North American Palladium's (PAL) CEO Phil Du Toit on Q2 2014 Results - Earnings Call Transcript

Aug. 1.14 | About: North American (PAL)

Start Time: 08:30

End Time: 09:11

North American Palladium, Ltd. (NYSEMKT:PAL)

Q2 2014 Earnings Conference Call

July 30, 2014 08:30 AM ET

Executives

Phil Du Toit - President and CEO

Jim Gallagher - COO

Dave Peck - Head of Exploration

Dave Langille- CFO

John Vincic - IR

Analysts

Alex Terentiew - Raymond James & Associates, Inc.

Andrew Mikitchook - Edgecrest Capital

James Hader - Rossport Investments

Brandon Throop - Mackie Research

Operator

Good morning, ladies and gentlemen, and welcome to the North American Palladium's Second Quarter Results Conference Call and Webcast being held on Wednesday, July 30, 2014, at 8:30 a.m. Eastern Time.

I’d now like to turn the call over to John Vincic, of Investor Relations. Please go ahead.

John Vincic

Thank you, operator. Good morning, everyone, and welcome to North American Palladium's 2014 second quarter results conference call and Webcast. The Company's financial results were issued earlier this morning and are available on our Web site at www.nap.com.

Before we get started, please be advised that the information discussed today is current as of June 30, 2014, unless otherwise indicated, and that comments made on today's call may contain forward-looking information. This information, by its nature, is subject to risks and uncertainties and, as such, actual results may differ materially from the views and expectations expressed today. For further information on these forward-looking statements, please consult the Company's relevant filings on SEDAR and with the U.S. Securities and Exchange Commission.

Also please be reminded that all currency amounts discussed on today's call are in Canadian dollars, unless otherwise stated. All references to production in ounces refer to payable production and all tonnes are in metric tonnes.

Our presenters today are Phil Du Toit, NAP's President and Chief Executive Officer; Dave Langille, Chief Financial Officer; Jim Gallagher, Chief Operating Officer and Dave Peck, Vice President, Exploration. When the prepared remarks conclude, we'll be pleased to take questions from analysts and institutional investors.

And now I'd like to turn the call over to Phil.

Phil Du Toit

Thank you John, and thank you all again for joining us on the call this morning. One of the hallmarks of great mining companies is consistency and reliability of operations. Predictability of performance both from a cost and a production perspective are two criteria that move mining companies to the head of the class. It is this culture and reliability and predictability we’re working towards and I’m happy to report we continue to make progress towards this goal in the second quarter.

During the quarter, we completed the debottlenecking of our underground ore handling system and the results today demonstrate that we have the ability to hoist our planned tonnes.

Just as we did in the first quarter, we continue to track against our full-year guidance across all key metrics, low recoveries, palladium grades and ounces of payable palladium were all inline or slightly ahead of our full-year guidance. Underground production rates were a little lower than guidance, but that was partly expected with the shutdown in June related to the ore handling system upgrades. More importantly with the work done, we’re well positioned for our ramp up.

During any new mine startup we can expect some unforeseen events and we’re no exception. The unexpected breakdown of our surface crusher in June and unforeseen reliability issues within both our underground and surface fleets did not stand in the way of our team meeting key guidance objectives. It is the ability to deal with these adversities that is really what counts.

Subsequent to the end of the quarter on July 11, we did face a kind of adversity no mining company ever wants to deal with. A fatality occurred underground and the company lost one of its worker. More importantly a family lost a father and a husband and we lost a friend and colleague. These tragedies are never easy to deal with, but thanks to the team, it was dealt within a very professional manner. And once again, we extend our condolences to the families and friends of Pascal Goulet.

From an operational standpoint, we’ve returned to normal. However, the investigation into the accident and subsequent ramp up of the area will result in a lower than planned production for the month of July. In spite of this, we remain focused on our targets and we maintain our full-year guidance for 2014.

But with that, let me turn the call over to Jim, to go over our operating results. Jim.

Jim Gallagher

Thank you, Phil and good morning everyone. As Phil mentioned, we continued to make good progress in the second quarter against our full-year ramp up targets. The upgrades and plant improvements to our ore handling system and the underground crusher system were completed on time at the end of June. This marks an inflexion point in our efforts to ramp up to 5,000 tonnes production per day by the end of the year.

Not only are we skipping more tonnes, the surface from the Offset Zone as planned, but we’re also transporting workers into the mine using shaft access. This reduces the travel time in and out of the mine by nearly 30 minutes in each direction aligned for obvious productivity improvements.

Let me recap briefly some of LDI’s operating highlights for the second quarter of 2014. Second quarter palladium production of just over 39,000 ounces keeps us on track to meet our full-year guidance. Production during the quarter was impacted by a surface crusher failure in June, which Phil mentioned earlier. Because of this we had 4,200 ounces of payable palladium in inventory as concentrate at the end of the quarter. These ounces will be reflected in our third quarter numbers.

The cash cost of US$510 per ounce, though slightly higher than the first quarter, is still ahead of our full-year guidance. The lowering of total throughput due to the problems at month end as discussed help drive this cost up slightly.

Our underground grades averaged approximately 4.9 grams per tonne and the surface low-grades stockpile which we continue to blend in at approximately 1:1 ratio averaged approximately 1 gram per tonne.

Mill recoveries in the second quarter were 83.6%, which is above forecast reflecting the mill improvements made to date and the higher head grades. The second quarter wasn’t without as challenges and I will talk briefly about these challenges and how we’re litigating them.

As we’ve ramped up mining and development activities at LDI, we’ve put additional strain on our mobile fleet both on surface and underground. A portion of this fleet is nearing the end of its useful lifecycle. And our scope of work underground is increasing from last year when we moved an average of 2,500 tonnes per day to ramping up to 5,000 tonnes a day, as we’re moving more backfill underground and we’re completing significantly more meters of development.

We have been achieving this increased scope of work with the same fleet and it has put a strain on the resources, especially when the reliability of fleet is less than it should be. To address this we’ve added one new and one rebuilt LHD at this time and more importantly have worked on and are ready to execute on broader strategy to execute a leasing agreement with the major supplier and rationalize and improve the reliability of the surface and underground fleets and streamline our maintenance program. This initiative is well advanced and we expect to finalize it during the third quarter.

During the quarter, we also placed more emphasis on reviewing our stope designs. As we progressively mine the Offset Zone, it is obvious that from a geomechanics point of view it behaves a bit differently than the Roby Zone. And we’re dealing with more large mark in our drop points than we had -- would be normal.

To mitigate this, we’ve completed a review of our stope design, stope size, the orientation, the length of drill holes and our blasting patterns. And the objective going forward is that by modifying some of these design parameters, we will have better quality mark in our stopes, less sloughage, we will reduce the amount of mucking that we currently do and we will improve our overall muck improvement efficiencies.

Finally, we’re looking at opportunities to optimize our mill runs. An economic analysis is underway to see if we can transition to running our mill on a full time basis initially with one ball mill only. If feasible, this will require a change in how we operate the mill and we will require the hiring of additional mill operators. Early indications are that we will increase our overall throughput at an improved recovery rate.

As Phil noted in his remarks, not only are in the midst of an operational turnaround, we’re also working hard to transform the culture at LDI. To do that, we need the right people and the right mindset. I sincerely believe that we now have the team in place on site that can execute this transition and help us over time realize the full potential of the ore body and the infrastructure at LDI.

With that, I’ll hand it over to Dave Peck, for the exploration update.

Dave Peck

Thank you, Jim and good morning everyone. In May of this year, our Board approved a $6 million increase to the 2014 exploration program at Lac des Iles. The expanded $10 million exploration budget will support 40,000 meters of surface and underground resource drilling on the Offset Zone deposit.

In March the Company published a new 43-101 technical report for Lac des Iles, which contained a major revision to our resource and reserve classifications. This change included the reporting for the first time of both higher grade hangingwall zone resources and lower grade footwall zone resources, in both the Offset and Roby Zone deposits.

Currently there are no Offset Zone reserves below the 1065 mine level. This being the lower most level for the Phase I mine plan and only a small mainly inferred resource exist in the Offset Zone deposit below this level. The Company believes that in excess of 10 million tonnes of lower Offset, hangingwall zone resources will be required to support a Phase II mine expansion.

Accordingly the primary objective of this year’s Lac des Iles exploration program is to delineate a resource of this size in the lower part of the Offset Zone. Referring to Slide 5, in the presentation, a vertical longitudinal projection, you can see that the Offset Zone deposit is divided into five different grade thickness domains. The thickest part of the deposit is referred to as the central Offset Zone. Domain number 4 on the figure. This area of thickening is modeled as having a channel like structure and a steep southerly plunge.

The current drilling program will as a major focus attempt to extend the central Offset Zone resource to depths of approximately 1,600 meters below surface, using a combination of long surface holes, surface wedge drilling, and shorter underground holes. The second objective of the current program is to convert inferred resources to measured and indicated category in the upper northern part of the Offset Zone. Domains number 2 and 3 on the figure.

The third objective of the program is to delineate new resources at the shallowest known level of the deposit in an area we refer to as the upper Offset Southeast extension. This is domain number 1 on the figure.

Drilling commenced this year in late March and we gradually ramped up during the second quarter with three surface rigs and one underground rig currently operating. Approximately 8,000 meters of drilling and eight holes were completed during the second quarter. An additional four holes were in progress at the end of the quarter.

Results from these eight completed holes are included in this morning’s press release. Most of the completed holes penetrated the upper Offset Zone, but we did manage to complete one hole on our primary target. The extension to the central Offset Zone below the 1,065 meter level. This all return an exciting 74 meter interval with an average grade of 4.76 grams per tonne palladium. Confirming that the central Offset Zone does indeed extend to depth at least to 1,150 meters and we believe quite a bit further down.

We also received encouraging results from our drilling in the upper Offset Zone. In the northern part of the upper Offset Zone, we intersected good grade in with hangingwall zone mineralization in three holes, including a 20 meter intersection having an average grade of 7.2 grams per tonne palladium. In the southeast extension target we had good results from our first two holes, including a 37 meter intersection with an average palladium grade of 3.7 grams per tonne.

We remain very optimistic that this year’s drilling in the upper Offset Zone will had resources and ultimately extend the Phase 1 mine plan. Looking ahead, we plan to add a second underground drill in August and then begin systematic resource drilling on the lower part of the central Offset Zone target. We’ve nearly completed a planned extension to our 655 mine level exploration drift. This drift will give us an efficient drilling platform for tackling this extension drilling. We will provide another update on our 2014 exploration program results as part of the third quarter results press release.

And now, I’ll turn the call over to Dave Langille to discuss the Company’s financial results. Dave?

Dave Langille

Thank you, Dave, and good morning everyone. During the second quarter, the Company closed tranche to convertible debentures for $35 million resulting in net proceeds of $33 million. Of the $67 million total convertible debentures issued in 2014, [ph] [over] $2 million have now been converted into equity.

Operational performance in the second quarter has generally met expectations despite certain operational challenges. And the financial results were aided by a strong palladium price, a favorable exchange rate, and higher palladium sales.

Now, I’ll review some of the key financial indicators for the second quarter. Revenue during the second quarter of 2014 was $50.5 million compared to $33.2 million in the same period last year. In the second quarter of 2014, the Company realized an average palladium price of US$806 per ounce of palladium, 12% higher than the same period last year, giving an operating margin of US$296 per ounce of palladium produced or a US$11.6 million operating margin during the quarter.

Net loss for the second quarter was $10 million or $0.03 per share compared to a net loss of $26.3 million or $0.15 per share in the same period in 2013. The decrease in net loss is primarily due to the higher impact -- of higher revenues, increased foreign exchange gains partially offset by increased operating expenses, and increased interest expense and other costs and a 2014 loss of extinguishment of debt which didn’t recur in 2014.

EBITDA was $15.9 million compared to negative $6.1 million in the same period in 2013. Adjusted EBITDA, which excludes interest expenses and other costs, depreciation and amortization, exploration, foreign exchange gains and losses, financing costs, and mine restoration costs net of insurance recoveries was $10.4 million compared to $0.9 million in 2013. Capital expenditures in the quarter were $5.6 million, significantly lower than the $27.8 million spent in the prior year.

Turning to the balance sheet as of June 30, 2014 the Company had cash and cash equivalents of $44.3 million compared to $9.8 million as at December 31, 2013. Availability of the Company’s US$60 million credit facility is limited by borrowing base calculation which as of June 30, 2014 with US$42.8 million compared with a utilization of US$37.1 million, resulting in availability under credit facility of US$5.7 million. As production ramps up and receivables grow, it is expected that Company will have full access to the credit facility later in the year.

Subsequent to the quarter end, on July 7th, the Company announced that it paid US$23.4 to Brookfield Asset Management, representing US$16.2 million of accrued interest and US$7.2 million of associated pre-payment fee. As a result, effective June 30, 2014, the Company reverted to a 15% annual interest rate on the senior secured term loan and that the cash balance, after reflecting the payment, was approximately 19%.

The decision to make the payment to Brookfield was largely due to significant cash balances on hand, continued strength of the palladium price and expectations of future production levels and operating costs. The payment allowed the Company to revert to the 15% interest level by paying one half of the amount required technically under the term loan without any additional modifications to the terms of the loan.

The payment to Brookfield and reverting to quarterly cash interest payments stopped the growth of debt that would have been experienced by accruing interest of 19% eliminates any prepayment fees associated without accrued interest and lowers the ongoing interest expense by at least US$6.4 million per annum. From a financial management perspective, we believe the payment to Brookfield was a prudent thing to do.

I’ll now turn the call over to Phil for some closing remarks. Phil?

Phil Du Toit

Thank you, Dave. As we look back on the first half of 2014, we can point to many positives in our business and our efforts to turnaround relations at LDI, as well as we’ve a good understanding of our challenges lying ahead of us for the rest of ’14. Strong economic fundamentals and robust supply and demand picture set the stage for continued strength in palladium prices. As we continue to lower our cash operating costs in the second half of ’14, we will expect to see improved margin in our business.

These overarching market conditions what gave us the confidence to return to cash interest payments on the term loan with Brookfield. We believe in the improving strength of our business and its ability to generate the cash needed to fund our interest and debt obligations going forward.

And finally, we’re very encouraged by the drill results we reported this quarter. Our 2014 exploration program is fundamental to our efforts to consider the longer term expansion opportunities at LDI.

We have many of the building blocks for the successful expansion already in place, more with excess capacity, performing very well, short capable of falling quite a lot more than what we’re utilizing here today. We have got the team in place to drive initiatives and to make it happen. The only missing piece to the puzzle is identifying and converting more resources at depths and I believe we will cross this from our to-do list in the very near future.

Comparing the opportunity we have for Phase II to other opportunities world wide in terms of expanding palladium production such like in South Africa, Russia, North America. It is evident to us that the Phase II at LDI because of existing infrastructure relatively low cost to bring further expansion into place quite expeditiously compares very, very favorable to any of the other developments that are on the table today. And we’re certainly attacking this program with vigor and we will probably have the feasibility studies in place next year, but we will keep you informed on the progress we’re making.

In closing, I want to thank our entire team at LDI and the corporate office for their ongoing dedication and commitment. I also want to thank our shareholders for their continued patience and support. And thank you again for your participation this morning. And now we will look forward in answering some questions. Over to you.

Question-and-Answer-Session

Operator

Thank you. (Operator Instructions) Our first question comes from Alex Terentiew from Raymond James. Please go ahead.

Alex Terentiew - Raymond James & Associates, Inc.

Hi good morning guys. I just have a few more operational type questions. Production cost per tonne milled, they’re continuing to be in the mid upper $50 per tonne range. What do you expect this number to get down to or is this kind of the number we expect to see throughout the rest of the year and any guidance on cost per tonne next year?

Phil Du Toit

Jim, would you like to answer that first?

Jim Gallagher

All right. I think obviously as the rate goes up that unit cost will come down towards the end of the year, and certainly it could be in the low 50’s by year end. Guidance for next year I think will hold off at this point, but we’re obviously looking at sustaining this production rate close to 5000 tonnes a day. So, that will be reflected in those comments.

Alex Terentiew - Raymond James & Associates, Inc.

Okay. And on the 5000 tonne a day target. Is all that going to be coming from the Offset Zone or are you still having some from Roby and is that Roby ore being hauled up or any of that being hoisted up through the shaft?

Jim Gallagher

No. Some of it will come from the Roby and we actually have some opportunities that we’re looking at across the board that in some of the material that Dave Peck talked about in the upper regions of the ore body. So, approximately 80% will come from the Offset Zone, and what was the other part of the question? Repeat the question.

Alex Terentiew - Raymond James & Associates, Inc.

Or just, if it’s coming out through the ramp or the shaft?

Jim Gallagher

Right now the only and we’ve talked about some of our big promise, so only some of the very larger market which we can deal with better on surface comes up by truck. The rest of it is being hoisted and through the underground system. So, we’re close to 80% to 90% and once we fix that oversize problem we should be very close to 100% hoisted material.

Alex Terentiew - Raymond James & Associates, Inc.

Okay. On the surface stockpile you guys are, seem to be consistently processing about 250,000 tonnes of the surface stockpiles ore per quarter. Is that something you expect to continue going forward or as the underground ramps up are you going to reduce that tonnage.

Phil Du Toit

Jim.

Jim Gallagher

Yes, we’re going to maintain moving that material. At current prices it certainly has a positive cash flow to process that. And part of the move to the fulltime millrun which we’re contemplating for year end even though we’re going to do with one ball mill essentially allows us total increase in throughput even though we’re down to one ball mill and significantly better recovery. So, that will allow us to process again the right ratio of that mix. So, we balance the mix to maintain the proper head grade and recovery rate. So we anticipate to continue to kind of fill the circuit with that geomaterial low grade stockpile.

Alex Terentiew - Raymond James & Associates, Inc.

Okay. And you also noted you began the partial replacements and upgrading of some surface underground production fleet. Is this new CapEx you’ve identified or is this in line with your current or with your previous plans. And also could you remind us of the capital spending plans for 2014 and if you’ve given any indication of what you want to spend in 2015? That would be appreciated also, thanks.

Jim Gallagher

So our total CapEx was $30 million for 2014. I won't give guidance on 2015 at this point in time. We’re obviously just starting that process now. Potentially yes, obviously this upgrade in fleet will be some additional capital, and the exact numbers are still being worked through on what that will be. We are looking at what is a fairly attractive capital lease program through one of the major suppliers to do that. I think the key here is that we now analyze this from a cash flow point of view, its absolutely going to be a positive. The surface fleet for instance, we currently run a mix bag of different size of previous open pit equipment to move all the material around the surface, and we have 10 to 11 units which have incurred cost over the last several months. And we’re going to go down initially to 5 units, new units, smaller, more efficient. The business case for that is actually pretty clear. So, it really is the right business decision to do at this point in time, and I think given the understanding of our cost structure and the production reliability challenges it’s absolutely the right thing to do.

Alex Terentiew - Raymond James & Associates, Inc.

Okay. I think it makes sense. Last question just on exploration. You guys are getting some nice thick and good grade intercepts. So, it seems pretty clear that the resource has lots of room to grow. Now, I just wonder if you can give me a bit of color then on your strategy for your $10 million mine plan. You’ve got a mine plan and obviously some reserves that will last you a few years, but also your balance sheet is fairly tight on cash. So, I guess the question is, to get your thoughts maybe on why you’re pushing ahead so aggressively on a plan. I’m just wondering is it really just to support feasibility studies in 2015 or what other thoughts you can provide there would be appreciated.

Phil Du Toit

Let me just follow you in there. The plan for 2014 is to really as Dave Peck mentioned is to the drilling to see if the resource is there, and we have also started with preliminary engineering to look at what capital cost would such an expansion require. So the work in 2014 is simply to support a feasibility study for early in 2015. The fact that we’ve got quite a good of infrastructure in place already and we have the ore body and the equipment, it’s really a compelling growth strategy that we want to pursue, but in the new year we will understand the economics a lot better and that will be indicated to us what is the best path forward for the potential implementation.

Alex Terentiew - Raymond James & Associates, Inc.

Okay, that’s great. Thank you.

Phil Du Toit

Thank you, Alex.

Operator

Thank you. Our next question comes from Andrew Mikitchook from Edgecrest Capital. Please go ahead.

Andrew Mikitchook - Edgecrest Capital

Good morning, gentlemen. Just to maybe get a little bit more insight into this underground handling capacity. You guys have finished the crusher modifications and the hauling I guess fine tuning. So, at least from that point of view is that part of the system able to handle the target 5000 tonnes per day, and the kind of chokepoint at this point right now is the availability of underground equipment and maybe stope design and I guess mucking patterns. Is that the correct interpretation of what you’ve given us so far?

Phil Du Toit

Good morning Andrew. Yes, absolutely correct. The choke we had before with regards to the ore handling and crushing underground can handle the required tonnage and the focus is now as Jim pointed out to get the stope designed right, get the muck size smaller and then the equipment availability. So those are the two issues left to make sure that we meet our ramp up obligations.

Andrew Mikitchook - Edgecrest Capital

Okay. And then when we look at this exploration, I guess it’s a cross section -- long section on Page 5. Can we just get an explanation as to where the shaft is with respect to the, I guess the apparent plunge of the central offset target so that we understand exactly how there’s no constraint there. And then secondly, is there any -- now that you’ve kind of redefined this, does that lead to a redesign to the mine plan or the mining sequence for the central Offset Zone target?

Jim Gallagher

Phil, I’m going to take that one.

Phil Du Toit

Yes, Dave. Why don’t you address the first part of the question on the shaft position?

Dave Peck

Yes, Andrew the shaft is shown at its current depth on the diagram and we expect that the ore body in fact we’ve got a couple of holes not shown on this diagram, historical holes, but sure the ore and hangingwall zone in particular doesn’t impact on the vertical projection of that shaft to whatever depth the mine team decides is practical. So, we’re well away from the pillar of the shaft extension which is a very good thing obviously. And that, so that service plunge will not cause a problem with the current design.

Andrew Mikitchook - Edgecrest Capital

Okay, so it’s just for simplicity. The shaft is on -- when we’re looking at that long section the shaft is on this side or is that on the far side of the plunge?

Dave Peck

Yes, so we’re looking west on that diagram. And the ore body will be closer to you. It will be further east than the shaft.

Andrew Mikitchook - Edgecrest Capital

And the shafts will be easy to find.

Dave Peck

That’s correct.

Andrew Mikitchook - Edgecrest Capital

Okay.

Phil Du Toit

And Andrew, maybe to the second portion of your question with regards to the lateral development areas like what Dave pointed out in terms of the north-eastern extension and the south-eastern extension up [ph] [Roxette]. It’s not a material change to the mine plan it is just additional stope design that will have to come in, and it’s fairly clockwise, very close to existing infrastructure. So, we (indiscernible) they required to do those stope development in these very, very low and we can access it quite quickly.

Andrew Mikitchook - Edgecrest Capital

Okay. I think that answers all my questions, and I’ll let someone else jump in. Thank you, gentlemen.

Phil Du Toit

Thanks, Andrew.

Operator

Thank you. Our next question comes from James Hader from Rossport Investments. Please go ahead.

James Hader - Rossport Investments

Hi, guys. Most of my questions have been answered. But I wondered if you could give us a little bit more color on the stope design in the Offset Zone, exactly what's happening there and what are the reasons for it and what should be modeled in terms of cost implications for that going forward?

Phil Du Toit

Jim, would you like to take the stope?

Jim Gallagher

Yes. I’d say the stope design and that’s primarily what we’re currently mining on the 825 level. These stopes were designed slightly larger than what was previously mined in Roby Zone, and I think the indications are they’re a bit too big. Part of that is a benefit then on the thickness or the ore body from hangingwall to footwall at 50 meters in the better part of the ore body. That total footprint that we have been opening up, has been leading to some sloughage over the over-cut, some sloughage off the pillar walls and more than we should. So we have been able to mitigate that through the sequence, but we’re still dealing with too much big muck. So, it is slowing down our mucking productivities down below. We’re evolving into and of course these things have a lifecycle of several months. So, you either can't change stuff over night, and certainly the next level that we’re driving down to which will be the 905 level. We will implement that whole level with a modified stope design. But essentially we’re going to make the stopes a bit smaller, and there still will be large blast hole stopes, we still have stopes over 100,000 tonnes. So they’re still big stopes, but not as big as we’re currently mining. We’re changing the geometry to minimize the impact of sloughage and in fact the design to blast out what has been sloughage, because the stopes do tend they want to get to a natural shape. And we’re changing the orientation of the stopes from hangingwall to footwall to a long strike which is a strong recommendation from our geomechanics firm. So, all of those factors, some more up-hole drilling in combination with down-holes, we’re going to change the dynamics with the way we mine that quite a bit with still big stopes, but not as big as we mine them now. So, it’s really over the next couple of months we should be verdict. We hope to work through some of the big muck issues and certainly moving into next year as we start on the next horizon. We will have a different design in place.

James Hader - Rossport Investments

And in terms of cost puts, we shouldn’t expect a big difference in what you’ve been guiding previously, that would not be what I’m reading into that?

Jim Gallagher

No, I think our current constraint and Andrew asked the question right on, is getting the muck out of the stopes both because of equipment and muck size. So, once we fix that and then we hit our targets our numbers should stay as guided.

James Hader - Rossport Investments

Just one follow-up if I may, just on moving to running the mill fulltime rather than the current, on and off situation. You talked about recoveries increasing. Can you give any guidance to what you’d expect if and when you move to running fulltime of the mill?

Jim Gallagher

Well, we’ve run that. So the essence here with running with one ball mill which runs at about 350 tonnes an hour, when we run on the two week campaign with two ball mills we run at about 540 tonnes per hour. So, we’re taking the pressure off the floatation circuit by running fulltime but at a lower throughout if you understand where I’m getting. So that residence time in the floatation circuit, a test we ran and we did take advantage of our downtime issues with the surface crusher and we actually, we were able to run the test over a couple of days and it demonstrated 2% or better recovery improvement by doing that. So we would expect that, sometime in the third quarter we’ve got a higher -- another crew essentially for the mill we’ve got to get them properly trained over a couple of rotations. So, we hope by the middle of the fourth quarter, maybe earlier but by the middle of the fourth quarter to have that in place. So, we’re expecting about 2% improvement for that.

James Hader - Rossport Investments

That’s great. Thank you very much. Good luck guys.

Jim Gallagher

Thank you.

Phil Du Toit

Thank you.

Operator

Thank you. Our next question comes from Brandon Throop from Mackie Research. Please go ahead.

Brandon Throop - Mackie Research

Hi, good morning guys. Just a quick one for me. On 2014 production for the rest of the year. You said that you’re inline with the guidance right now which I think was 170,000 to 175,000 ounces. It seems, the first half is just [technical difficulty] so, I’m just trying to get a sense of the grade in recoveries for the remainder of the year or you’re expecting it to be similar as the past two quarter is kind of above guidance. I know that there’s been a bit of a production impact for the start of July. So, I was just wondering how to get back to the 170,000.

Dave Peck

All right Brandon, thank you. I think the essence is we are increasing the rate and again we have been hovering around the 3000 tonne a day, the systems, the number of stopes necessary to get us to 5000, they’re all coming into place. So, the availability of the muck as long as we have storage size and we have equipment to run it, these are going to allow us to increase the rate and that’s really going to -- what's going to drive the increased palladium production. The grade will decline slightly in the last half of the year, and I think we’ve stated that before we had higher than budgeted grade in the first half and that will average out. We are mining -- we have mined the center of the ore body and we progressed outwards and so the other edges of the ore body will be slightly lower grade. So, the grade will drop slightly. The tonnage will increase and the recoveries as we stated we expect to see those kinds of incremental improvements as we implement some of our additional changes here through the course of the year.

Brandon Throop - Mackie Research

Thank you. That’s all I got. Thanks.

Phil Du Toit

Thanks, Brandon.

Operator

Thank you once again. (Operator Instructions) At this time we have no further questions. I will now turn the call back to Phil Du Toit for closing comments.

Phil Du Toit

Thank you, operator, and thank you all for participating. If we missed anyone please get in touch with John Vincic, and have a good day.

Operator

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect. Presenters one moment please.

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