3?
We were about 10% down on power for that motor, so we'll revert now to full performance. So you'll see throughput come up slightly at Buzwagi, but it won't be material. The throughput already at Buzwagi has been increasing quarter-on-quarter, in recent times. So it’s not something that I think is material enough to factor into your plans, but it will be a focus for us.
Dan Major - UBS
And perhaps a question on the box cutter at Bulyanhulu, has there been any sort of progression in your studies looking at that? And when would you expect potentially to put that to the Board for approval?
2016. The original Upper East proposal that we were playing with included an early start to that with surface access with Bulyanhulu, but it would have required a negative cash position in terms of the project about $120 million. So we redesigned that, so to push that surface access back a couple of years so that now within 2014 Upper East will pay for itself and will pay for itself every year following this year. So, yes that surface access is important, we will be able to throw 60 ton trucks at pulling material up and down that decline. But with the focus on cash it made no sense to spend that amount during this year and next year.
Dan Major - UBS
So, am I correct in saying that you wouldn’t really start committing capital to that project till 2017?
Dan Major - UBS
Yes. Sorry there is one question online.
Yes sir, we have a question from the line of Brock Salier from GMP. Please go ahead.
Brock Salier - GMP Securities
Hi Brad, just to expand on your discussion of M&A potential next year, is it too early to say whether you're looking at pre-production or production assets? And do you have a view on how the IRR of what's out there would compare to something like the surface access at Buly?
Yes. Thanks for the question. It will always be difficult to compare opportunities to Buly, because we see a lot more value in Buly and as far as IRR, it really depends on the asset but we wouldn’t look at anything under 20%. With respect to other opportunities in stage of development we are really after a production asset not a development asset, we are active on the exploration front in Tanzania, in Kenya you are seeing some of the good results coming out Buly and Kenya recently and we are looking for ground West Africa but that’s not focus for us. We have got a budget of $16 million for that. Where any M&A do we do next year or beyond will be a transformational deal. We are not interested in acquiring small assets.
Brock Salier - GMP Securities
Understood, thanks very much.
Cailey Barker - Numis Securities
Hi, thanks. Cailey Barker from Numis. Congratulations on the results first of all, secondly, just on a couple of questions firstly on Gokona. Are you expecting any ounce constipation this way and also this year and also what would it do your growth?
No, no ounces this year but very soon thereafter. Grades we are expecting around 8 grams per ton out of Gokona. So, it will have the impact of increasing overall production from North Mara in future years.
Cailey Barker - Numis Securities
Okay, thanks. Could you just also give us a bit more color on Buly to cost, what’s happen this quarter and where you expect to go for the rest of the year?
Yes, you saw on a Buly cost coming in, in Q2 which were over $1,300 an ounce. It’s important to consider to understand that so $9.5 million of the cost in Q2 which were included in the all-in sustaining cost number comes from the development we are doing for Upper East and the development we are doing for the Lower West, that some companies would classify the Upper East cost as sustaining capital no we don’t it’s sustaining capital not expansion capital.
So, if you take those two numbers out and they are numbers which are accessing gold that we will mine this year then you can take $200 of that all-in cost. So, it’s really an abnormal based on developing some high grade assets for us. Going forward as I said, you can expect Buly’s all-in cost to come down to $900 an ounce at the end of next year incrementally.
Thank you, Brad. And on the cost of Buly as Brad said just about 9.5 million taken through capital but we did spend additional cost there as well. So, all-in numbers close for the 15 million between Byrnecut who are the contractor of developing the Lower West area of the mine and the Upper East development we had no ounces to that yet. So, that’s a significant percent over the quarter.
Cailey Barker - Numis Securities
Okay, thanks. And then just a final question just maybe some clarification you have a dividend policy, what’s the payout ratio that on the free cash flow?
The policy on the ratio hasn’t changed. So, it’s still 15 to 30% it’s just the moving from an earnings space to a cash flow base dividend.
Cailey Barker - Numis Securities
Great, that’s all for me. Thanks very much.
Richard Hatch - RBC Capital Markets
Richard Hatch, RBC just a couple of questions and especially on the operational review and you know that you are about -- we are looking to beat your 185 million target. Have you got a gut feel as how much more that can go through? And then secondly one for Andrew, I note in the accounts about $5 million charge for the operation review in terms of retrenchment cost and such like. Can you give a guide us as to how much more we need to build in for this year and should that what can we expect for next year as well?
On the first question we expect to hit 200 this year on the operating review savings but then I think we move onto continuing to drop the cost, the overall cost in the business. The operating review never included actual mining and maintenance costs which is where most of the costs are and the improvements that you’re seeing in the business beyond that $200 million worth of savings halfway getting to an all in cost of $900 per ounce at Bulyanhulu and some of the other improvements that we talked about at North Mara. So, I think the quantum of the cost going forward the cost savings going forward is significant but we want to put a number on it you can calculate it from where we think Buly is going to end up.
Just on the, so on the second question what we planned to do at this point is largely done but we’re moving ahead with additional plans as well and largely centered around Buly. So, we haven’t finalized those yet but you could see a couple of million over the back half of the year additional costs in that. And potentially into 2015 if there is another stage after that we don’t have that finally planned out yet but that’s the order of magnitude that will set down.
Richard Hatch - RBC Capital Markets
Dominic O'Kane - JPMorgan
Dominic O'Kane, JPMorgan. Just I know it’s in the presentation that wasn’t unlawful lot of distress about exploration and I think the exploration results were pretty good. Could you maybe just put into context did they exceed your expectation meet your expectation and are you tempted to spend more this year or/and maybe looking onto next year and thereafter should we expect a similar exploration spend? And could you maybe just put into context how that impacts long-term mine planning thinking?
Yes. Look we’re very happy about the exploration results that normally no one wants to talk about them so the market generally doesn’t look at exploration or value exploration these days. But we are still strong believers in exploration. You can talk to Peter Spora over lunch. And Peter is excited about some of the opportunities he’s got if my view and then you get Peter’s later is that Buly still has a lot of upside potential. The results that you saw will add significantly to the resource. We’re now embarking on an underground program from our mine development guys not the exploration guys to look at adding millions of ounces of resource in Reef 2 which we believe is underexplored.
And the Kenyan results are some of the best results we’ve seen from an aircore almost a geochemical program. You don’t normally get those types of results that early in an exploration project. So, Kenya looks it will get, look it is early days at Kenya but it looks very, very encouraging. We’re already looking at spending more money this year at Kenya outside of our budget to do some deeper drilling. And then West Africa and you’ve heard me talk about this before but I am bit of a contrarian when it comes to exploration and exploration dollars. We’re actively talking to companies in West Africa about picking up substantial landholdings there because there are quite a few distressed exploration assets in some of those countries.
So, yes we’ll probably spend more in exploration than we have budgeted this year it won’t be significantly more and depending on the results which look positive next year we may slightly increase exploration as well. But I am a big supporter of exploration. But talk to Peter he is even more excitable than I am.
Neil Pidgeon - Whitman Howard
Brad, Neil Pidgeon from Whitman Howard I have a few so for Andrew. Could you just give us a flavor of what the general VAT issue has been in terms of there? And how long and what shape you think the permanent solution is likely to be?
Look, I’ll let Andrew talk to that and he is down there talking to them often.
Neil, thanks for the question and I think the general flavor is probably the same as it is pretty much in every country and send pressure on government revenues and we’ve seen that we’ll see it as we go this year we just started as the last four year before an election in October next so that tends to ramp up government spend with deficit winding. In terms of how we deal with that we for imported VAT put in place a mechanism whereby rather than go to the government as income that goes into an external account which we’ve verified through a certification process and it was about three months delay the funds are being refunded. What we want to do so domestic VAT where we don’t have any mechanism as it’s been is have pretty much the same form of structure which should cover about 80% of our domestic VAT so that’s gone through what's called the National Investment Steering Committee which is chaired by the Prime Minister the feedback from them has been we should do this.
They’ve told the attending revenue authority come up with a mechanism. We are told that they, from the Tanzania Revenue Authority to send a proposal back to the government. We haven’t seen it so until I see it in black and white and I’ll still be down there pasturing. But the progress in terms of refunds is excellent we think that structure advancing so we hope to see that certainly by the end of the year not one to see at this quarter to be honest. And if we can get that in place prior to the election really ramping up then most of the risk is removed and then it’s about how quickly we’ll recover the 65 million ounce spending. But we’ve seen about $11 million a month coming back for the first six months of the year which when you compare to last year when the first three quarters we were suffering $21 million a quarter outflows that’s a big reversal.
Just to add to that the bigger picture with government relations is an improving story on all of the issues that we discussed with the government we’re getting we’re making significant progress so there is the relationship with the government today is probably the best it has ever been we’re certainly placing more emphasis on it I spend a lot of my time on it but we’ve also recruited some impressive Tanzanian people who daily liaising with government officials. So I think we’re making good progress in quite a few areas with the government.
Steph Bothwell - Bank of America Merrill Lynch
Hi it’s Steph Bothwell from Bank of America Merrill Lynch, perhaps one for you, Andrew, and with the ramp up in production in the second half where do you anticipate your working capital requirements going?
I think that we are budget they’re going to be fairly flat over the second half. And the positive benefits we’ve got are the focus on inventory levels and we’ve seen about $6 million gain over the first half but that’s not enough. So our inventory holdings are still too high specifically at Buzwagi so Buzwagi we’re completing a new warehouse and we’re re-bidding, re-cataloging all of the inventories at Buzwagi so we should see further gains there. We’d hope to see further gains in terms of the VAT indirect tax situation so I think in terms of any potential build up as we ramp up volumes particularly at Bulyanhulu we’re obviously a lot more consumables going through the process plan and there is lot more consumable usage driven through the actual development work we’re doing. But we certainly wouldn’t expect to see any negative overall impact from that in half two.
Any other questions, no well, thank you for your attendance this morning. Look we’re still around for a little bit longer and it’d be pleasure to discuss ABG and our first half performance more over the refreshments. Thank you very much.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!