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Executives

Rod Antal – CEO

Mark Murchison – CFO

Analysts

Michael Slifirski – Credit Suisse

Dan Rollins – RBC Capital Markets

Steve Parsons – National Bank Financial

Stefan Hansen – Morgan Stanley

Alacer Gold Corp. (OTCPK:ALIAF) Q2 2014 Earnings Conference Call July 29, 2014 6:00 PM ET

Operator

Thank you for standing by. This is the Chorus Call conference operator.

Welcome to the Alacer Gold 2014 Second Quarter Earnings Conference Call and webcast.

As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. [Operator Instructions]

At this time I would like to turn the conference over to Rod Antal, Chief Executive Officer. Please go ahead.

Rod Antal

Thanks, Saatchi [ph], and thank you all for joining us.

This call is to discuss Alacer's second quarter 2014 results. Joining me on the call today is Mark Murchison, our Chief Finance Officer.

We'll be speaking to a slide deck summarizing our quarter two results which along with the other documents released today is available on our website. Following the presentation, we'll open up the call for Q&A session.

If I could direct you to Slide 2 of the presentation. This call will include forward-looking statements. Please refer to the forward-looking language including our press release and MD&A. Additionally, all dollar amounts in this presentation are expressed in U.S. dollars unless otherwise noted.

Now turning to Slide 3 which summarizes the continued strong performance of Copler. I'm pleased to report that Copler continued to deliver profitable and safe operation performance and we're on track to deliver on our 2014 production and cost guidance. I'm proud of the fact that the Copler team achieved 500 days without a lost-time injury in early July, which is another significant safety milestone for the operation and a continuing indicator of an engaged and motivated workforce.

Our second quarter gold production of 39,836 attributable ounces was delivered in an industry-leading all-in cost of $806 per ounce, of which $69 an ounce or $3.4 million was for the sulfide project. A total of 1.5 million tons of oxide ore was stocked on the heap leach pads during the quarter at an average grade of 1.5 grams per ton, which is in line with our internal projections. A further 300,000 tons of sulfide ore was stockpiled during the quarter, bringing the sulfide ore stockpiled to a total of 2.4 million tons at 4.7 grams per ton of gold. Importantly, this sulfide or stock ore contains 42% more gold than was produced within the 2013 resource block model.

Operating cash flows totaled $12.5 million, demonstrating the continued strong operating margins of Copler. I would like to just reiterate that we're on track to meet our 2014 production and cost guidance of 160,000 to 190,000 attributable ounces at all-in cost of $730 to $780 per ounce. This will exclude further sulfide project expenditures in the second half of 2014.

Gold production during the second half of 2014 is expected to be more than the first half. This is mostly driven by an increase in the oxide grade mines of about 1.8 grams per ton of gold, as more ore is sourced from the main pit.

I'll now hand over to Mark for an overview of our financial results outlined on Slide 4.

Mark Murchison

Thanks, Rod. The corporation continues to have a strong balance sheet. At the end of June we had approximately $292 million, no external debt, and $325 million of working capital.

Our cash balance at the end of June is only slightly more than the start of the year. And this is due to several annual cash outflows that typically occur during the first half of the year, including the payment to our joint venture partner Lidya Mining for their 20% share of the 2013 Copler profit of approximately $22 million, the annual Copler royalty payment to the Turkish government of $7 million, the dividend payment to the Alacer shareholders of approximately $6 million, and the final tax payment for the 2013 income year of approximately $12 million. These cash outflows will not reoccur again in the second half and therefore we expect the cash balance to build over the remainder of 2014.

Moving on to Slide 5, we have an overview of Alacer's P&L for the second quarter. Please note, the summary title is for our continuing operations only and therefore excludes the Australian business unit numbers in the 2013 comparatives.

A few key points. A total of 49,455 ounces were sold during the quarter at an average price of $1,298 per ounce, a gross sales of $64 million, which is 25% less from the corresponding period in 2013, which is primarily due to lower gold sales arising from the declining oxide ore grade. Copler's production costs for the quarter were similar to 2013 and thus the decrease in mining gross profit primarily reflects the lower revenue for the period. G&A charges for the quarter of about $3 million are considerably less than the corresponding period in 2013. Putting it all together, Corporation drove a profit before tax of approximately $18 million and a profit after tax of approximately $13 million.

In relation to tax expense, just a couple of comments. It's important to note the Corporation primarily pays corporate tax at the Copler entity level in Turkey. The approximate rate for this year is expected to be around 20%, which is in line with the Turkish corporate tax rate. At the Corporation level, we consolidate the other entities in the Group. The other entities derive losses from activities such as regional exploration, and these costs are unable to be offset against the Copler entity profits. Therefore, at the corporate level, the losses derived by these other entities produced a consolidated profit and thus increases the effective tax rate.

The result for Q2 is an effective tax rate of approximately 28%. It is expected the Corporation's effective tax rate for the year will be closer to the 20% level. It will fluctuate with movements in foreign exchange rates and the [indiscernible] incentive tax credits available in Turkey.

In relation to the incentive tax credit, we recently closed out the first incentive tax credit certificate with the Turkish government. The final outcome was broadly in line with the Corporation's original estimates. Our experience through this process provides us with confidence [indiscernible] incentive tax credits that Copler will qualify for in the future. We're currently assessing whether additional expenditure incurred under this second incentive certificate may qualify as eligible expenditure. Should additional expenditure be identified as eligible, this will reduce both tax paid and the effective tax rate.

Now if you could please turn to Slide 6, I'll hand back to Ron.

Rod Antal

Thanks, Mark. A year ago we set out an aggressive plan to reset the business, and established a clear pathway for the future. I'm pleased that we have consistently delivered on our promises and therefore transformed Alacer into a company focused on becoming a high-margin, long-life, multi-mine producer in Turkey. Our initial action plan has culminated in the release of the 43-101 for the Copler sulfide project. We now have a clear path forward for Alacer and we'll continue to deliver on our promises.

If you could just turn to Slide 7. The full 43-101 technical report for the sulfide DFS was released this morning, with a minor change made to the tailing storage facility cost and timing of capital payments. A change was made to the timing of the TSF phased construction sequence and capacity to match the new mine [ph] plant as a result of the resource reconciliation study [ph]. As a result, we have deferred some of the initial capital expenditure and a sustaining capital which is forecast to be spent in the years 2031 to 2033. These changes have had no material impact to the financial outcomes. This slide outlines the key metrics released in the 43-101.

Importantly, the study has demonstrated a robust economic outcome for Copler that will retain its position in the lowest cost -- lowest quartile of all-in sustaining cost for many years to come. The 43-101 estimates all-in sustaining cost will average only $597 per ounce for the forecast 3.2 million ounces of production over the coming 20 years.

Please turn to Slide 8. The release of the sulfide project DFS represents a significant step change for Alacer, which puts us in a strong position. The DFS and R&R [ph] updates further demonstrate the robustness of the sulfide project and the significant upside that we see. The sulfide project generates very attractive financial returns, with an unleveraged internal rate of return of 25%, a 1.7-year payback period from the start of the sulfide production, and over $1.6 billion of life-of-mine free cash flow.

In terms of implementation, the project is already significantly de-risked. This is proven technology and Copler was a brownfield project. It is based on very exhaustive studies over three years and we worked very hard to get it right. We have a clear plan in place to further de-risk the execution phase, and we are on track with regards to the permitting process.

The exploration program continues to focus on the discovery of supplemental oxide ore in the Copler district, and we continue to be excited by Alacer's organic growth opportunities around Copler and Turkey. Our efforts are keenly focused on progressing these exploration projects into mines. We will continue and look at other opportunities at Copler. For instance, our current heap leach pad is constrained at 50 million tons and we'll reach capacity at the end of the mining of the oxides in 2019. We've started geo-technical work, ground stability and metallurgical work to determine if it's possible to add another lift [ph] to the current heap leach pad to capture the oxide tons currently classified as waste in the DFS mine plant. Alternatively, we've identified two locations for new heap leach pads if there is another oxide discovery in the Copler district.

And finally, it's these fundamentals that give us confidence that Alacer has the platform and is in a strong position to continuing our growth plan in a methodical and de-risked manner.

This now concludes our prepared remarks. I will now open up the conference call to questions. Thanks, Saatch [ph].

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions]

The first question is from Michael Slifirski of Credit Suisse. Please go ahead.

Michael Slifirski – Credit Suisse

Thanks. I've got a couple of very simple questions. First of all, in terms of guidance, given that the grade you've stocked in the June quarter is not dissimilar to the March quarter, should we expect the September quarter to be pretty similar to the June quarter production? And then that 1.8 gram material that you talked about, posts [ph] in the December quarter, so the December quarter will be the big quarter for the year?

Rod Antal

Yeah, that's right, Michael. I mean the higher grades are being stocked now. And obviously there's that lag of getting the gold from the heap leaches. So while this quarter will be somewhat higher than the last -- the current quarter, the quarter three to quarter two, really the expectation is [indiscernible] plan that quarter four will be our strong quarter for the remainder of the year.

Michael Slifirski – Credit Suisse

Great, thank you. Secondly, with respect to the sulfide project in the -- I couldn't see within the 43-101 any production profile, yet you've indicated [indiscernible] stock material of the early years will be stronger. Are you going to provide at some stage some sort of indicative profile to show what it might over those first few years?

Rod Antal

In the original press release, Michael, we've put out the actual production profile. It's on the -- I think it's the very last page of the actual release itself, per memory. So if you're unable to find it, happy to send it to you.

Michael Slifirski – Credit Suisse

Okay, I'll check that. And then finally, the cash -- the cash flow diagram that you have in your -- in the 43-101 showing again a [indiscernible] of just under 300 million, so basically you're saying with the cash gone here now, you're funded, you're fully funded.

Rod Antal

Correct. That's the same -- the same assumption that we're talking to about when we released the actual results. And not forgetting the joint venture partner's contribution.

Michael Slifirski – Credit Suisse

Yup. Terrific. Thanks, Rod.

Rod Antal

Thanks, Michael.

Operator

[Operator Instructions]

The next question is from Dan Rollins of RBC. Please go ahead.

Dan Rollins – RBC Capital Markets

Thanks very much. Ron, I was wondering if you might just provide a little bit of insight on what you need to see from the exploration front on the oxides to justify I guess the development of a new pad. One, I was just wondering what sort of the target tons you're looking for to justify a new pad, maybe sort of what the cost is to developing a new pad? And then maybe if you can touch-base on how much of the oxide resource is currently in the sulfide plant but deemed waste that could be brought into production if you can find additional oxide ore in the new mine [ph] area?

Rod Antal

So, Dan, there's a couple of things that we're looking at right now. So in the new resource reserve statement that we put out, there's about 45 million tons of oxide leachable material treated as waste. So the first thing that we're looking at is whether we can actually put a lift on the current heap leach pad, because obviously that would be the quickest road to success for us toward producing that ore without having to sink any more capital costs into that heap leach to do that, or if we do, it would be quite minimal.

Failing that, and then it really will be dependent on probably supplementing that 45 million tons with some more oxide ore from the exploration programs that we're -- we've got around the Copler district to help support another heap leach pad to build. And we have two sites that we've identified, but really the preferred site right now has about a 35 million ton capacity. And our current estimates are that it will cost us around $30 million to actually build it.

So what we'll be looking for is something to supplement that 45 million tons that would give us the necessary hurdles [ph] to actually build that pad. And then we can go from there with anything else that we're able to discover.

Dan Rollins – RBC Capital Markets

Okay. And what do you need to see to be able to put another lift on the pad? What's sort of the limitations of doing that right now?

Rod Antal

Look, I think it's really -- it's probably about the same amount of material would give us confidence that we'd be able to get a, you know, appropriate payback for that heap leach construction. So we have another 5 million tons.

Dan Rollins – RBC Capital Markets

But is it physically doable right now or -- because right now you have a leach pad constraint where obviously if you had the ability you would put it on there, but can you physically do it or is it about the [ph] payback?

Rod Antal

Are you talking about -- sorry, Dan, are you talking about --

Dan Rollins – RBC Capital Markets

Another lift on the existing pad.

Rod Antal

Look, I don't know the answer fully about what we'll see from the work. It was kicked off about three weeks, three or four weeks ago. So we'll wait to see what the guys can come up with.

Really the concerns, if you want to call them that, we're working through, is the -- really the ground stability. It's probably the key area that we're focusing on, and then also the leach kinetics, to ensure that we don't untowardly affect the current heap leach operations by putting another leach on top.

So that will really determine whether it's possible or not. Then the -- and then we'll also provide [indiscernible] how much capacity we can get.

Dan Rollins – RBC Capital Markets

Okay. I haven't been there in a couple of years, I forget, but are you using Interlifts miners [ph] on the current pad?

Rod Antal

Just explain what do you mean Interlifts?

Dan Rollins – RBC Capital Markets

You put basically a new [indiscernible] down over the existing pad, on top of each lift.

Rod Antal

No.

Dan Rollins – RBC Capital Markets

Okay. Perfect. Okay.

And then maybe just moving on to [indiscernible] you increased your stake to 50%. When could we expect the next sort of exploration results from that project?

Rod Antal

We're in the progress right now of putting all of the exploration results for the year together, Dan. So we're still waiting on some of assays [ph] and some of the drill [ph] results to come in. And then we'll put -- try to get that together as quickly as we can for -- trying to release it in the next two months, next two to three months is really the target.

So as soon as we can get them together and we've had a chance to do the assessments and interpretation, we'll be able to release it.

Dan Rollins – RBC Capital Markets

Okay, perfect. Thanks.

Operator

The next question is from Steve Parsons of National Bank Financial. Please go ahead.

Steve Parsons – National Bank Financial

Yeah. Hey guys. Thanks. Just a couple of quick questions.

First off, on the sulfide project, in the MD&A it states that the next stage of the project will be further reduced risk by completing the basic engineering. Then it goes to talk about examining financial aspects associated with the project. Maybe if you could just add a little bit of color about what other financial aspects that you'd still like to examine as it relates to the project?

Rod Antal

I'll let Mark answer that actually, Steve. I think it's really in line of what we were talking about when we were out in the market here in the last month. But we're just sort of summarizing those financial aspects, but, Mark, [indiscernible].

Mark Murchison

Yes. Thanks, Steve. The -- we're running a few work streams just on looking at various aspects, and yeah, broadly they can be defined as looking at potential financing facilities. As we said, we can actually finance the project, but we're still looking at possibly a small working capital type facility. So we're going through that process.

We're also looking at opportunities with our input costs, the major components of those. For example, power, and just what we might be able to do in terms of securing costs going forward and engaging with the government to see if there's any opportunity for any incentives that might be provided similar to what we had when we started Copler.

Considering the revenue streams, locking in revenue with hedging, we're open to all of those alternatives. Not necessarily saying we will. But we could potentially de-risk on that by locking in the underwriting of I guess the construction with the price now on our sales.

And also on CapEx, looking at alternatives there. Things like possibly AM [ph] fixed price EPC [ph] arrangement. So they're the key streams that we're looking at when we're referring to that.

Steve Parsons – National Bank Financial

Okay. Just as I play with the model, certainly the IRR really does benefit from favorable tax treatment in the early years on the sulfide. And so what are you doing on that front? I mean, well, you've operated in the country, you're getting a favorable tax treatment, you're going to be spending a lot of money in the country, additional money. It's a start [ph] to sort of signing stability agreement to ensure that that's the tax structure that you're going to see for this project?

Mark Murchison

Yeah. They don't necessarily have a framework for agreements, Steve. It's -- that is not to say that we're not going to talk to the government about those things, but it's not -- it's certainly not something that's common that we've come across.

But in terms of the tax treatment that we get, it's -- the key is through those incentive tax credits that we have. And there's a framework within the Turkish tax legislation that deals with this and provides this benefit which is obviously there to encourage investment and development.

So we -- what we're doing is we have to go and get another certificate to cover the sulfide project. And over the coming months we'll be looking at doing that with the government, to get another certificate in place that will cover the -- to cover that spend. And that would be our third incentive certificate that we'd be looking to secure. So we've already had the third certificate as I mentioned that we've closed out, we're currently under the second certificate, and we'd be looking to put in place the third certificate that would have the parameters around getting the incentive credits.

Steve Parsons – National Bank Financial

Thanks a lot. Okay. That's it for me. Thanks a lot.

Mark Murchison

Yeah.

Rod Antal

Thanks, Steve.

Operator

The next question is from Stefan Hansen of Morgan Stanley. Please go ahead.

Stefan Hansen – Morgan Stanley

Hi everyone. Just a couple of quick ones from me. In the MD&A you wrote that you got a 23% positive reconciliation on sulfide or compared to the 2013 resource model. I'm not sure if the mining from the second quarter was incorporated in the resource reconciliation work that you did. But I guess if it wasn't, how does it compare to the new model?

Rod Antal

Yeah. Stefan, your questions are good [ph]. The actual new model is being rolled out at Copler in two days' time from the 1st of August. So [indiscernible] comparing it to the old resource model. But remember, we talked about the work that we've done up until the end of Q1, which [indiscernible] very closely to the new resource model. So it's a matter of now actually putting that into the field. And as we've talked about, that will be something we currently watch.

Stefan Hansen – Morgan Stanley

Okay. No worries. The next one, just on that change in capital estimate on the TSF, is that related to the extra lifts later in the life of the project due to a change in the production schedule or anything like that?

Rod Antal

It's actually two things. One was when we -- we just completed the new mine plan [ph] from the -- the resource reconciliation project. We went back over and we're looking at the requirements of the TSF. So we changed that slightly for that. We also looked at the design and the [indiscernible] designs to get access to build the actual tailing storage facility and well [ph], which led to some changes.

So what we're able to do is actually defer some of the capital for later use. In fact, a lot later use, post 2030. But it's gone up overall. But [indiscernible] give an initial capital cost of around 630 [ph], with a bit of internal rate of return. So, overall a better result for us.

Stefan Hansen – Morgan Stanley

Okay. But that new mine plan [ph] that you talked about [indiscernible] based on the new resource model, is that different then from what we saw in the initial release where you had that production profile?

Rod Antal

No. It's exactly the same one. What it was, was the work we did with the TSF was, for the release of the DFS, was, you know, we just completed it. So we went back over and looked at some of the [indiscernible].

Stefan Hansen – Morgan Stanley

Great. Okay. Thanks, Rod. Cheers.

Rod Antal

Thanks, Stefan.

Operator

There are no more questions at this time. I will now hand the call back over to Rod Antal for closing comments.

Rod Antal

Well, thanks, Saatchi, and thanks everyone. I appreciate the taking the time to look into the call today. Obviously we're very pleased to report another solid quarter from Copler. And until next time. Goodbye.

Operator

Ladies and gentlemen, this concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

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