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Executives

Laurie Gaborit – Director-Investor Relations

Paul Martin – President, Chief Executive Officer and Director

Pierre Beaudoin – Chief Operating Officer

James Mavor – Chief Financial Officer

Analysts

Andrew Quail – Goldman Sachs

Phil Russo – Raymond James

Trevor Turnbull – Scotiabank GBM

Steve Parsons – National Bank Financial

Anita Soni – Credit Suisse

Mike Parkin – Desjardins Securities, Inc.

Detour Gold Corporation (OTCPK:DRGDF) Q2 2014 Earnings Conference Call July 29, 2014 10:00 AM ET

Operator

Thank you for standing by. Welcome to the Detour Gold's Second Quarter 2014 Operational and Financial Results Conference Call. 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 call over to Ms. Laurie Gaborit, Director of Investor Relations. Please go ahead.

Laurie Gaborit

Thank you, operator, and good morning, everyone. I'm Laurie Gaborit and I'm pleased to welcome you today to Detour Gold's second quarter 2014 conference call and webcast.

On the call I'm joined by Paul Martin, President and CEO; Pierre Beaudoin, our Chief Operating Officer; and Jim Mavor, our Chief Financial Officer. At the end of the presentation we'll be pleased to answer any questions you may have. Today's presentation is available on the webcast and the financial results and press release are posted on the company's website.

Before we start please note that certain statements to be made today by the management team may contain forward-looking information. We refer you to review our press release of July 29th and our second quarter MD&A. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause the actual results to be materially different from those expressed or implied by such forward-looking statements.

Please note that all dollar amounts mentioned on this call are in U.S. dollars unless otherwise noted. Now to the business of the day, I will turn the call over to Mr. Paul Martin.

Paul Martin

Thanks, Laurie, and hello, everyone. We're pleased to report our second quarter results which illustrates the strength of the Detour team as we execute the 2014 ramp-up quarter-by-quarter. We remain focused on achieving our targets and setting the course for a successful future long-term.

In the next few minutes, I'm going to walk you through the highlights of the quarter and then turn it over to Pierre and Jim for a more detailed operations and financial update.

I'm pleased to report on Slide 5, that our gold production exceeded our expectation in excess of 117,000 ounces. This is our second quarter in a row where we have beaten our grade target and I applaud our operational team for this success.

Pierre will provide more details on this matter later in the call. We realized revenues of a $139 million from the sale of 107,000 ounces at a realized gold price of $1,293 per ounce sold.

Total cash costs were $941 per ounce sold, higher than our expectations but still a 4% improvement from the first quarter. We expect to realize further improvements in this area in the second-half of 2014. We realized an improvement in our net loss at $35 million or $0.23 per share and an adjusted net loss of $17 million or $0.12 per share.

Our cash and short-term investment balance remains solid at quarter end to a $138 million in the bank. We've previously stated that we would reduce our burn rate in Q2 and have successfully delivered on this.

On the exploration front we reported an early June high-grade gold intersections from the Lower Detour Lake area, located approximately 6 kilometers south of the Detour Lake mine. On Slide 5 and 6, as I stated on the press release we continue to make meaningful progress in ramping up the Detour Lake mine, the designed rate of 55,000 tonnes per day.

Since we declared commercial production on September 1, 2013, quarter-after-quarter we have delivered production growth and reduced operating costs. On Slide 7, for the first-half of 2014 we have achieved the high-end of our production guidance, 224,520 ounces versus our guidance range of 200,000 to 225,000 ounces. In fact, in the first six months of 2014 we have produced nearly the same amount of gold as we produced in all of 2013.

While any ramp-up is challenging, on the Q1 call and during meetings with many of you who are on this call, we have highlighted that the second-half of our guidance range was higher risk. That the mine and mill had to continue ramping up at the pace in our plan to achieve the higher production levels in our original guidance which was forecasted to have 50,000 ounces more in the second-half of 2014 than the first.

With lower than projected mill throughput having been realized in the first-half of the year we have decided to tighten our guidance. Therefore the 2014 production guidance is now between 450,000 and 480,000 ounces and still within the original guidance range.

Our second-half head grade guidance is estimated to be between 0.85 grams and 0.9 grams per tonne. We have also adjusted our total cash cost guidance, in part due to the reduction of the high-end of our gold production range, but also to consider slightly higher projected operating cost in the second-half and lower credits related to deferred stripping and stockpiles which Jim will elaborate on further, this results in an increase from the original guidance of $800 to $900 per ounce sold to $900 to $975.

And while this is an increase we still have the potential of meeting the high-end of the original guidance range. And with the goal of maintaining not less than $100 million in the treasury at year end, we feel as also prudent to reset our aggressive debt reduction targets from $80 million to $100 million to a maximum of $80 million for 2014. That reduction remains a high priority over the next few years and with increasing gold production and lower cost this objective can be realized.

All-in-all, we remain confident in our execution plan making progress of the operation through the second-half of the year with the focus on improving the mining and milling rates and ultimately we expect to reach mill design capacity by year end.

And now I will turn the call over to Pierre Beaudoin to comment on the second quarter operational results.

Pierre Beaudoin

Thanks a lot, Paul, and can we please move over to the Slide #8. Slide #8 is actually the one in which we have the production profile quarter-after–quarter. And Paul spoke to the fact that we have the 117,000 ounces this quarter, this is 10,000 ounces more than the previous quarter, and but the highlight is not so much that from our perspective, it’s not even the grades, the highlights, because the grade was kind of expected within reason.

The highlight for us is we managed to bring the dilution down to something to a value actually less than 3%. This was the result of a concerted effort at the mine site and we are very pleased with that. So this is a very positive news on its own, but the best from our perspective is not just that, the best is that it's just reiterate our longstanding view that our reserve base is absolutely sound.

In the second quarter we milled 4.4 million tonnes or 88% of our nameplate, this is something like 10% better. It's actually a little more than close to 9% should I say better than the previous quarter and this despite still some challenge with our availability. So we did some very substantial gain on mill throughput and I mean more the rate of milling here.

At the mine and during this quarter we tested a much more aggressive approach on ore mining, given the flexibility we had with a comfortable stockpile at the end of Q1. What we did in Q2 is, we designed the ore blocks to limit dilution and the mining execution continued to improve in mainly three points. First, we limited the mining at long strike, we still have some, but we limited it. We were – we managed to have a more appropriate shovel allocation and our operator's training experiences is gaining by the day.

So we want to continue on this path, this is the approach that we will favor in the future and we will steer to take advantage of our stockpile inventory when that’s possible.

I will now go on Slide 9 please, where we have a waterfall chart. And on this we see that, our mining rate reached 209,000 tonnes for the quarter, and this is lower than our expected 230 kilo-tonne per day. And we had a good April and May, but June, we were a bit surprised starting in the second week of June and for the rest of June, where our mining rate actually dropped to a little lower than 190,000.

So we have fairly confident that we can return to the level that we had previously. And our shortfall mainly came from the overburden and till, which was extremely less than some part to the south of the mine and we also faced some pretty challenging condition around the old mining area of the former Campbell pit operation, where we had to mine essentially between concrete blocks and rebar and this made it quite challenging.

So the tire manufacturer would tell you that this is very good for them, but this was not so good and we have to slowdown our pace in this area. So the bottom line is that, as you may recall during the first, maybe the middle of the first quarter, we took the decision to accelerate the overburden removal. At the time this was very strategic for us and meant to de-risk 2015. This adjustment was made possibly as a result of the favorable stockpile inventory.

The bottom line is that, our effort focused on accelerating the southwall pushback and the Campbell breakthrough. And this was to open the pit both to the south and to the east. So to put it simply what we did is invest in the development. Advancing the mine in this way actually serves two objectives. First, to provide a second access to higher grade zone to the east and second it opens the pit up for higher productivity.

So in Q2, our result – our efforts resulted in over $6.4 million tones of overburden. You will recall that in Q1 it is $5.6 million, so it’s almost $1 million more. It is a massive effort. This is very positive, but it was extremely challenging.

Going forward, we expect the mining rate to improve for two main reasons, and I already alluded to these facts. First, in H2, the plan is to decrease the overburden massively, okay. We did 12.1 million tonne in the first half and we plan to go to 4.6 million tonne in the second half, so that's one-third roughly, okay. And the second, as we open the pit, we will ask much more opportunity to double side-load with our big shovel. And every time we do that, we see our productivity just skyrocket, okay. And lately, we didn’t see much of that, because we have to use our time to big shovel in the overburden.

So the combined impact of these two factors will bring our mining rates to the 250 kilo tonne per day range. We've done more than 250,000 in several days, we've done even 300,000 tonnes in some days. Our challenge and what we are working on is to more successive days of about 260,000, and with this we are going to be successful.

The plan for the second-half is therefore to mine roughly 442 million tonnes and to build out the stockpile inventory to about 2 million tonnes by year end. The southwall pushback is planned to be completed in Q3, and shortly in Q4, we should have a nice area in the Campbell breakthrough to expose additional higher grade zone.

Let’s move to Slide #11 now, and we'll discuss process a bit. In Q2, we averaged north of 48,000 tonnes per calendar day and the availability for the quarter was 83%. Our lower availability was partially offset by the milling rate, which reached an average of 2,452 tonnes per operating hour.

I'm very pleased to report that for the month of May we actually beat the nameplate of the plant with 2,505 tonnes per operating hours and we did actually average 52,500 tonnes per day with 87% availability, so overall this is just shy of our 55,000 tonnes target. In the plant during the quarter, we encountered some challenges within the mill drive system and the front-end of the circuit, which impacted our availability.

On the positive side, we've made further progress with shutdown planning and overall maintenance practices and in (inaudible) our effort to improve the secondary crusher (inaudible) and we saw that in our rate of milling. The metallurgical recovery remained good, averaging 91% for the quarter and the gravity gold was 24% for the quarter.

Moving to Slide #12 now for the second half of this year in the plant, we have actually initiated in the third quarter a three-phase approach on a four-phase maintenance improvement program. This program was started in Q1 and we did – we'll extend into 2015 and actually in Q4 it will extend to the mining operation, this program looks at the number of maintenance activities and amongst other in the inspection, the QA/QC, logistics, procurement (inaudible) and spare parts.

Going forward in Q3 we have scheduled downtime to invest in the front-end. I already discussed the fact that this caused us some issues in Q2, so we want to invest in fixing this for good. And this is actually going to do two things for us. It’s going to actually allow us to further increase the rate of milling and it’s going to actually reduce some of the downtime. So we think that this is going to have a positive impact on both the rate of milling and the availability. So stay tuned for that. We are increasing our confidence that we are going to meet nameplate by year end.

In July, we completed the full change of our pulp lifter in both SAG mills. As such as I pointed out, availability for Q3 is expected, should I say to be similar to Q2. And in Q4, we're expecting a step change in the I-80s [ph] and our goal remain to reach the design capacity of 55,000 tonnes per calendar day by year end.

If we now move to Slide # – which one is this, 13, if we move to Slide #13, our total cash cost for the quarter was US$941 per ounce, and Jim will provide more detail about that, I will talk to the unit cost.

James Mavor

Okay.

Pierre Beaudoin

On the mining side, we were higher than projected and this is mainly results of the shortfall in expected tonnes and higher equipment maintenance cost. Our re-handling costs were also high and the overburden mining negatively impacted maintenance for sure. This is very difficult to time [ph] and obviously the equipment there, the cost increased a bit.

So on the billing side our unit processing costs were approximately 4% higher than planned driven by higher maintenance cost and also 4% lower mill throughput. For the second half of the year, we lowered the budgeted mining and milling rates and consequently as Paul discussed, we have lowered the high-end of the production guidance. We've also adjusted maintenance costs between the two maintenance departments. These adjustments are mainly associated with contractor and to a large extent expected to be non-recurrent.

Economies of scale are typically lagging the production ramp up, and we are seeing some of this here. Despite these adjustments we still expect to see a general downward trend in the operating costs over the next quarter, as we start to take advantage of the economy of scale for both the mine and the plant, but again at the slower rate than we initially anticipated.

On Slide 14, I will provide a quick update on the few near-terms opportunity. The debottlenecking exercise that we initiated this year is progressing very well. The 2014 work is on schedule and the scope for the rest of the debottlenecking is being refined. The bottlenecking is all about testing the circuit and I can assure you that the guys at the site, they tested that.

We've now raised our cap on the milling throughput to 2,850 tonnes for operating hours and we're testing the circuit to see where we need to do some adjustment. So we begin to understand that, and we think that what we've seen in the last quarter is not the end of it. So stay tuned.

We've also started the heap leach testing, but – and we are all very eager to see the results but they're not available yet. So on that one too, we ask you to stay-tuned. I remind you that for right now for at this point the low-grade material of the stockpile in its considerate way, so this would be just a plus that we could prove that this material is amenable to each process.

We are also continuing our effort on the potential removal of the pebble circuit. This is absolutely very high on our radar screen. As some of your know a preliminary indication show that the pebbles are barren and we have actually a lot of people very excited about the concept. And I have another number of people that want to do some pretty interesting stuff with the pebble, should we extract them.

In addition, I'd like to point out that we're continuing our effort to bring the reserve updates on Block A and we continue our work on the high grade gold intersect that we reported in June.

Before I conclude and transfer the call to Jim, I'd like to make a couple of points, that's very close to our heart. You might recall that in the past we discussed a lot about the grade at Detour. I'd just like to remind everybody that we've now mined more than 500,000 ounces of gold from that deposit and our reserve model has been proven right for and that is for the grade, the tonnes and the dilution assumptions now. And this absolutely gives us confidence that the Detour Lake reserve is robust.

We like what we see there, and we like the way we model this deposit. At the mine, we're advancing the developments in the right direction and we're about to conclude a massive effort in overburden removal. In fact, in Q3 we should see that we will have mine close to 50% more overburden than we first were planning to, and we did that for very good reason. We wanted to pave the way for 2015 and we are absolutely confident that this is the right approach.

At the plant, we've seen a lot of very good things at the plant. We've nearly reached life of mine recovery targets. We nearly reached the nameplate milling rate targets and we continue to gain stability and availability and keep our eyes certainly on the target to reach design capacity of 55,000 tonnes per day. It's not a matter, we're going to do that, it's going to happen, okay?

So, what I'm saying here overall is that, what has happened with grade and dilution is now happening with gold production and it will be followed by cost. So we feel very comfortable with our grade, we're still comfortable with our deposit, our design, and our life of mine production.

On this I'm going to pass the call to Jim to discuss our financial results.

James Mavor

Thank you, Pierre, and good morning, everyone. In the second quarter, we produced 117,000 ounces of gold of which 107,000 ounces were sold. Again, as in the first quarter our ounces sold are lower than production but this time it was due to the processing of high grade ore in the final two weeks of June which increased our gold and circuit inventory at the end of June. The good news is these ounces were poured in July and they've been sold in the third quarter.

Metal sales for the second quarter were $139 million on the sale of the 107,000 ounces of gold and we realized an average price of $1,293 per ounce. Production costs were $98 million and translated into total cash costs of $941 per ounce a 4% improvement over the first quarter. So we realized the gross margin before depreciation of $352 per ounce on our ounces sold.

Depreciation expense was $38 million or $357 per ounce which is consistent with levels from the first quarter. Moving down the income statement you will see we recorded $28 million of net finance costs, the largest component being a $15 million fair value loss on our convertible notes. This loss relates to the $500 million convertible notes and occurred because our share price increased quarter-over-quarter. So as a result we reported a bottom-line net loss of $35 million or $0.23 a share.

When we exclude certain non-cash items such as the fair value loss of $15 million, accretion charges of $6 million and a refund for electricity relating to 2013 of $3.9 million, the adjusted net loss was $17 million or $0.12 a share.

Now, prior to moving on to the statement of cash flows I'd like to note that our risk management programs for gold and foreign exchange realized a total of $1.7 million of gains which are booked as income items in net finance cost. As well in early July we added gold hedge positions for the second-half of this year, and as of today we have 100,000 ounces of gold sold for August through December at an average price $1,287 per ounce.

I'd now like to make a few comments on the statement of cash flows. Cash flow generated from operations was $39 million. In addition, we had positive changes to our working capital balances. You may recall that in the first quarter our operating cash flow was reduced by almost $50 million, whereas in this quarter it has increased by $7 million primarily due to the collection of sales tax refunds in April.

In our investment activities we spent $27 million on sustaining capital expenditures such as tailings dam construction and equipment and an additional $15 million for deferred stripping as our actual strip ratio in the second quarter was 5.6 versus the life of mine average of 3.5.

Our financing activities of $11 million primarily consisted of paying interest on the convertible notes. So, we ended the quarter with cash in short term investments of $138 million for a net reduction of $7 million from March 31. This is a good sign and shows that with the ramp up progressing and at today's gold price, our liquidity which is comprised of cash and the undrawn bank facility is solid.

Now, before I turn the call back to Paul there are three other items I'll bring to your attention. One, early in 2014 the company was accepted into an energy program with the Ontario Power Authority and we signed a six-year electricity contract at a fixed price. Under the terms of the contract, the company recorded a rebate of $26.4 million for electricity charges that we previously paid in 2013 in the first-half of this year. You will see this in our other receivables in note four of the financial statements.

About a week ago we received $16 million of this rebate and the balance of $10.4 million will be collected over the rest of 2014. As a result our working capital will continue to improve in Q3. Secondly, in July the company amended the terms of its credit facility with its bank group in order to allow more time to pass the completion test. We've extended the completion test from September 30 to May 31 of next year to give the mine and mill a little more time to complete the ramp up and reach nameplate. Both these items are described in note 15 to the financial statements.

And lastly, to give you some context to the revision of the total cash cost guidance, original guidance was premised on higher mining rates, a slightly faster ramp-up and gold production towards the top end of the range. As we've narrowed the range of production to 450,000 to 480,000 ounces we'll be selling fewer ounces than in the high production scenario. As well based on recent review of costs, costs in the second-half may be up to 8% higher than the first-half which would equate to about a $45 increase for the full year.

And lastly, because of the slower mining rate than originally planned we aren't moving as many tonnes. Specifically we forecast to have lower waste tonnes and ore tonnes in 2014 and as a result we will not be able to allocate as many mining cost to deferred stripping or to ore inventories on the balance sheet. So when we factor these three issues together we felt it was necessary to adjust the cost guidance to $900 to $975 per ounce for the full year.

So the opportunity though for us to improve on cash costs in mainly on our hands. One, we expect to mine more tonnes in the second-half as we took a hit in Q1 and Q2 to remove significant amounts of overburden and with more tonnes mined we'll have access to better grades. We expect the mill to ramp up to nameplate by year-end and that should yield more ounces produced. And then lastly, we expect cost improvements when operations can run continuously at steady state and, of course, we'll work with our suppliers for cost reductions and production efficiencies.

And with that, I'll turn the call back to Paul.

Paul Martin

Thanks, Jim and Pierre, for the additional insight on the quarter, I think there is a lot of positive news in there. And before we open up the call for questions, I'd like to make a few final comments.

We are still in our ramp up phase and that should not be lost on anyone. We have to continue to improve the performance of the mine and the mill to complete the ramp up and we remain cautiously optimistic about attaining this by year end. As you've heard from Pierre, our block model is reconciling and performing extremely well. Rates are being realized and we have demonstrated that external dilution can be controlled. This is truly great news that this is the foundation of our company.

And with every passing day, we go more excited about being able to look beyond our first, second, and third priorities, which is the ramp up of the Detour Lake Mine towards our pipeline of organic growth and value-added projects, which includes Block A, the processing of incremental low-grade material, and the possibility of removing our pebble circuit. These are sitting right on our doorstep and can assist and significantly enhancing our valuation.

Combining these with the potential to identify incremental higher grade targets on our large land package provide significant opportunity to improve upon our already solid life of mine plan. With an increasing production profile over the next few years, this operation will generate increasing cash flows. We offer leverage to the gold price and we believe the supply and demand fundamental supporting higher gold prices in the future, this bodes well for Detour's shareholders. And of course our shareholders understanding investment rationale, the Detour Gold offers a unique investment opportunity.

Number one, the minus large – the large reserve base and a plus 20-year mine life. Number two, it’s located in the safe mining jurisdiction, and number three, we have substantial growth opportunities. As a matter of fact, there are no other operations with these qualities, which are not already controlled by a major.

And with that, we'll proceed to our favorite part, which is the question period. So now I'll turn the call over to the operator and I'll turn up for questions.

Question-and-Answer Session

We will now begin the question and answer session. (Operator Instructions) The first question is from Andrew Quail.

Andrew Quail – Goldman Sachs

Yes, good morning, Paul, Pierre, James, and Laurie. Thanks very much for taking my question and congratulations on another strong quarter at Detour Lake. First one is on grade, obviously excellent and it beat us. Is it fair to assume, given you haven’t changed guidance that Q3 and Q4 will probably be lower than the first half, but obviously it must be offset by higher throughput, but we are talking just grade?

Pierre Beaudoin

Yes, on the grade, we – what we are seeing for Q3 and Q4, and please keep in mind that, it depends highly on all the plant perform and all the mine perform, right, and we are thinking that the grade is going to be anywhere between 0.85 to 0.90 gram per tonne to the plant.

And so, during that quarter, during the next quarter, we don’t think we're going to as aggressive with our dilution or the simple fact that our stockpile inventory has gone down. So we need to return to a more conservative approach with the mining sequence and the block design. But the Board is very glad that we did discuss in Q2, because it gave us the confidence that should – our stockpile inventory return to higher level. We can implement this strategy, it works and it has a very nice impact on the grade.

Now, one thing I would like to point out on the grade is that, we were expecting roughly 0.85, 0.87 during this quarter. We are at 0.91 and this is mainly the result of much better dilution. In fact, during the quarter, we had something like 2.3% dilution. And this is pushing a bit our limits. We don’t want to continue to be that aggressive, because it’s going to have – it could have an impact on as you know on ore loss. And we need to return to more of a life of mine target of 3% or 4%. So that’s what we are planning to do going forward.

Now, just on the grade of Q2, I just like to point out that, we guided the market to 0.85, because we thought that this was the case. And in fact, the reason that we were a little higher as I said is, because the dilution was a little much lower than expected in one hand, but also because the plant did not process as many low grade – lower grade tonnes, okay. This needs to be understood, we are not seeing here all of a sudden that our model is going to spit 2% more grade all of a sudden, okay. And so the model is actually responding exactly as expected and overall with 0.91 and the win we managed our mine and the plant we are not surprised with this result.

Andrew Quail – Goldman Sachs

Thanks for the detailed answer, Pierre. A question I suppose related on mining availability, obviously improved significantly in the last couple of quarters. Do you – are you still sort of looking to save sort of 92% by 2015?

Pierre Beaudoin

Are you talking about availability or?

Andrew Quail – Goldman Sachs

Yes, availability.

Pierre Beaudoin

Yes, there are several ways we can approach that and certainly we see that the end of 2014, we see that the plant is going to be in the high-ends of the 80s. It should be pointed that, during some month we had one of the lime that was about 90. So we know we can do that. At this point there is more a matter to repeat this month-after-month and then quarter-after-quarter.

So our plan is to be in the low 80s – in the low 90s for next year. We have not yet build up all our budgets, but certainly, it’s going to gravitate around 90%. But one thing that is clear is that, whatever we have on availability, we think if we have the 1% or 2% or 3% lower on availability, we now see that the rate of milling can absolutely compensate for it. And we are always thought that this would be the case, but the last couple of months I've just reiterated our confidence in this.

Andrew Quail – Goldman Sachs

Great. And just last one, obviously you talked about – briefly about the exciting opportunities that exist to sort of grow organically around the mine. Is it – is it sort of your guidance on timing that we might get an update on some of these what the – with the heap leach or the pebble crusher removal?

Paul Martin

That’s actually a very good question. And within the next couple of quarters, we should understand this a little better. I would say that, the first question for us is to try to understand to which extent these opportunities are – how big are they, okay? And for the heap leach, we just tested the test work. We already tested some concept, but this – these project – this one is really at the tendency. But it’s a huge opportunity as you know, by the end of life of mine, we are going to have 100 million tonnes of material between 0.4 and 0.5. And this is not even accounting what we could do with material between 0.25, let’s say on 0.4 as heap leach was to be a process that works.

So this one is going to take a little more time. The other one the pebble – the potential pebble circuits removal, this one could go a little faster, but it’s also a bit complex as we need to ensure that whatever we are seeing now, we are going to see it in the future. So we certainly see a tendency for the pebbles to be barren, but we want to make sure that we understand this well before we invest, say $40 million or $50 million to remove this from the circuit.

Andrew Quail – Goldman Sachs

Thanks very much, guys.

Operator

The next question is from Phil Russo of Raymond James.

Phil Russo – Raymond James

Thanks, operator. Good morning, guys. Pierre, maybe I can get you to just expand a little further here on the overburden. If you look at the line of mine plan you still have, if I'm reading it correctly, high rates of overburden removal in the next sort of few years here, maybe you can explain a little further why this productivity impact wouldn't be recurring. The aim here is it, your fleet obviously grows in the next couple of years here, but is that the main driver here like maybe you can just talk a little further about that?

Pierre Beaudoin

Well, we're going to have overburden going forward, that’s a given, just going by memory here, but I think the life of mine is calling for 100 million tonnes of overburden and just going to go by memory again, so don't quote me on it. I think that so far we have roughly 30 million tonnes of overburden mine or we will have by the end of the third quarter.

And so, the overburden removal is going to be part of our life okay. And what we did during Q1 and Q2 is try to get a little more add with overburden removal, so that it doesn’t impact the mine production going forward. And the reason we were able to do that still is, because we have a bit more stockpile than we really needed. So we took advantage of the fact that the mine was a little bit ahead and we invested in the development.

Going forward and especially for the end of this year, we see that our phase position [ph] is going to be because of that it's going to be much better than it would have been if we had on the mine, let’s say, 10 million tonne or 11 million tonne. And as we move, we've learned a lot this year about how to mine overburden and what to expect, what kind of surprises to expect when we are mining overburden? And we are going to be testing a number of new opportunities to mine overburden a little more efficiently. And obviously as we are going to have less to do in the future, it’s not going to be as challenging. We don’t see that we are going to have other years with that much of an effort.

So overall, the ratio of overburden to the rest of the operation should reduce. And overall, we think now we have a much better handle how to approach it and we certainly understand the ugliness of that beast, so and we have a couple of thing we want to test. And as an example, we are discussing with suppliers to provide set of tracks that would be much wider for the shovel and for us allow not so much sheeting under the shovel. So that’s one of the thing that we are going to be looking at for next year, even if next year we are going to have less it’s going to prepare us for the following years.

Phil Russo – Raymond James

Okay, thanks. Just moving on to the 2015 impact here potentially if there is one you guys talked about reduced mine output here, 92 million tonnes to 82 million tonnes mill output et cetera. I know you're still finalizing budgets (inaudible) but next year sort of production profile, are you still confident in that, is it understated over here?

Pierre Beaudoin

No, as you point out, Phil, rightly so, actually is, we're in – we're just about to enter August, we've just began the five-year plan. This is the first step of our life of mine process of reviewing the life of mine process. But what I can say for 2015 is that, we use 2014 to be risk, yes, and we are absolutely positive that our phase position at the end of 2014 as we are doing now, it’s going to be better than we would have otherwise and if you are continued with the previous plan. So taking advantage once again of the large inventory of ore we had available, our opinion is – was a good strategic move for us.

Phil Russo – Raymond James

Okay, great. And just lastly here then, Q2, you guys gave us bit of a parameters to work with here in terms of mining rates, mill availability, tonnes per day, a type of a range. Do you feel comfortable giving something about that Q3 here, what we should expect?

Pierre Beaudoin

Well, we said, we finished, yeah, I'm comfortable to do that, Phil. We finished June with – or the second quarter with 209,000 tonnes of overburden. And as I pointed out during the call, we've really been too good in June with, even lower than 190,000 tonnes per day, and so which impacted our overall average for the quarter. Going forward, we plan to move from the $220 level back to level of $250 at the end of the year. So I think with this information, you can figure out what we are seeing.

Phil Russo – Raymond James

Okay.

Pierre Beaudoin

Is that okay? I think we provided a little more guidance on the availability of the plant, and so we see the second quarter – the third quarter being similar, but we are still working hard to increase the rate of milling inside the plant. So I'm still cautiously optimistic that that we can still with similar availability in the plant perhaps beat the 4.4 million tonnes we did in the second quarter, that’s – the guys are certainly at the mine site on a mission to achieve that.

Phil Russo – Raymond James

Okay, great. That’s it from me. Thanks.

Operator

The next question is from Trevor Turnbull of Scotiabank.

Trevor Turnbull – Scotiabank GBM

Yes. I just had a quick question kind of following up on the stockpiles. You mined about 65% from the pit and 35% out of the stockpiles. Wondering if you're rebuilding the stockpiles, I assume you won't be pulling as much in Q3 and Q4 from them, or is that incorrect.

Pierre Beaudoin

Well, that’s certainly the plan. We – what we wanted to see in Q3 and Q4 is to replenish the stockpile to a level of – we wanted to return to roughly 1.52 million tonnes by the end of the fourth quarter. But this is going to be our – we've got 13-week plan and it’s very easing within that. But certainly our goal is to increase the inventory, because bottom line Trevor is that, if we are able to have an inventory of say 2 million tonnes or 3 million tonnes on the stockpile then it gives us an opportunity to redo what we did in Q2 and to be more aggressive on the mining shape and to target a lower dilution and de-spike our grade with 2% or 3% more grade, which for us is making a heck of a difference on the bottom line.

Trevor Turnbull – Scotiabank GBM

Yes, exactly. The other question I had was with respect to the higher grade that was alluded to the – kind of came in towards the very end of the quarter. I was wondering, was that partly due to positive reconciliation, or when you modified the mine plan a little bit, was that just a natural consequence of the new sequence that you’ve got into some higher grade that the model predicted, but that you hadn’t originally put into the mine plan as early as Q2?

Pierre Beaudoin

No, it was – it’s none of them actually. We were planning this grade that came in. The thing that that Jim referred to is the fact that, sorry, Paul, sorry, I lost my train of thought on…

Paul Martin

Sorry, on the high grade sequencing.

Pierre Beaudoin

In the high grade, sorry mate, okay. So Jim was alluding to the fact that we have higher grade. And the reason why you said that is to clarify why the inventory went up inside the plant. And so this was kind of a plan for that quarter, but obviously within that quarter, we are not too sure when it’s going to happen. And when it happens at the end of the quarter, it’s extremely difficult for the stripping circuit to be able to cope with it. And we are grade testing the plant in the 1.2 gram a tonne to 1.4 gram a tonne towards the end of the quarter. So it was a bit difficult for the circuit to be very responsive. But by the end of July, we think that the inventory is going to be back to normal and actually it’s almost back to normal as we speak.

Trevor Turnbull – Scotiabank GBM

Sorry, when you say 1.2 gram a tonne to 1.4 gram a tonne that was the actual grade coming out of the pit at the very end of the quarter?

Pierre Beaudoin

It’s that grade hitting the plant at the end of the quarter.

Trevor Turnbull – Scotiabank GBM

Okay. So you really – and again that was stuff the model predicted, it just – it wasn’t simply positive reconciliation, it was just a matter of progressing?

Pierre Beaudoin

All predicted by the model and in fact towards the end of the quarter, we had zone at 1.8 grams and it was in the model and we just mined and milled it.

Trevor Turnbull – Scotiabank GBM

Okay, great. And then the final question, you were talking a little bit about doing some work on the front-end of the mill, it almost made it sound like you were able to get some things done that might reduce the schedule downtime in Q3, or is that from this understanding?

Pierre Beaudoin

No, that’s actually the opposite, because in Q3, what we plan to do Trevor is to invest a little more in the front-end and to prepare for Q4 of next year. We need to do slight adjustment to our 4 tonne conveyor, the feeder, at the bottom of the gyro-crusher and we absolutely need to see – to do this, because as the plant is ramping up it's absolutely fundamental that the front-end is able to follow and it's very much needed also for the mine because if we need absolutely to decouple the plant from the mine, otherwise the mine is too much at the service of the plant and just doesn’t operate well.

And the best way to do that is to have a very effective and capable crusher and for the moment the crusher is very capable but the conveyor is a bit limited which kind of limits the overall package. So that's why we need to fix that, and once this is fixed, then we're up to the raise.

Trevor Turnbull – Scotiabank GBM

Okay. Well, congratulations and thanks again, Pierre.

Pierre Beaudoin

Okay. No worries.

Paul Martin

Okay. Operator, we'll take three more calls. Could I ask – we've been on the call now for 50 minutes, so if you could restrict it to one question each. And if we don't get to everybody please contact us directly after the call.

Operator

No problem. The next and last question is from Steve Parsons of National Bank Financial.

Paul Martin

Sorry, operator, I said three more, please – the three more participants.

Operator

No problem. Go ahead, Steve.

Steve Parsons – National Bank Financial

Yes, thank you. Yes, good morning, guys. Just maybe to follow up on the dilution and availability, I see you can modify the blocks or the ore block design to control dilution, get dilution down and at their way to the mills sort of push tonnes to address low availabilities, but what are the – whether any cost implications of doing both of those things, presumably controlling the design in the pit, either unit – your mine costs and making the changes in the mill. Looks like your unit milling costs are quite a bit higher than what you need to be for 2015 run rate so you maybe you can just speak to that please.

Pierre Beaudoin

Okay. So, you're wise that Steve you asked three questions inside the same. Okay. So, starting with the dilution, the way we approach dilution absolutely does not change the operating cost at the mine. It does not change it. Actually I was a bit concerned about that and I had the very same question to our guys and we went into detail about the rationale for that. So we are very positive that changing the approach a bit with dilution doesn't change our operating cost.

And as far as our operating cost in the plant as you know I think you're process plant person, as you know, when we increase the rate of milling inside the plant the operating cost, the incremental operating cost are just going to go down significantly. And as we approach the 5 million tonnes per quarter you're going to see these operating costs go down.

Now we still have some work to do on the maintenance side, we're still employing way too many contractors. We need to transfer this to our own guys. We are still – within our planning process we still have 5% or 6% allocation for on plant down time. We need to bring this down to perhaps 1% in the long term.

And so these things together will bring these operating cost down, so see – what I'm saying is that essentially when you're ramping up a mine or any mine of this size there is a process to bring the production up and the operating costs are typically lagging a bit and that's what we're seeing here.

Steve Parsons – National Bank Financial

Got it. Okay, I'll follow-up with you off-line. Thanks.

Pierre Beaudoin

No worries. Thanks.

Operator

The next question is from Anita Soni of Credit Suisse. Please go ahead.

Anita Soni – Credit Suisse

Hi, guys. Thanks for taking my call. Steve asked what I was going to ask. So I guess I have another question that would be one of my favorite question, strip ratio, what do you – how do you see that evolving for Q3 and Q4, is your 3.25 still valid for the year? And what does it look like for 2015, is that still 3.42?

Pierre Beaudoin

Okay. For Q3, what we see, Anita, is that we're going to have fairly high strip ratio again and the reason for this is we want to finish the overburden in Q3. We've got a very aggressive plan for Q3 on overburden again and we're well on our way to make a big dent into it in July, so our strip ratio is going to be up again in Q3. But we have to be careful quite honestly because in this case our stockpile inventory needs to be watched closely. We cannot push that to the extent that it's – it could have an impact on gold production.

Q4, should see a significant reduction in the strip ratio and it should be below 3 actually and for next year I'm going to, I cannot answer the question, I don't have the data and our phase position is going to be a fair bit different than what we were expecting when we did the life of mine. So I need to – I need a little more time to be able to speak intelligently about that.

Anita Soni – Credit Suisse

So, how – maybe, you could just answer the overburden tones that you're going to remove this year. What is that number now?

Pierre Beaudoin

Well, what we're saying is that…

Anita Soni – Credit Suisse

Used to be 11.7, so…

Pierre Beaudoin

Well, okay, the overburden is – we have done 12.1 million tonne in the first-half of the year. We're planning for 4.6 million tonnes, so the total is going to be 16.7 million tonnes of overburden for the year.

Anita Soni – Credit Suisse

Okay. Thank you.

Pierre Beaudoin

Okay.

Operator

And the next question is from Mike Parkin of Desjardins Securities.

Mike Parkin – Desjardins Securities, Inc.

Hi, guys. Just a couple of questions, I thought I heard that you had some issues with the mill drive, there's some challenges there, if you could comment on that a little bit. And then the maintenance costs, is that the kind of the bulk of the percent higher cost in the second-half versus the first-half that you were talking about?

Pierre Beaudoin

Yeah, let me, okay. So drives and maintenance cost. Okay, the drives is the system that is a fairly complex system that is between the motor if you wish and the mills. And we're working very closely with the manufacturer to address these issues. And part of what we're planning to do is to integrate them a little more in our team. The product that we have is not any different than where – what you'll find in a number of other operation.

The difference in our case is we have four of them for our four mills. It's fairly rare that you're going to have that many in a single operation. So we're working closely with the supplier to address, it's mainly an issue with troubleshooting and the time to troubleshoot when we have an issue and so we need to go through that process. The guys we're dealing with are extremely competent and we're comfortable that we have their entire support.

So, that's it for the drive and as far as the maintenance cost increase, the way I look at this, for the increase that we're suggesting from $900 to $975– sorry, I – typically I separate that in three boxes. The first box is of roughly one-third is non-cash item like Jim suggested, okay? And the second box of roughly one-third is because we increased our operating cost on maintenance and they increased in operating cost in maintenance are largely going to be non-recurrent and essentially lagging the delay in operation.

And the third one is just because our gold production for the year is going to be 20,000 ounces lower than we expected. So, going forward we think that our operating cost are going to go back except for the inflation whatever we have there to the level of the life of mine.

Mike Parkin – Desjardins Securities, Inc.

Okay. Yeah, that's what I just wanted to confirm. It's more like just the short-term nature impact rather than the medium term and beyond.

Pierre Beaudoin

Yes, we'll know better when we finalize the budget but the core of the expenses that we see, we see them as non-nature in for the moment.

Mike Parkin – Desjardins Securities, Inc.

All right. Thanks, Pierre.

Pierre Beaudoin

Okay. No worries.

Operator

So, this concludes the time we have allocated for questions today. I'll turn the call back over to Paul.

Paul Martin

Thanks very much, operator. And thanks everyone for your time today. We did miss a few people on the question queue so if you could please contact us directly. And just a point forward for Q3, Jim and I also are available to answer questions, with that thanks very much. Bye-bye.

Operator

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

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