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Alamos Gold Inc (NYSE:AGI)

Q2 2014 Results Earnings Conference Call

July 31, 2014, 12:00 PM ET

Executives

James R. Porter - Chief Financial Officer

John A. McCluskey - President, Chief Executive Officer, Director

James Porter - Chief Financial Officer

Manley Guarducci - Chief Operating Officer, Vice President

Scott Parsons - Director, Investor Relations

Analysts

Andrew Quail - Goldman Sachs

Dan Rollins - RBC Capital Markets

Kerry Smith - Haywood Securities Inc

Phil Russo - Raymond James

Mike Parkin -Desjardins Securities

Michael Gray - Macquarie Research

Rahul Paul - Canaccord Genuity

Jeff Killeen - CIBC World Markets.

Operator

Good afternoon. I'll now turn the meeting over to Mr. Jamie Porter, Chief Financial Officer. Please go ahead.

James R. Porter

Thank you, operator, and thanks everyone for attending Alamos' second quarter 2014 conference call.

In addition to myself, we have on the line today, John McCluskey, President and CEO; Manley Guarducci, Vice President and Chief Operating Officer. I would like to remind everyone that our presentation will be followed by a Q&A session.

Before we begin, please note the disclaimer concerning forward-looking statements. We refer all participants to our forward-looking statements and resources disclosed in our press release and MD&A, and caution that mining and exploration are subject to a number of risks and uncertainties, particularly with respect to the mining and processing of ore, recovery rates, operating plans and the conversion of mineral resources proven and probable reserves, to name a few.

There can be no assurance that forward-looking statements made in the press release and conference call, based on information on hand today, will prove to be accurate. Future results and events could differ materially from those anticipated in such statements and should not be relied upon. Also, please bear in mind that all the dollar amounts mentioned in this conference call are in U.S. dollars unless otherwise noted.

Now John will provide you with an overview. John.

John A. McCluskey

Thank you, Jamie. Good afternoon, everyone. Hopefully, most of you have had the chance to review our second quarter results that were issued earlier today. We have two significant achievements in the second quarter both of which help position our Mulatos Mine in Mexico for continued success.

Firstly, after many years of negotiations with the landowner, we secured an agreement to acquire the surface rights for the Cerro Pelon and La Yaqui satellite deposits. Secondly, we’ve advanced underground development of the high-grade San Carlos department -- deposit, such that we will be in a position to begin mining ore in the third quarter.

We produced 33,000 ounces of gold in the second quarter at a total cash cost of $663 per ounce, below our full year guidance range of $700 to $740 per ounce for the second executive quarter. The open pit heap leach side of our mining operation, the backbone of Mulatos continued to perform well from higher than budgeted grades. However, this was offset by lower than expected production from the Escondida Deep zone.

As we discussed at the end of the first quarter, we encountered some early challenges with the Escondida Deep zone, given its small size, we chose to focus underground development on the San Carlos deposit, which is expected to contribute substantial high-grade production over the next four years.

I’m pleased to report that our efforts have paid off. We reached the underground ore body at San Carlos late in the second quarter and completed the bridge across the Mulatos River before the onset of the rainy season.

We made the decision in the second quarter to go ahead with upgrades to our existing mill circuit in order to maximize gold recoveries from the high-grade ore at San Carlos. These enhancements are expected to cost approximately $3 million and will be completed over the next -- over the course of the third quarter.

While the modifications are underway, high-grade ore mine from San Carlos will be stockpiled and processed in the fourth quarter, leading to what we expect will be a very strong finish for the year.

We expect the majority of our remaining production to come in the fourth quarter and we are confident that we will achieve gold production within our full year guidance range of 150,000 to 170,000 ounces.

Our development pipeline continues to advance with our Cerro Pelon and La Yaqui satellite deposits expect to start contributing low cost production growth at Mulatos from 2016. Work continues on the planed resubmission of the Esperanza EIA in the first half of 2015, and at Quartz Mountain, I am pleased to report that we have just received exploration permits for the project and we expect to begin drilling shortly.

In Turkey, we continue push from positive legal resolution to the challenge against the previously approved Kirazli EIA. In parallel, we expect to be in position to resubmit a new EIA for Kirazli incorporating accumulative impact assessment until September.

We are very focused on timelines and deliverables in this industry. But it’s important to take a step back from time-to-time. We remain optimistic that the permits require to develop our projects will be granted in time.

We own a control pipeline of assets that can grow our production to a sustainable level approaching 500,000 ounces per year, and with $392 million in cash and no debt, ongoing cash flow generation, we have the means to develop this pipeline.

With that, I’ll turn this call over to CFO, Jamie Porter, who will give an update on second quarter financial performance. Jamie?

James R. Porter

Thank you, John. Good afternoon everyone. As John mentioned we produced 33,000 ounces of gold in the second quarter, at cash cost below our full year guidance. Gold sales totaled 34,000 ounces at an average realized gold price of 12.88 per ounce consistent with the average London PM Fix price, revenues of approximately $44.

Cash operating costs of $595 per ounce and total cash cost of $663 per ounce were both 5% below the low end of our guidance range. All-in sustaining cost of $1,047 per ounce were above our guidance range, but remain within guidance on a year-to-date basis at 980, and we expect these to come down as product from San Carlos ramps up in the fourth quarter.

Our operating cost remain below the industry average and even with the challenging gold price environment we continue to generate healthy margins and cash flow, with operating cash flow before working capital changes of $13.2 million or $0.10 per share for the quarter.

We expect cash flow from operations to fund all of our capital and exploration spending in 2014. Earnings in the second quarter were $0.7 million or $0.01 per share compared to a year ago, earnings were impacted by lower gold price and less [ounces] sold.

Amortization remains high at $286 per ounce. However, this is expected to decrease in the fourth quarter to below $200 per ounce as production from San Carlos ramps up. The effective tax rate for the quarter of 84% appears high in relation to statutory corporate tax rate in Mexico of 30%.

The higher effective rate reflects the impact of $7.5 million of cost in Canada and Turkey that are not deductible for tax purpose. As we have no offsetting income in these jurisdictions.

The tax rate for our Mexican operation was consistent with the statutory rates factoring in the after tax impact of a 7.5% royalty. Despite a substantial decline in the gold price over the past year, we’ve maintained and paid our ninth consecutive semi-annual dividend of $12.7 million in April, bringing the total cash we’ve returned to shareholders in the form of dividends of $84 million.

At the current share price our dividend represents a 2.1% yield among the highest of our peer group. We closed the quarter with over $392 million in cash representing more than $3 per share and no debt.

Based on the strong production we’re forecasting for the fourth quarter, at current gold prices we expect our cash balance to rebound to the $400 million level by year end. With our strong balance sheet and ongoing cash flow generation, our development pipeline is fully funded.

We remain focused on delivering shareholder value and have the flexibility to pursue additional accretive growth opportunities. But we’ll do so following the same principles that have given us one of the best long-term track records of capital discipline in the industry.

At this point, I’ll turn the call back to John.

John A. McCluskey

Thank you, Jamie. I’ll now ask Manley Guarducci to give an update on operations at Mulatos mine.

Manley Guarducci

Good afternoon, everyone. Our open-pit heap leach production at Mulatos delivered as expected in the quarter. Ore crushed and stacked on the heap leach pad graded 0.93 grams per tonne in the quarter, 9% higher than the annual budget of 0.85 grams a tonne.

On a year-to-date basis, we’ve mined and stacked ore on the heap leach pad grading 0.98 grams per tonne, 15% above our annual budget. Total crush ore throughput average 17,400 tonnes per day for the second quarter, slightly below our annual budget of 17,700 tonnes per day reflecting lower than planned high-grade mill feed.

At Escondida Deep, grades of 8.65 grams per tonne were consistent with the reserve grade. However, tonnes mined in mill were below expectations. Structurally control fracturing within the deposit and higher than anticipated mining dilution limited ore production to 6800 tonnes in the quarter, cumulatively we’ve mined and in milled 11,000 tonnes at an average grade of 7 grams per tonne and expect to mill up to additional 10,000 tonnes from Escondida Deep in the third quarter.

But as John mentioned, given the small size of the deposits, our primarily focus in the second quarter was on ramping up underground development at the San Carlos deposits. Underground development at San Carlos reached the ore body late in the second quarter and we’re on track to begin mining ore in the third quarter.

We are investing approximate $3 million to upgrade the existing milling circuit to ensure targeted recoveries of 75% are achievable. And as a result, high-grade ore is expected to be stockpiled during the third quarter. These upgrades are underway and expected to be completed by the end of the third quarter after which the stockpile will be processed along with underground production from San Carlos.

We are off to a strong start in the third quarter with both crushed ore and grade stacked on the leach pad higher than budget so far in July. We are also currently working through the rainy season in Mexico and given the above average rainfall thus far, this will have an affect on deferring some open-pit heap leach production into the fourth quarter reflecting dilution of the prevalent solution as in past years.

Combined with the deferral of gold production from San Carlos, we expect the bulk of the remaining production this year will be realized in the fourth quarter and we are confident we will achieve full year production guidance.

We successfully negotiated an agreement to acquire the surface rights of Cerro Pelon and La Yaqui in the second quarter, with La Yaqui closing in June and Cerro Pelon expected to close in the third quarter. The focus over the next 18 to 24 months will be on permitting and construction with low cost production growth expected in 2016.

In Turkey, the Canakkale Administrative Court upheld its earlier injunction decision in the second quarter and officially revoked the Ministry’s Kirazli EIA approval due to the lack of cumulative impact assessment. The decision is being appealed in the Turkish High Court with the ruling on the interim relief remedy requested by the company expected in the fourth quarter.

In the interims, the company is amending its EIA for the Kirazli project to include an assessment of the potential cumulative impact. If the appeal to the High Court is unsuccessful the company expects to be in a position to submit the revised EIA by the end of September 2014.

Initial production from Kirazli is expected 18 months from the receipt of the outstanding forestry and operating permits. Baseline work continues at Esperanza as part of the plan resubmission of the EIA. Preparatory work is underway for geotechnical and small exploration program scheduled for the second half of this year.

Having recently received our first exploration permits for Quartz Mountain, an initial drill program designed [towards] validating the existing resources will commence in the third quarter.

With that, I’ll turn the call back to John.

John A. McCluskey

Thank you, Manley. I’ll turn the call now over to [Qumel] and the operator who will open up the lines for you questions.

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone lines. (Operator Instructions) The first question is from Andrew Quail from Goldman Sachs. Please go ahead.

Andrew Quail - Goldman Sachs

Afternoon John and team, thank you very much for taking my question. Congratulations on the strong 2Q. My question is about Mulatos. Obviously you got -- I think, I bet that you guys are still targeting a recovery of about 75%. Do we see that bouncing back with the ore from San Carlos during third quarter and fourth quarter, because it looked like a Deep -- with the Escondida Deep deposit in Q2?

Manley Guarducci

Hi, Andrew, it’s Manley. You are partly correct that we expect the recoveries to increase with the increase in underground production, because recoveries are greater in the mills than they are on the leach pad. And also our recoveries shouldn’t be looked at on a quarterly basis. I like to look at them over 18 months, because we have some quarters higher than others, and they will go up and down.

But over the long-term, yes, they are expected to increase. The low recoveries are also slightly affected by the placements of lower recovery material on leach pad, because of the economics that was doing now, but that isn’t a substantial amount. So yes, we expect our recoveries to come up in the long-term.

James R. Porter

Manley, historically we’ve had a lower recovery ratio in the third quarter given the impact of the rainy season and a much higher recovery ratio in the fourth quarter as we get on to those deferred ounces.

The recoveries can dip down into the high 60s in the third quarter and then rebound and be in the low to mid 80s. In the fourth quarter as production that was started in the third quarter starts to come out in the fourth. Its also effected to some extent by where we have to be stacking over the course of that quarter and we were stacking on higher lift during Q2, whereas for the beginning of the third quarter we’re more or less stacking right against geomembrane, so there’s a less of a lag time for those solutions to percolate down through the orders.

So they are just a number of factors that we’ve been pointing out here that influence way in a quarter-by-quarter basis you’ll get some variation, but overall, its smooths out if you look at it over a longer period of time.

Andrew Quail - Goldman Sachs

Okay. So it makes little bit sort of more short-term in the next two quarters, is it fair to say, it improves from Q2, or is that’s a fair or…?

James R. Porter

I would say this is fair to say. The mine has been in production since 2006 and the recoveries have tended to -- essentially and that grade on where we’re guiding which is about 72% or so. And overall that’s where we expect to be, that’s where we have been for long, long time.

High-grade production coming out of San Carlos has the ability to affect that to some extent, because we’ll get about a 75% recovery from there. So to end up being some blended number between the effects of the production coming out San Carlos at 75% recovery and the typical heap leach recovery which has generally [hurdled] that 72% recovery line.

Andrew Quail - Goldman Sachs

Okay. All right, thanks, guys.

Operator

Thank you. The following question is from Dan Rollins from RBC Capital Markets. Please go ahead.

Dan Rollins - RBC Capital Markets

Yeah, thanks very much and good morning guys. Good afternoon now. Manley, I just wondering if you could touch based just on what we should expect throughput wise from the high-grade circuit in Q3, you talked about tying in some additional components to ensure the recoveries at San Carlos, I mean, the specifications, but if you could estimate right now, what you think the average throughput for the quarter will be on the high-grade circuit?

Manley Guarducci

For what quarter, Dan?

Dan Rollins - RBC Capital Markets

For Q3, when you tie up everything.

Manley Guarducci

For Q3 throughput it won’t be as big of a factor, because we plan on putting through the 10,000 tonnes of Escondida high-grade that we have remaining. And then we’re going put all the San Carlos high-grade on the stockpile until Q4 and start processing that once all the mill components are done at the end of this quarter.

Dan Rollins - RBC Capital Markets

Okay. So, are you planning on processing any development ore from San Carlos in Q3?

Manley Guarducci

We’re also stockpiling the development ore from San Carlos, Dan, we want to keep everything there until the mill has got additional components to it and then we’ll probably increase the throughout of that in the fourth quarter to put all the stockpiles and [everything].

Dan Rollins - RBC Capital Markets

Okay, perfect. And so how is the rainy season in Mexico where you guys are?

Manley Guarducci

Right now, we’re about 25% over in rainfall for the month of July comparing it to an average year. We’ve definitely had worst, but last year it’s a little bit more than last year. So, we have seen a little bit more dilution to the head grade, but it’s like every year, Dan -- what we don’t get today we’ll definitely get tomorrow. The tonnes that we’re stacking on the leach pad are more than budget, our grade is really good and Q3 with what we’re putting on the leach pad what we get.

Dan Rollins - RBC Capital Markets

Okay. So basically the changes and the alterations you made to the crushing circuit for the last three years that are starting to pay benefit and we’re seeing some restructuring that we did last year.

Manley Guarducci

Definitely, last year I think we had a very, very good Q3 and I don’t see anything different this year.

Dan Rollins - RBC Capital Markets

Okay. That’s great. That’s all I have. Thanks very much.

Operator

Thank you. The following question is from Kerry Smith from Haywood Security. Please go ahead.

Kerry Smith - Haywood Securities Inc

Thanks, operator. John, I had a couple of questions about Turkey. Have you done a cumulative impacts studies well for the ADA EI that was filed or will you do that now subsequently to the filing September for Kirazli?

John A. McCluskey

I’ll let Manley answer the question, because Manley and Andrew are overseeing specifically the studies that we’re doing with respect to ADA development. Go ahead, Manley.

Manley Guarducci

Hi, Kerry. With respect to the ADA EIA that was filed, we added wording to allow us to later submit any other assessments that are required including cumulative impact and yet we’re starting on putting together the cumulative impact assessment in case we need it.

Kerry Smith - Haywood Securities Inc

Okay. So if required you would just submit it as an – manufacture ways the way you do?

Manley Guarducci

Yeah. And that in effect is quite a difference to the Kirazli filing that we made.

Kerry Smith - Haywood Securities Inc

Okay. I get you. So you sort of okay, okay. And just for the tonnes through the plant in Q3 from Escondida Deep you talked about 10,000 tonnes in Q3, right. And you had already processed 11,000 tonnes, but the reserve was 32,000 tonnes. So Manley that other whatever it is roughly 11,000 tonnes of ore you’re not going bother because the economics don’t make sense, so you’re just going to leave it behind, is that what’s happening?

Manley Guarducci

Essentially it started just to fractured and to modeled up to mine in any economy fashion, Kerry, the structural geology and that was a little bit more complex than we anticipated. But we do know that the 10,000 that are they are now, those were already developed and we got more confidence in those. So yes, we’re going to mine those as well.

Kerry Smith - Haywood Securities Inc

Okay. And so does that means you effectively just shut the mill down to make the upgrades ones that 10,000 tonnes has been processed and the mill will be shutdown effectively, probably start up again in Q4.

Manley Guarducci

Most of the – actually all of the mill upgrades that we’re doing, Kerry are all on the side, like adding a thickener, we don’t have to anything to the mill, adding the regrind mill. The very – how do you say individual components that require very little shutdown time if any to the mill, so that isn’t too much of an issue.

John A. McCluskey

The reason we’re stockpiling San Carlos ore is that you don’t want to process that ore until all the modifications are completed, because with those modifications we are assured of getting those 75% recovery where we’re much confident getting to 75% recovery that we’re anticipating.

Those modifications were envisioned for that San Carlos ore, so we don’t want to start putting it through until the modifications are finished.

Kerry Smith - Haywood Securities Inc

Okay. So that is answer to that. And how many tonnes are you sort of thinking you will process in Q4 than through the mill?

Manley Guarducci

Right now, we have 7,000 tonnes stockpiled, Kerry, lot of Q3 will be development must get stockpiled and then we’ll get into production by the end of the quarter. So it all depends on how many development headings we’ll have. But we’ll definitely be batching through more than what the underground can supply because of the stockpiles that we’ll have during this time.

Kerry Smith - Haywood Securities Inc

Okay. But I guess what I’m getting at is, do you think you could sustain the mill at it’s design throughput rates for the entire quarter there?

Manley Guarducci

That would be our intension. If we can get it up – keep it up with 700, 800 tonnes a day that would be ideal. But it will depend on how many underground headings are developed at San Carlos.

Kerry Smith - Haywood Securities Inc

Great. I got you. Okay. And obviously the grade might be a bit lower with some of the development marked to them?

Manley Guarducci

The development mark interestingly enough goes through all the ore body, right, except that some of the peripheral goal which is in the leach grade ore, but right now, the development, stockpile [most] that we have is grading pretty good, its [48] ounce a tonne.

Kerry Smith - Haywood Securities Inc

Okay. And perhaps Manley, maybe I’m sure Andrew can answer this. But you have made some commentary in the MD&A about the CapEx for the Turkey projects, sort of expecting – you expecting them to be roughly inline with what you had in the work that was done in 2012 and then you’re doing some incremental work on the operating cost.

I’m just wondering directionally are you thinking the operating cost would be higher or lower given everything that’s happened when you did this study to what’s going on today. I’m just thinking of directionally and not necessary the number, but whether you think it would be up or down?

Manley Guarducci

I can tell you that all the work that we were doing with the engineering and procurement and everything, yeah, everything pointed like all reports we’re getting, everything was in line with our original capital cost, okay. Now one thing -- there are various things that are going to change when you get into the operating, but I think they’ll be pretty much flat, because the things like the Turkish Lira exchange rate in all of the – there’s a bunch of variables in that Kerry, but we have some pros and we have some cons, I don’t expect that to vary too much.

Kerry Smith - Haywood Securities Inc

Okay. Okay, great. And just the last question. Is the Ministry in Turkey actually appealing injunction? You guys have filed for injunctive relief. But are they actually appealing as well or they just kind of stepping back and going like your lead file?

James R. Porter

In fact Kerry, it’s quite the opposite. It’s the Turkish Ministry of the Environment which is actually been indirectly sued. They are the ones that the injunction was applied against, not us. So, they are the ones that are primarily responsible for the appeal and they are leading that appeal.

Kerry Smith - Haywood Securities Inc

Okay.

James R. Porter

And we have our status before the quarter is more or less friend of the court status.

Kerry Smith - Haywood Securities Inc

I get you. Okay. Okay. That’s great. Thanks a lot.

Operator

Thank you. The following question is from Phil Russo from Raymond James. Please go ahead.

Phil Russo - Raymond James

Thanks, operator. Hi, guys. My question is just a quick one just following up on this Turkey permits. I’d heard through the credit line that have been unable to substantiate to now that the forestry and land tenants that as I understood require the approval from the Prime Minister’s office, but that since then pushed back down to the Ministry. Are you guys seeing that in your dealings?

John A. McCluskey

I just spend the last week of June in the first week of July in Turkey. I met with representatives from the various ministries and then well, nobody will show you because that’s a written entry saying what has happened. And people talk very openly about some of the things that are going on. And one of the things that I’ve heard directly from quite a high level is that very thing has happened that the responsibility for granting forestry permits has been put back in the hands of the forestry department, no longer being handled out of the Prime Minister’s department.

Phil Russo - Raymond James

If that…

John A. McCluskey

That’s exactly what I heard from a fairly high level.

Phil Russo - Raymond James

Great. I’m curious that you would view that is an encouraging sign here in terms, because its been a bit of a back hole, the forestry and land [tenants] tends to timeline, but I think get more of uncertainty here?

John A. McCluskey

I think it’s actually a very good sign. While everything remained in the hands of the Prime Minister’s office it was just going to be a tremendous bottleneck. I just don’t believe they were adequately set up to deal with the full extent of the permitting applications. So I think they handled this well as they could. But and point of fact you need entire department, standalone department in order to handle the volume of permit applications that would be going through in a country the size of Turkey.

So, I took it to be a very positive – a very positive piece of news when I learned that this in fact it transpired – and I also have heard that they have started granting forestry permits again and a number of companies that receive them. While our Kirazli project is under – this current legal cloud, we can’t apply for nor be granted forestry permits, we effectively have to have this injunction process run its course. So we haven’t directly benefited from yet, but we expect we will.

Phil Russo - Raymond James

Great. Thanks John.

Operator

Thank you. The following question is from Mike Parkin from Desjardins. Please go ahead.

Mike Parkin -Desjardins Securities

Hi, guys. Just a couple of questions on relating the San Carlos. The equipments that you are ordering to modify the circuit, is that – and if my memory serves correct, you got the mill of Australia, are the modification components coming out of that area too. Have they been shift, do you know where they are currently and when the kind of timing for maximum time before they have to be on site before they disrupt your guidance plan for throughput of the San Carlos ore in the fourth quarter?

Manley Guarducci

Hi, Mike. It’s Manley. Nothing that will possibly disrupts our guidance plan that’s coming from Australia. Most of the components are actually in Mexico. We’re talking about thickeners, the small regrind mill which we actually have. So lot of the work is simple.

So nothing that will affect our guidance is coming from Australia. We do have one component that’s coming from Australia which is another [IOR], but that has nothing to with what our goals are for Q4.

Mike Parkin -Desjardins Securities

Okay, super guys. One just on -- can you remind again, what was the process has been with determining the expected recovery rate at San Carlos, is it 75%, was that lab test I mean you’re feeling pretty confident in hitting that number fairly, quickly or do you feel there will be a bit of a ramp up in tweaking needed in the fourth quarter that hit that 75% recovery?

Manley Guarducci

Mike, I think the plant is fairly simple. We’re not talking huge tonnes, so we do have a little bit of flexibility and because of the flow sheet that we’re running, essentially we’re going to be having a gravity components that create a [con], right. All the tails that don’t go through the gravity will go through a float and then go to that same con. So we’re kind of doubling up. I think I’m pretty confident in it. We did run additional test after the first batch and we continue to run more test to just check variability with grades and this that and other things. But everything is pointing to the same recovery.

Mike Parkin -Desjardins Securities

Okay. And just the one last question, you kind of spoke to it earlier on another question, but fourth quarter grade would like 6.5 grams, 7 grams seems fair for an average for the quarter?

Manley Guarducci

For high-grade mill, yeah, that’s definitely doable.

Mike Parkin -Desjardins Securities

Super. Alright, thanks guys. That’s it from me.

John A. McCluskey

Thank you.

Operator

Thank you. The following question is from Michael Gray from Macquarie. Please go ahead.

Michael Gray - Macquarie Research

Hey, guys. Just a follow-up on the 75% recovery on San Carlos, is there much upside to that or is that about what you would expect?

Manley Guarducci

That’s what I would expect Mike, that’s what we’re going to use for guidance.

Michael Gray - Macquarie Research

Okay, so not upside to that number. And then just on Esperanza in terms of pretty short and sweet in terms of resubmitting the EIA and some of the work going on. Maybe John can you talk about you confidence level in terms of the process, in terms of the consultation you need to do to get the social license there?

John A. McCluskey

Before we make the acquisition Mike, we spend some time querying particularly the Federal Government, the body in-charge of granting the environmental permit. To really make sure that we understood what the short comings of the previously filed EIA, where we wanted to know, if it could be corrected and what their feelings on that was?

And the feedback that we received was that there were really no issue from SEMARNAT perspective in granting that permit if the work was done correctly and if the report was as comprehensive as they expect it to be.

We worked with them extensively in the past. We’ve been working with them for over a decade and we have a great reputation with them and they were quite confident that we were capable of getting the work done that was required and they were looking forward to seeing a resubmitted EIA. We should undertake one. So, I would say, from the get go, we were very confident that the project could be permitted.

As far as the -- when you make reference to social license. We have very, very strong local community support. We’ve always been sensitive to that issue and I would say because we probably had one of the most difficult times of any company in Mexico in terms of working with the local community.

We’ve done an awful lot for local community and in Sonora State and its been a hard thought process to win even with limited support we enjoy today. And this is quite different and morale of the local community here is -- I would almost describe it [meditatively] supportive, and I suppose that in part it has something to do with the fact that the one area within the overall picture where we don’t have support of that, the governor’s level.

But I’m confident with the local community’s support that we enjoy and the Federal Government’s very open minded approach to granting environmental permits for this project that we’re going to be in a position to get the governor on-site. And I think what is going to require in order to make that happen, we’re going to have show him an environmental study that demonstrates that we have made every effort to mitigate environmental risks and we have to demonstrate to him that we can build first grade project that he can be comfortable with.

And among other things, it’s our intension over the next six months and these discussions have already started. We’re trying to organize a trip for the Governor to make up to our Mulatos operation. I think what he has to look what we’ve been doing there, and over the last two years we’ve actually done a substantial amount of reclamation at the site, I think he’d be very impressed when he sees it.

So both way we operate the clean environment record infact an award winning environmental record that we’ve had in Sonora state, sensitivity we demonstrated where the environment is concerned. And the considerable amount of reclamation works that we’ve already undertaken while we are in the process of mining.

I think all of those things will make a big impression on the Governor. So for those reasons, I feel quite confident that we’re pursuing the right course where the Esperanza project is concerned and then I think when the time comes we’re going to be able to our permit.

Michael J. Gray - Macquarie Research

So that your confident in terms of mitigating the upward issues and the archaeological issues and everything?

Manley Guarducci

Well, there is no [airport] issue per say, and the archaeological issue was already dealt with prior to our acquiring the project.

Michael J. Gray - Macquarie Research

Okay. Good. Thank you.

Operator

Thank you. The following question is from the Rahul Paul from Canaccord Genuity. Please go ahead.

Rahul Paul - Canaccord Genuity

Hi, everyone. Question on the San Carlos recoveries again, can you remind me if you plan to stock the mill tailings from San Carlos on the leach pad?

Manley Guarducci

Hi, Rahul, it’s Manley. Yes, the mill tailings from San Carlos will go on the leach pad and that’s part of the mill upgrade process that we’re doing which is an addition thickener, because of the different mineralogy of the San Carlos ore. They will get thick and they will get converged into a paste and then they will get stuck on to the tails.

Rahul Paul - Canaccord Genuity

So when you see 75%, how much of that will be -- how much of that do you expect to come out of the mill and how much of the leach pad?

Manley Guarducci

The 75% doesn’t include any assumption of recovery on leach pad, it’s strictly the plant recovery.

Rahul Paul - Canaccord Genuity

Okay. So, I guess ultimately you would possibly be able to get a little more than that?

Manley Guarducci

Yes. There is room to leach some of the tails on leach pad, correct.

Rahul Paul - Canaccord Genuity

Have you done any test to that extent?

Manley Guarducci

We have, but not confident enough to put a number on it, Rahul, that’s why I haven’t increased that 75, okay. I’d want to see how it turns out for the next little bit.

Rahul Paul - Canaccord Genuity

Okay. Thanks, Manley. That’s all that I have.

Operator

Thank you. (Operator Instructions) The following question is from Jeff Killeen from CIBC World Markets. Please go ahead.

Jeff Killeen - CIBC World Markets.

Afternoon, and thanks for taking my call. Most of my questions have been answered, but just again coming regards to the mill, do you think that that’s something the company would press release and independently wants the upgrades being complete or is it something we’ll hear about say in the next quarterly update?

Manley Guarducci

I think in the next quarterly update we’ll hear about it, because it should be done by the end of the quarter and it should running by timely update on the quarter.

Jeff Killeen - CIBC World Markets.

Okay. And then extension to the previous question. The location that you’re going to stack the tails from the mill, is it in a particular location away from the rest of the material being stack so you actually can assess what impact it’s having or is it going to be something that over time, you just have to reconcile?

Manley Guarducci

Well, it just over time and lab test work you’ll be able to come up with the number, because you just stack it with everything else, you don’t have any control of where its stack. Infact, its agglomerate with the all of the rest of the heap leach ore.

Jeff Killeen - CIBC World Markets.

Okay. Very well. And then just lastly on Quartz Mountain, you know do you get permits to move forward with drilling. Just wondering what type of program you’re envisaging, is it predominantly focused on the oxide, is it both oxide, sulfides, would you hope to upgrade any of that material as they indicated or is it primarily just validation of what’s there?

John A. McCluskey

We took over permitting process that had commenced under the previous owners of the property and we did that because it was already quite far along and its one of the first ore programs that’s been permitted in Oregon for a long, long time. And rather than start again from scratch and we design a drill program, but we thought that was [married] in what they wanted to do and we more or less decided to follow through with that.

So this first program is mostly confirmatory drilling, most of the drilling that had been -- that had taken in the place in the Quartz Mountain project goes back to the 1980s and while we look at that work and we consider that the work was very, very well done, I think it’s just a prudent step to follow through and do this confirmatory programs.

So it will give us a material to conduct metallurgical work on as well. And, given that we’ve got about 15 drill platforms permitted over quite a substantial area. Its our intension to probably drill a few more holes from those platforms than what was originally intended, and I don’t think that’s going to be too difficult to get that modification.

And as far as the principle focus, what we are confirming here is the mineralization in the oxide resource, which is of primary interest to us because of the leach ability of that ore. So, that’s a first path and we’ll be – well, we are doing this. We’re in the process of permitting a second phase of drilling which will be far more substantial than the first one and will go far beyond the current limits of what the program we’re designing today reaches out to do. So we’re actually going to be doing step-hole drilling into areas of operation that we think will actually expand the resource.

Jeff Killeen - CIBC World Markets.

Okay. Very well. So just clarify than this first program do you think it would give you enough data to potentially provide an updated estimate for the oxides or would that be something to come with the subsequent program?

Manley Guarducci

One have to see, but its not primarily the focus of the program as I said, our primary focus is to confirm, but in doing so we’re going to change to some extent the way we’re drilling the deposit, they’ve pretty much exclusively drilled vertical drill holes, we’re going to be drilling angle holes, we think angle holes in part have the ability to intercept a high-grade structures in the manner that vertical holes were unable to do because of the natural inclination of the ore body.

And so from that point of view, in addition to confirming you might find -- you pick up better grade. But we won’t be able to know that until we try. So I think every time you go to drill the deposit, in the back of your mind is how can I possibly improve what I already know not just precisely duplicate what was done before I think you’re always trying to up come with new idea that possibly makes the deposit better.

Jeff Killeen - CIBC World Markets.

Great. Thanks very much. That’s all from me. And thanks for your time.

Manley Guarducci

Thank you.

Operator

Thank you. If you have any further questions registered at this time. If you have any further questions that have not been answered, please feel free to contact Mr. Scott Parsons at 416-368-9932, extension 439 or at 1-866-766-8801. I would now like to turn the meeting back over to Mr. Parsons, please go ahead.

Scott Parsons

That’s it. We’ll close the call and thanks for joining us and we’ll speak to you again in Q3.

Operator

Thank you. The conference has now ended. Please disconnects your lines at time and we thank you for your participation.

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Source: Alamos Gold Inc (AGI) CEO John McCluskey on Q2 2014 Results - Earnings Call Transcript

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